Tuesday, April 27, 2010

More Thoughts on Disloyalty

Maritz Marketing Research published a research report titled "Customer Disloyalty". The report was written by Dr. Dan Lockhart. He starts out by saying that loyal customers have the following characteristics:
1. Like your product and/or service
2. Frequently purchase your product and/or service
3. Feel your product and/or service is worth what they paid for it
4. Feel that your product and/or service is better than your competitors'
5. Feel you product and/or service meets their expectations or desires
6. Recommend that others purchase your product and/or service.

He then defines disloyal customers as "anti-customers for the following reasons:
1. They dissuade others from patronizing our business
2. They bring law suits against you
3. They may complain about you to the media
4. In extreme cases they may picket your business.

According to Dr. Lockhart there are 4 stages of disloyalty:
Stage 1 - the customer is dissatisfied or has unmet expectations or desires.
Stage 2 - there is an attempt to correct the situation if the company is aware of the dissatisfaction or unmet expectation.
Stage 3 - If the company fails to correct the problem the customer may refuse to make any additional purchases
Stage 4 - If the customer feels he/she has no other option that customer may attempt to influence others not to buy from the company.

These four stages represent the downward spiral that begins with a dissatisfied customer and ends with a lost customer.

The research report uses a tree to show where customers get lost through the various stages of disloyalty. The tree starts with 1200 customers. The first stage (two branches) shows that 960 customers (80%) have no problem and 240 have a problem. Of the 240, (the second stage with two branches) there are 48 customers with a problem (this represents 20% of those with a problem who don't tell anyone and start down the path to disloyalty). Of the 192 that do tell someone (the third stage with two branches) 86 get excellent results (45%) and 102 do not get excellent results and start on the path to disloyalty. Finally in the fourth stage there are two branches that show half of those who received excellent response decide to purchase again and the other half chose not to repurchase. When all of these probabilities are combined there are 197 customers out of the original 1200 (16.4%) who end up on the road to disloyalty.

One of the obvious conclusions that can be drawn from this discussion is when companies do not handle complaints very well they are accelerating the decline from dissatisfaction to disloyalty. The data used in the research paper to create the probabilities was from a client and hence has some validity. While these probabilities represent the performance of just one company, the conclusion drawn by Dr. lockhart makes sense.

The bottom line is that managing customer complaints well appears to have a dramatic positive effect on customers with the implication that the company also benefits in terms of reducing the number of customers that may become disloyal. The challenge for companies is to examine the magnitude of these four stages that lead to disloyalty. One way to think about these four stages is to see them as cracks in the organizational structure. Then it becomes a management problem of how best to fill the cracks.

Saturday, April 17, 2010

More About Customers as Assets

One of the goals of The Customer Institute is to publish a book which describes customers as assets and how to manage those assets. When customers are viewed as assets they take on a different perspective. For example Apple computer has taken the position that customers are assets and have developed them to the point where they can introduce a new product, such as the iPad and almost guarantee huge sales. Ben Fowler wrote an interesting piece dated April 6, 2010 in his blog (voiceofcustomerguru). Customers of Apple respond to Apple product announcements with little hesitation because they believe that Apple products deliver high quality.

Compare Apple to US automobile manufacturers during the 60s and 70s. They built cars with great styling and innovation but the product quality was inferior to those being sold by the Japanese whose products had less style and innovations but superior quality. The US automakers damaged their customer asset to the point that even today when their product quality is equal to the Japanese, they must offer incentives and lower prices to get sales.

The US economy has changed in the last 50 years. Whereas 50 years ago the size of manufacturing was twice the size of consumer service. Today the ratio is the same but with consumer service twice the size of manufacturing. Consumer service requires a different accounting system than the one used for manufacturing. When cars are sold there is an immediate transfer of asset from the car manufacturer to the new owner. The asset transfer is complete.

When we are dealing with the customer asset, we need to look at the value of that asset over time rather than in a single time period. There are have a number of books and articles written about measuring the value of a customer. One book that has been around for a while is "Managing Customer Value: Creating Quality and Service That Customers Can See" by Bradley Gale. The typical calculation of long-term customer value is based on the average life of a typical customer. If the customer life is three years, the value is based on three years. However, many of the books and articles written about calculating the value of a customer have not dealt with the value as an asset and its implications when looked at from an accounting perspective.

