Monday, November 17, 2008

Loyalty Metrics That Make Sense

There are probably as many loyalty metrics as there are consultants. At one extreme some say you only need one while the other extreme says you need a PhD in statistics to understand all the interactions that a customer has with your organization. My personal leanings are toward the middle but nearer the low end.

I was recently reading the work of Jeanne Bliss, the author of "Chief Customer Officer" and thought she had a pretty good idea of the kind of metrics that makes sense and yet is reasonably comprehensible. She devotes a chapter to these metrics in her book and refers to the metrics as Guerrilla Metrics. I think she calls them Guerrilla Metrics because it will take Guerrilla tactics to get them implemented in your organization. I think she may be over-stating the problem, but she appears to be speaking from experience.

Guerrilla metrics consist of five measures (reasonable and comprehensive in my mind). The following descriptions of the metrics reasonably describe them in simple language.
1. Measure the number of new customers in a specific reporting period (weekly, monthly or quarterly). The idea is not to just count them but also categorize them at the same time. By that I mean classify them according to the types of products and services they are buying and then assess them in terms of value (lifetime or some other measure that differentiates the high value customer from the low value customer).
2. Measure the number of customers you lose in the same reporting period. This is one of the most overlooked aspects of customer loyalty. Many companies have no idea when they lose a customer. Unless you know why you are losing customers, you may continue to lose them. Remember the sage quote "if you don't know your history you are bound to repeat it."
3. Repeat customers or customers who renew on-going contracts. Just as it is important to know why customers leave, it is also important to know why they come back.
4. Measure the revenue and profitability of each of the categories of customers identified previously. There are two reasons for this measure; namely, (i) to rank order each group in terms of profitability and (ii) to see if there is migration from one group to another - preferably from a lower profit and revenue group to a higher one - but just as important to note when migration starts to move from higher revenue and profit groups to lower ones.
5. Measure the number of referrals from existing customers. This is similar to the NPS measure except it requires that you track the rate of referrals overall but more specially by customer group. If your company is not getting referrals that may be a sign of a customer disconnect somewhere along the customer corridor.

These five measures are all great measures in my opinion. However, they are also very difficult measures to accurately assess. The bottom line is that we know that there is a strong relationship between customer-centric organizations and ROI. Hence, we can conclude that it probably takes a comprehensive customer metric system requiring multiple measures to examine all aspects of customers (coming ,going, staying and referring new customers). For example, using NPS one would only be measuring the fifth component of the five Guerrilla measures.

With these measures one could easily start building a business model that would show the net customer perspective each reporting period (new + existing + newly referred customers - lost customers). This could be done by each business segment to show both quantity of customers and value. I would be interested to know if there are any companies that use this type of customer metric system. Drop me a comment if you know of one or, better yet, if you are one.

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