Wednesday, September 23, 2009

Rethinking Customer Satisfaction

This past spring I read a short article by Xavier Quenaudon of the CFI Group and thought he made some sense when he described some of the myths we live with in the world of customer satisfaction. I believe that once you see these myths described you might want to rethink what you have believed about customer satisfaction and how you might want to change your perspective.

The first myth says that loyalty is more important than customer satisfaction. Since it takes a while to get a measure of customer loyalty, loyalty can be considered a look through the rear view mirror. Loyalty comes with building a relationship which takes time. Although this is worthwhile, it is a lagging indicator. Customer satisfaction, on the other hand, is instant and can quickly identify the short term direction of customers. Loyalty is a strategic variable whereas customer satisfaction is tactical. If the tactics are not right, the strategy will fail.

The second myth says you should maximize customer satisfaction. It doesn't take a brain surgeon to realize that not all customers are profitable and you can't afford to keep them. The better approach should be to optimize customer satisfaction. That means you want to spend enough on customers to keep them profitably satisfied but you may not be able to afford to keep them completely satisfied.

The third myth is that you should exceed customer expectations (Wow them). I think we would all agree that customer expectations should be met - but not necessarily exceeded. It may not be profitable to reduce waiting time for service and so long as the real waiting time is within reason, the customers will often not notice the difference (such as waiting 30 seconds instead of 20 seconds when calling customer service).

The fourth myth says that customer dissatisfaction should be avoided. Thee are some customers that are not profitable and companies would be better off if those customers went to the competition (I have suggested this approach to some of my clients). While a company must be careful to take care of the profitable customers, the unprofitable customers can become a cash drain as well as a resource drain. It may not be profitable to eliminate dissatisfaction and it also may not be possible.

The fifth myth says the customer complaints should be minimized. One of my golden rules is that a customer complaint is the cheapest consulting you can get. Your customers know your company, your products and your services. When they complain they are, in fact, telling you the result of their analysis of your operation and have found a problem which they are usually suggesting that you fix. What a wonderful way to get first-hand analysis of your operation. The best thing you can do is make it as easy as possible to submit a complaint and then PAY ATTENTION to what the customer is telling you.

The sixth myth says that customer satisfaction should be expressed as a percentage. As I continue to blog about customer satisfaction the one message that continues is that customer satisfaction is a complex bundle of thoughts and emotions. I continue to write about the various methods academics and consultants devise to measure customer satisfaction. Almost all of them end up using more than a single measure. When customer satisfaction is reduced to a simple percentage it increases the likelihood that management will focus on the percentage and see it only as a simple number rather than seeing it as a major component of their corporate strategy.

The bottom line is that we often hear platitudes such as "we must get from our customers a "WOW" if we are to be successful." Too often we forget these myths and why they are important to remember.

Tuesday, September 22, 2009

More Metrics

If you think that NPS is the only way to go, be prepared to stop and take another look. This blog is based on an article by Suresh Lulla. I think the main message out of this blog is that we still haven't decided what is the best way to measure customer satisfaction and loyalty.

The first method is a single measure like NPS but his measure is CPV which stands for Customer-perceived value. The basis of this measure is the belief that perceived value is the basis of customer loyalty, retention and re-purchase. The measure is a cost-benefit analysis of a product and/or service. One of the challenges of CPV is that it is usually implicit and abstract. It is often used to compare alternatives. Customers don't usually put the CPV down on paper with numbers. However, the brain seems to be able to integrate values so that each purchase can be reviewed relative to all the other purchases made over a period of time. That is why customers can compare the value of a pair of shoes with a new shirt or blouse; or they can compare the value of a toaster to a mixer. The advantage of CPV is it is a great metric for benchmarking. Since customers value can change over time as result of purchases CPV becomes a dynamic measure and must be continuously revised. this puts a great deal of stress on the company to keep the measure current.

NPS is a single metric that many use to measure loyalty and predict future performance. NPS is based on the question "how likely is it that you would recommend this product/service to a friend or colleague?" Customers respond on a scale from 0 to 10 where 0 indicates no chance for a referral and 10 means the customer will make a recommendation. The scale is interpreted as follows: scores of 9 or 10 indicate a promoter, scores of 7 or 8 are neutral and scores from 0 to 6 are considered detractors. The Net Promoter Score (NPS) is the difference between the percentage of promoters and detractors. Most companies seem to fall into the range of 5% to 10% and market leaders such as Southwest Airlines and Federal Express will have an NPS score near 50%.

Another measure is Share of wallet (SOW). This metric forms the basis for penetration marketing and measures the percentage of the customer's purchase against their total product/service budget. Share of Wallet is being recognized as a more effective predictor of long-term performance than of market share.

The Gallup group uses four measures of customer engagement to analyze the satisfaction and loyalty of a company. Their four measures are:
1. Confidence - this is a measure of how the company is perceived in delivering on its promises.
2. Integrity - this measure detects the faith in the organization's commitment to quality, customers and ethics.
3. Pride - measures the ownership of the brand. This measure the personal association with the product/service.
4. Passion - It is a measure of the belief that the product/service is the perfect solution to their requirements.
Gallup's research suggests that customers who score high on all four metrics tend to contribute about 23% more to profitability than the average customer.