Note the following example and some of the accounting discussion is being done without the oversight of an accountant and must be viewed with some scepticism.

There is an excellent example of this weakness of viewing the customer asset in a book by C. Fornell titled "The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference." The example the author uses examines the case where it costs $1000 to acquire a customer. If the customer lifetime is 3 years, the net income for those 3 years is -$100. If the company has acquired 1000 new customers for the year, the cost of acquisition is $1,000,000 and the net income from those new customers is $300,000. However, that is not the way the accounting system would report the performance of the company. The accounting system would show a loss of $700 for each customer acquired for the first year or a total loss of $700,000 for the 1000 new customers. The second year an additional 1000 new customers are acquired for another $1,000,000. This year the total sales is $600,000 so that the total loss for the year is only $400,000. When you include the third year the lost is $100,000 for each and every year thereafter as long as the average customer lifetime is 3 years.

The customer asset must be viewed in the light of the value to acquire it and the revenue expected from each customer. One of the keys to building the customer asset is consistent performance and value similar to Apple. Toyota has just dramatically reduced it customer asset by mismanaging its communications with its customers.

The bottom line is that customer retention is a key to success in the consumer service marketplace and the foundation for building the customer asset. Companies need to know the length of the average customer lifetime before they start a campaign to acquire new customers. What is usually missing in many companies is the cost to acquire a customer and the average customer lifetime. We have been taking the wrong measurements.

This analysis does not examine the process of building the customer asset. We will have to investigate further to understand how Apple has achieved so much asset value from its customers.

Monday, April 12, 2010

Benchmarks - How Good Are They?

In the latest issue of Quirk's Marketing Research Review (April 2010), there is a survey of researchers regarding benchmarking. The survey was performed in the Spring of 2009 with 97 responses from people involved in market research in their organizations (83 have a designated market research function). The survey was performed by Jennifer Van de Meulebroecke and Michele Sims both members of the staff at TRC Market Research in Fort Washington, PA. The researchers represented many markets including insurance, utilities, high-tech, health care and financial services.

The researchers noted that:
1. 75% of the researchers collected benchmark data as part of an internal study,
2. 56% of the researchers collected benchmark data separately or at a different time than other studies. Some also use an outside vendor for assistance.
3. 56% of the researchers used a syndicated source for their benchmark data.

The research went farther by asking the researchers to focus specifically on benchmarking data and describe their confidence in making comparisons for their company with benchmark data. The results indicated that 75% of the researchers who had less than 11 years in market research had confidence in using external benchmarking data; whereas only 58% of those with more than 11 years in market research had confidence in using the external benchmarking data for comparisons. The conclusion drawn from this piece of information is that it appears that the longer people are in market research, the less trust they have in using the external benchmark data to draw comparisons.

Since there are such low scores with respect to using external benchmark data, the question is what are the factors that people should be aware before using external benchmark data. The survey found the following factors and are ranked in order of importance by those who were surveyed:
1. 91% were concerned about the consistency of the scales and responses,
2. 83% were concerned with consistent question wording,
3. 77% were concerned with consistent screening,
4. 67% were concerned with the method of collecting the data (web, phone, etc),
5. 58% were concerned with type of sample that was used, and
6. 51% were concerned with the time period for data collection.

As an editorial comment I would note that many companies put extreme value on industry benchmarks. I had a consulting assignment several years ago with a high-tech company that had the lowest scores on their industry benchmark. The executives and managers were very concerned about their score. They believed, and rightly so, that thefact that the benchmark that showed they had the lowest scores in their industry would impact their sales. They asked for my help and within 3 years they were tied at the top of the industry benchmark. The problem was that they were scored low but did not have enough information to know where to make changes to their product nor support. Once we captured the information it was only a matter of time before they moved to the top.

The bottom line is that benchmarks are becoming more and more important to companies. Today many companies use benchmark data to assess their market position without understanding how the benchmark was created. In addition, the companies do not have the detail information necessary to accurately evaluate the meaning of the benchmark scores. The lesson is benchmarks are very valuable when used properly but can be VERY misleading when not properly understood.

Friday, April 9, 2010

Loyalty Versus Retention - Is There a Difference?

I noticed that the Irish Direct Marketing Association is hosting a conference on Loyalty and Retention. According to the news release there are a number of companies in Ireland that are trying to differentiate between customer loyalty and customer retention. The aim of the conference is to deliver clarity for the attendees on the difference between the two relationships, particularly with respect to marketing strategies.

