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.

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