Don't Be Stupid - You Can't Earn Loyalty

I have finally reached the point where I must respond to the never ending blogs and pronouncements about new ways to "earn" customer loyalty. The fact is you CAN"T earn customer loyalty. It is IMPOSSIBLE!!!

Start with the definition for loyalty as found in Webster's Encyclopedic Unabridged Dictionary of the English Language:
loyalty - 1. the state or quality of being loyal; faithfulness to commitments or obligations. 2. faithful adherence to a sovereign or to a government, or to a leader, cause or the like. 3. an example or instance of faithfulness, adherence or the like.

Under the heading of synonyms there are the following:
1. Loyalty, alligiance, fidelity all imply a sense of duty or of devoted attachment to something or someone.
2. Loyalty connotes sentiment and the feeling of devotion which one holds for one's country, creed, family, friends, etc.

I think those who use the phrase building loyalty really mean building trust. Again referring to the same dictionary for defintion of the word trust:
trust - 1. reliance on the integrity, strenth, ability, surity, etc. of a person or thing; confidence. 2. confident expectation of something; hope. 3. confidence in the certainty of future payment for property or goods received; credit. 4. one on whom or that on which one relies; God is my trust. 5. the condition of one to whom something has been entrusted. ...

Under the heading of synonyms there are the following:
1. certainty, belief, faith. Trust, assurance, confidence imply a feeling of security.
2. Trust implies instinctive unquestioning belief in and reliance upon something: to have trust in one's parents.

I hope that by examining these two definitions, the distinction is clear. Loyalty is derived from trust. Therefore, the way customer loyalty increases is through increased trust by the customer in the company's products and services.

The bottom line is that the words loyalty and trust need to be used correctly so that business plans can be developed to solve the correct problem. If it is the desire of a company to increase customer loyalty, then the challenge is to create programs and processes that will build trust with the customer.

Remember, you can't earn loyalty BUT you can earn trust!

Five Stages of Customer Bonding

Customer-driven quality improvement is critical to long-term profitability. Increased competition and concern over diminishing market share motivates companies to invest in their futures.

Customer loyalty develops from personal relationships and trust between the company and the customer over time. This includes keeping customers involved throughout the product lifecycle as well as developing products and/or services to meet changing customer needs and desires.

This bond results from effective one-on-one communication, mutually-beneficial interaction, the company's genuine interest and involvement in the customer's life and lifestyle, a combination of customer allegiance and company advocacy, and a shared sense of purpose. Several years ago Richard Cross identified five important aspects of customer bonding; namely, awareness, identity, relationship, community and advocacy. I think these five aspects are still applicable and hence have described them in some detail below.

AWARENESS
The art of earning customer "share-of-mind" involves creating an impression of personal identitication with the company's products and/or services. This first stage, awareness, represents the weakest aspect of a relatioinship because it is non-interactive and depends entirely on the customer's perception. Madison Avenue advertising agencies know that because nothing is required of a customer at this point, advertising must capture the atention and stir the emotions of prospective customers, without a clear understanding of who they are.

A company does not know the basis for a customer's positive or negative reaction to a communication or advertising message at this stage of the relationship.

IDENTITY
The identification stage occurs when a potential customer asks the question, "What's in it for me?" A customer idnetifies a product of service as meeting one or more important personal needs, such as self-fulfillment, status, or belonging. A customer may perceive the company as having values and preferences similar to his own and begin to form a relationsip with the company.

At this stage, customer and company interaction is limited to one-way communication, so the customer's perception is his reality because no feedback loop exists. Because an impression results from minimal information, the "relationship" remains extremely tenuous and a cusotmer can be easily swayed. Druing this initial stage of contact, the goal is to entice potentional "best" customers to take action relative to using a company's products and/or services.

RELATIONSHIP
At this stage, the customer receives the benefit of products and/or services tailored specifically to his individual needs (at least as nearly as the company can provide). Once a customer interacts with the company, repeated experiences of individual customer satisfaction take on significant importance.

Thus, customer satisfaction is an on-going process rather than a single discrete event. Customer satisfaction is not a goal, it is an obligation. Customers expect that products will work and that they will receive good service. Customer delight results largely from how a product is sold and is serviced as well as how the company responds to inquiries and solves problems.

Customer retention is critical becuse it typiclly costs five times as much to attract a new customer as it does to retain and existing one. (This statistic first came to me through stories by Tom Peters author of "In Search of Excellence" and several of his follow-on books). I do not have evidence that this statistic is true, but it seems reasonable and it seems to be used by many who tout the value of customer retention. In any case, focusing on product and service qualtiy provides an effective customer retention strategy and barrier to competitive threats.