This dilemma hasn't crossed the desk of The Customer Institute before, but it does raise an interesting question; namely, is there really a difference between customer loyalty and customer retention. Clearly there is no obvious answer, otherwise, there would be no need for a conference to discuss the issue.

With great hesitation, the following perspectives are offered without the imprimatur of academic certainty. It appears at first glance that customer loyalty has a greater reach than customer retention since many of those who support the concept of customer loyalty imply that the loyal customer brings word-of-mouth support of the company, its products and its services to other potential customers. On the other hand, customer retention appears to imply the customer will return (is being retained) but with no implied word-of-mouth component.

A simple definition of loyalty is "faithful to one's allegiance." The word retention comes from the root "retain" which is defined as "to keep possession of." These two definitions imply a very stark difference. Whereas loyalty seems to suggest that the connection comes from the customer, retention seems to come from the company. A customer becomes loyal for one or more reasons and chooses to return. On the other hand a customer is "retained" by the company. The retention can be in many forms without the need for physical restraint. The retention can come from special offers or preferential treatment.

The implications that can be drawn from these simple definitions are:
1. Customer loyalty comes from the customer and companies need to provide programs that build relationships with their customers (either heart or mind) that inspires them to return.
2. Customer retention comes from the company and is built on retaining a customer without the need for a change of heart or mind (becomes loyal). Retention then comes from providing incentives for the customer to return (is restrained from leaving) in the face of competitive actions.

The bottom line is the difference between loyalty and retention is much more complicated than this brief discussion and needs more study. The Customer Institute will continue to pursue these topics with the objective of discovering research that will provide quantitative understanding of these concepts with respect to customers.

Saturday, April 3, 2010

The Customer Satisfaction Grid

This is a follow on blog to my previous blog. The source of the information for these two blogs is an article written by Earl Newmann and Donald W. Jackson, Jr. and published in Business Horizons. The previous blog discussed what they describe as the two-factor theory of customer satisfaction. In that previous blog I also discussed their logic and description of the two factors; namely hygiene and satisfiers.

In this blog I will discuss how the authors combine these factors into what they describe as a customer satisfaction grid. They further discuss how the grid can be used in the pre-sale, transaction and post-sale aspects of business.

The customer satisfaction grid shows the satisfiers on the x-axis and the hygiene attributes on the y-axis. The four segments of the grid are:

1. The lower left segment identifies company performance that doesn't meet the performance requirements of hygiene and also ignores the performance of those attributes that contribute to customer satisfaction. When customers are exposed to this level of performance in this segment of the grid these customers are strong candidates to seek a new vendor.

2. Firms that operate in the upper left segment of the grid have a much greater chance of holding onto their customers than those in the lower left. Unfortunately they are not performing well with the satisfiers. A restaurant which serves good food but has poor service and little atmosphere is definitely vulnerable to competition that provides some of the satisfiers for good service or an inviting atmosphere.

3. There are companies that operate in the lower right segment of the grid. These companies see the satisfiers as the way to build satisfied and loyal customers. These companies chose to focus their resources on the satisfiers while ignoring the hygiene factors. Their problem is they are ignoring the hygiene factors that significantly add to the value of the products and/or services. A movie theater that always brings in the latest and greatest films into a posh viewing area but does not clean their restrooms would be an excellent example of a company with a focus on the satisfiers but not the hygiene factor.

4. The upper right segment is where companies should be heading. This is where the industry leaders are located. These companies have figured out how to effectively meet the requirements for the hygiene factors and simultaneously provide a high level of performance for the satisfiers.

These two concepts (hygiene and satisfiers) are at play throughout the customer life cycle. The hygiene factors and satisfiers will change as customers go through the pre-sale phase, enter the acquisition phase and move into the post-sale phase. The companies who strive to get into the upper right segment and stay there will identify the hygiene and satisfiers in each of the life-cycle phases knowing that they change during the life cycle.

The bottom line is that this model is comparable to a number of others on the market. One of its values is that it offers a simple way of separating satisfiers and dissatisfiers by using the term hygiene components to explain the dissatisfiers. The key value of this paper is that it clearly points out that hygiene factors must be present before satisfiers have a significant effect on the customers.

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