Another Metric for Loyalty

Forrester, a marketing research company offers another metric for loyalty. It appears that Forrester has three elements which they use to define loyalty; namely
(1)reluctance to switch business from a company, (2)willingness to buy another product or more products from a company and (3)likelihood to recommend a company to a friend or colleague. These are good measures for loyalty and when combined make sense to use as a loyalty metric.

They offer what seems to be an obvious conclusion that there is a correlation between customer experience and loyalty. Another brilliant conclusion is that when companies want to increase sales they should focus on customers.

The real value of this blog is the reluctance to switch business metric. The three legged metric that has been used for many years consists of (1) overall satisfaction, (2) likelihood to recommend to a friend or colleague, and (3) willingness to buy again. Forrester appears to have substituted the reluctance to switch from a company in place of the overall satisfaction measure. Since the other two measures are ones that are familiar in the loyalty measure, the interest is in the reluctance to switch measurement.

One of the standard loyalty measures is to measure the percentage of customers that score "top box" for all three measures. By "top box" most people refer to the highest score on the scale as the "top box." Using a 5 point scale where 5 is the highest score, companies would measure the percentage of customers that scored all three questions with a five. I am presuming Forrester is soing something like this.

Some companies, in order to present high loyalty scores, will include the top two boxes. Thus the percentage of customers they would claim are loyal are those customers who scored them either a 4 or a 5 for all three loyalty questions.

Getting back to the loyalty question of reluctance to switch from a company offers both a positive aspect and a negative aspect for the metric. From the positive perspective a company/customer who is reluctant to switch is for all intents and purposes loyal by definition. The customer is saying that the products and/or services are such that he believes the value proposition offered by competitors is not sufficient to warrant the cost and energy to switch.

From the negative perspective this question may be deceiving by yielding a high score by the customer when, in fact, the customer feels locked into the product and/or service being offered and is only scoring high becasue he feels trapped. For example, a company may be using an obsolete product for a particular process and may be reluctant to switch to another product and/or company until a newer product has been deemed successful in the market. This has been true particularly in the software market with new revisions of software being offered. Companies are reluctant to switch until the newer software has been "debugged" by other customers in the market. An obvious example is the reluctance of companies to move to a new operating system for PCs.

The bottom line is that the use of the question reluctance to switch business from a company is novel. I believe it can be an excellent predictor of loyalty. It has the drawback that it can also be misleading if the customer/company feels trapped with the current product and/or service as noted above. It would be an excellent experiment to test the use of the these three metrics offered by Forrester against the more traditional three metric model which uses overall satisfaction in place of reluctance to switch.

I find this model to be very exciting. Until we have an industry standard model that everyone uses, we need to keep looking for the gold tablet of loyalty metrics and the best way to find it is to keep trying new models.

Product Impact on Customer Loyalty

Yesterday I noted that relationship was one of the three components of customer loyalty and referred to a survey which showed the impact of customer service in terms of advise and knowledge provided by employees without giving the shopper a bad experience. The statistics, based on the 12,000 shopper survey, was dramatic (95% of the shoppers indicated the sales associates are very/somewhat important). See yesterday's blog for more detail.

I am following this study with results from two other studies. These two studies were performed by JD Power and Ispos, both of whom surveyed the digital camera market and each examined usage and customer satisfaction. The study was completed during the spring of this year (2007). Ispos indicated a sample of more than 1000. JD Power did not indicate the sample size but a fairly large sample would be expected. The findings are noted below:
1. 70% of internet households own a digital camera.
2. 61% own a photo printer.
3. Nearly 24% of the respondents chose Canon as the most frequently named brand according to the Ispos survey. JD Power also indicated that Canon led the list as best manufacturer.
4. A 10-point improvement in overall satisfaction can lead to a 1-percentage point improvement in brand loyalty (particularly within the point and shoot, premium point and shoot and ultra slim segments of the market) according to JD Power.
5. The variables used to score the cameras included picture quality, performance, operation and appearance and styling.
6. JD Power also found that 36% of all camera owners report that positive recommendations from friends and family played a strong role in their purchase decision.

These studies tend to support the notion that loyalty has a strong product component. In this case, I have made a leap-of-faith by assuming brand loyalty and product loyalty in this market are relatively synonymous. With this assumption, the results fall neatly into my previously described 3 parameter model for customer loyalty; namely, product, process, and relationship are the three base ingredients to customer loyalty.