One important aspect of a successful customer-driven marketing strategy is the use of comprehensive and accurate databases to frequently market products and services to specific customers. Because the process of relationship-building involves direct and intereactive communication, the customer learns that the company recognizes his specific interests and values his business.

Service, a second critical element of an effective customer retention strategy, relies on the premise that each employee within the company must recognize that if he if not directly helping a customer, then he is helping an employee who is.

As bonding occurs, the customer has an investment in participating, maintaining and perpetuating the relationship. A customer requires awareness and idnetification with potential personal benefits of the company's products and/or services prior to investing time and energy in a relationip with the company. By the time the intersaction develops to this level of satisfaction, loyalty and trust begin to accrue.

COMMUNITY
Customer bonding requires high levels of effective interaction. When the company integrates its products and services into the life and lifestyle of its customers, communal bonding occurs. The community relationship stage achieves an integration of values, preferences and priorities between customer and company where each derives mutual benefit. Companies that achieve this type of loyalty consistently delight their customers.

Depending on the type and frequency of interaction, loyal customers are more resilient to competitive threats and/or higher price points because of their perception of shared values.

ADVOCACY
At this advanced level of custoemr bonding, the company services as an advocate for the customer, and the customer shows an allegianfce to the company; word-of-mouth advertising flourishes. Because the company now can encourage buyer-get-a-buyer programs through appropriate incentives, it must be prepared to follow through professionally to make new recruits feel as valued as the advocates who recommended them.

The bottom line is that loyalty results from customer bonding and does not automatically follow from successive customer interactions without a plan to build the customer bond. Building the bond with the customer is one of the most often overlooked aspects of customer loyalty.

One of the Toughest Markets to Get Loyalty

I just read a study done by the IBM Institute for Business Value. The title of the study is "Why Advocacy Matters to Grocers." The study was performed in 2007 and provides both interesting statistics as well as some very insightful perspectives about loyalty. It appears the full study is available from IBM at iibv@us.ibm.com. The following information is just a taste of the information that is in the study.

Perhaps one of the innovative (at least from my perspective) classifications of customers used in this study is:
1. An advocate is a customer who likes your store, buys from you and stays with you. These customers recommend their grocer to others, would not switch if another valued grocer moved to the area and would increase purchases if grocer offered other store products. The study found that only 27% of grocery customers are advocates.
2. An apathetic is a customer who is neither an advocate nor an antagonist.
3. An antagonist is a customer who carries a poor attitude toward their grocer and may be actively casuing damage to the business reputation. Almost half (46%) of the entire surveyed group was identified as antagonists.

Some of the consumer attitude statistics derived from the study include:
1. 79% of customers will commit to a deeper product or service relationship with a brand after a satisfying experience.
2. 31% of grocery customers tell multiple people about their bad experiences.
3. 48% of grocery customers avoid a store based on on someone else's experience.
These statistics come form "Retail Customer Satisfaction Study - 2006" by The Jay H. Baker Initiative at Wharton and the Verde Group.

These statistics clearly point out the need to create a satisfying experience for customers and pay attention to customer perceptions that may breed a contagious negative message.

Some of the observations that were derived in the study include:
1. The large national and regional grocers are the least customer-focused and have earned the fewest advocates (19%).
2. The Regional and local specialty stores ranked the highest in terms of advocates
(46%).
3. 19% more advocates give the majority of their business to their chosen grocer.
4. Conversely, twice as many antagonists as advocates decreased the amount they purchased from their primary grocer over a two-year period.

The study did an excellent job of identifying the key attibutes that drive success.

1. Quality - 97% of advocates strongly agree their grocer does this well. 73% of the apathetics strongly agree and only 48% of the antagonists strongly agree.
2. Convenience - 94% of advocates strongly agree their grocer does this well. 53% of apathetics strongly agree and 38% of antagonists strongly agree.
3. Employees - 94% of advocates stongly agree they are happy with the service from store employees. 61% of apathetics strongly agree and 38% of antoagonists strongly agree.
4. Availability - 84% of advocates strongly agree their grocer has products that I want always on the shelf. 48% of apathetics stongly agree and 17% of antagonists strongly agree.
5. Social responsibility - 78% of advocates strongly agree their grocer is socially responsible. 39% of apathetics strongly agree and 22% of antagonists strongly agree.

