Tuesday, January 5, 2010

Some Different Measures of Loyalty

Before I continue my discussion of the previous blog and the research by Werner Reinartz and V. Kumar I think it is necessary to properly define loyalty. The tool that these researchers used was REM which stands for recency, frequency and monetary value. There is also a consultant (the service wiseguy) who uses referrals in his calculation of customer loyalty. The loyalty factors he uses in his calculation of the value of customer loyalty are retention, repeat business and referrals. One of the most popular measures of loyalty that is in use today is NPS, Net Promoter Score. Since this is the one that appears to be the most often used in the market today, the following information provides some background on NPS.

Fred Reichheld in his book "The Loyalty Effect" provided some interesting background on the subject of loyalty when he referred to a book,"The Philosophy of Loyalty", written in 1908 by Josiah Royce, a professor of philosophy at Harvard. According to Professor Royce loyalty per se cannot be judged as good or bad; it is the principles one is loyal to that can and should be judged. And it is devotion to those principles that tells us when and if the time has come to end our loyalty to an individual or group. While this definition does little to lead us to a mathematical model for loyalty, it does offer logic that suggests that mathematics may not be the only criterion to measure loyalty.

Of course we can always go back to the dictionary definition that defines loyalty as faithful to one's allegiance. However, this simple definition does not carry the necessary depth to explain the intricate relationships between companies and their customers.

Mr. Reichheld offers some economic effects that he believes is derived from loyalty. The five effects that he offers as a natural consequence of loyalty are:
1. Revenues and market share grow as the best customers are swept into the company's business, building repeat sales and referrals.
2. Sustainable growth enables the firm to attract and retain the best employees.
3. Loyal long-term employees learn on the job how to reduce costs and improve quality, which further enriches the customer value proposition and generates superior productivity.
4. Spiraling productivity coupled with the increased efficiency of dealing with loyal customers generates the kind of cost advantage that is very difficult for competitors to match.
5. Loyal investors behave like partners.

These five effects are countered in the article by Reinartz and Kumar. I will discuss these effects in the next blogs. Meanwhile, the bottom line is that there appears to be no one measure of loyalty that everyone can agree on. I think we can take as the bottom line that mathematics is not sufficient to describe customer loyalty.

I am sure I have omitted a number of other measures and descriptions of loyalty that may be more useful than these. I apologize for the omissions and am willing to consider any that come to my attention.

1 comment:

Anonymous said...

nice post. thanks.


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