As you can easily see there are a number of metrics in the market that are all being promoted as the metric which will improve your company's performance. It is not clear that any one of the measures outperforms the others. These measures remind me of the simple management principle that "people do what gets measured." Once management starts looking at a metric, the metric tends to improve.

The bottom line is that measures are good but there is also the problem that the measure itself may become more important than the performance it is measuring. I call it the measurement trap and will discuss it in the next blog.

Saturday, September 5, 2009

Two Opposing Views of Customer Loyalty

There was an interesting column in the Phillippine Daily inquirer by two consultants, Ned and Ardy Roberto who see what they call the reality of customer loyalty. They start by pointing out the difference between "how can we retain a customer whom we have not satisfied" and saying "satisfying customers is not necessary for retaining them." The obvious difference is that the first quote refers to an individual customer and the second is aimed at the entire customer base or some subset of the customer base.

From this perspective they note that surveys treat customers as a whole and what may be true for a group of customers may not be true of each individual customer. Besides the leap from customers as a group versus an individual customer, they ask what are you going after by focusing on customer satisfaction. Their conclusion is that one reason companies measure customer satisfaction is that it leads to customer loyalty. They quote the article in the Harvard Business Review in 1990 when Earl Sasser and Frederick Reichheld wrote that "by increasing customer satisfaction you will increase retention. ... Raising retention leads to more customer loyalty." The article goes on to state "if loyalty is the end, it follows that companies should strive for 100 percent retention or zero defection, or perfect customer satisfaction.

These two consultants point out they have never witnessed perfect customer satisfaction, or zero defection or 100 percent retention. The highest satisfaction score they ever saw was 92 percent and usually the scores were between the mid 70s and mid 80s.

What they found was that Professor Roland Rust at the University of Maryland replicated and re validated the study by Sasser and Reichheld but found that higher customer satisfaction does not necessarily lead to higher customer retention and shouldn't be expected to do so. He found that customers segmented themselves into three satisfied-retained/loyal segments; namely,
1. Dissatisfied-defecting/disloyal customers whose population ranged from 1 to 5 percent of the customer population.
2. Satisfied-borderline retention/loyal segment making up about 70 to 85 percent of the customer population
3. Delighted-raised retention/loyal customers who account for about 5 to 10 percent of the customer base.

From Dr. Rust's data he concludes that highly satisfied and loyal customers actually get in and out of loyalty depending on two recurring factors; namely some are seeking some variety in their product or service which may lead to defection and the second factor is competition continues with intense promotional activities such as discounts, coupons, etc. From this Dr. Rust concludes that 100 percent retention does not appear to be viable.

Whereas Sasser and Reichheld give an unqualified "yes" to the question "does higher customer satisfaction lead to higher customer retention?" The results from Dr. Rust's wider based research found that higher customer satisfaction does not necessarily lead to higher customer retention and shouldn't be expected to do so.

The bottom line is customer satisfaction appears to be more complex than most market researchers attribute to it. There must be some factors that we still do not understand which is why we continue to get different theories on how to keep customers, grow the business and increase profits. There is enough going on to keep a lot of consultants busy.

Tuesday, September 1, 2009

Another Challenge to the Ultimate Question

Once again there is a challenge to the use of the Ultimate Question. The Ultimate Question is used to create a Net Promoter Score (NPS) and has become very popular as a process to understand customers. It is a single question used on customer surveys that is used to compute a Net Promoter Score, a measure which its developers believe is the best predictor of business growth. A new book entitled Beyond the Ultimate Question takes aim at NPS and states that NPS is no more predictive of business growth than other commonly used customer loyalty questions such as overall satisfaction or likelihood to purchase.

The author, Dr. Bob Hayes, states that these three questions (likely to recommend, likely to purchase and overall satisfaction) all measure advocacy loyalty. Dr. Hayes suggests there are three robust, reliable measures of customer loyalty and then demonstrates how each of the three metrics predict different types of business growth. The three metrics are:
1. Advocacy
2. Purchasing
3. Retention
The idea proposed is that when a business measures these three components they will have a more complete picture of the customer relationship and will be able to maximize growth through new and existing customers.

The key to Dr. Hayes approach is to build a successful customer feedback program. Thus a company needs to look beyond the simple question of NPS and work on improving the entire customer feedback program.

Some companies have top executive support and others don not.Some companies use customer feedback results as part of their employee incentive programs while other companies rely on more tradition incentive programs. Some companies integrate their custom feedback data into their daily business processes while others keep them separate. Then there are other companies that conduct in-depth customer research using their feedback data while other rely on the data alone to provide them customer insight.

The bottom line is everybody seems to think they have the best metric to use to predict business growth. Since all the people and companies who are espousing their metric are in the business to make money, it seems reasonable to wonder how much of what they say is based on generating business and how much is valid. I suggest we wait and let the market or some unbiased organization sort the metrics out. I have written previous blogs about other metrics as well as NPS and the three metrics of Dr. Hayes. I would give the most credibility to ACSI if they would take the challenge to sort out which is better. I doubt they will take on this challenge.

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