The grocery business is probably under more continuous consumer scrutiny (daily) than most businesses - most people visit their grocer more frequently than any other business. As pricing, quality and options for consumers keep improving, grocers must figure out how to maintain,or even better grow, their customer base and then how to increase the percent of advocates in their base.

When Loyalty Does Not Include Customer Service

J.D. Power and Associates published a list of the retention rates for the various car manufacturers in early December 2007. The list indicated Toyota Motor Sales USA, Inc as the car company with the highest retention rate at 68.9%. General Motors Corporation came in second with a retention rate of 64.7%. At the very bottom (and I do mean bottom) was Isuzu Motors America, Incorporated with a retention rate of 1.6%.

There are two interesting points that can be made from this release. The first point is that the scoring is now done by car company and includes all the makes and models produced by that company. Thus, the retention rate for General Motors includes customers moving from Chevy to Buick to Cadillac ot GMC and any other brand produced by General Motors. I think this is the right way to measure retention sincemany customers often change brands but like the company (e.g. General Motors). This hits home to me since my father always bought an Oldsmobile and from that heritage I have purchased a number of General Motors cars. I was disinclined to change and buy a Ford Motor Company car. I did buy a Chysler 300 at one time. I think migration between brands is a natural phenomenon in the United States and am willing to accept this premise for scoring without further consideration.

The second point that I find intersting is that customer service does not appear to be included in the retention discussion. Neal Oddes, director of product research at J. D. Power cited improved quality in general and the introduction of several well received products in the last couple of years as factors that probably drove the increased retention for General Motors.

When I think about the idea that customer service is not mentioned, perhaps the reason is that customer service is more a function of the dealer than the car manufacturer and hence should not be included in the measurement scheme. Certainly, the dealer has at least as much impact on retention as the product quality or new product innovation. That is another study that I would like to see done. I would want to see the impact of the dealer's service operation on retention. Within the last 18 months I worked with one of the car manufacturers with respect to their service operation. It was clear after a brief study that service plays a major role in repeat business for car dealers.

The bottom line is that car manufacturers could dramatically increase their retention rates if they would insist on having more control over service quality at the dealer level. Some car manufacturers will say they impose service standards, but my brief experience led me to conclude that service quality comes from the dealer ownership. My one liner to every service operation is that every service encounter requires two repairs; namely one must repair the product and one must also repair the customer. The customer repair is ALWAYS the most important.

Don't Expect What you Don't Inspect

One of my least favorite bosses used the phrase "don't expect what you don't inspect." It did not make me happy when he said it, but he made his point that it is important to measure those attributes which are important. Michael LeBoeuf noted as his platinum principle that people do what gets measured. It all points in the same direction. If we want to have loyal customers, we better have systems in place to let us know how well we are doing.

Even the best designed loyalty-based program will deteriorate unless an effective measurement system is established. Accurate, relevant measures that establish feedback loops are the foundation of organizational learning.

One way to avoid mistakes in managing a customer loyalty program is to track and understand the cash-flow consequences of changing customer loyalty - the defection of a target customer. John Goodman, of the Technical Assistance Research Program (TARP) has described three building blocks necessary for an effective customer-driven quality-improvement tracking system:
1. quantify the bottom-line impact of poor quality and customer problems
2. identify quality priorities on the basis of market/revenue impact, and
3. measure performance continuously in each priority area and have top management review the results.

A company's definition of quality must be driven by the desire to earn customer loyalty, and it requires an examination of products and srvices in terms of customer expectations. Achieving customer satisfaction, continued customer loyalty and long-term revenue growth depends on the consistent delivery of products and services throughout the customer's relatioinship with the company, and requires that all areas of the company have a direct or indirect effect on quality, customer satisfaction and continued customer loyalty.

Goodman has identified two rules for a successful measurement system:
1. Identify where and how often customr expectation have not been met:focus on expectations. He has suggested "presenting customers with a list of potential problems or questions across a broad range of transaction types and soliciting which and how many problems or questions they have experienced." Remember, whatever the customer says is a problem, is a problem!
2. Determine the company's ability to handle customer complaints and inquiries by obtaining a baseline indication of the extent to which the existing recovery process reduces defections or helps retain customers who otherwise might defect to the competition.

By examining the impact of problems on customer loyalty, the company can quantify the payoff for problem prevention. For example, in most industries, for every six customers who perceive thay have an unpleasant experience, the company risks losing some, if not all of the future revenue from at least one of those six customers. Further, about 50 percent of all customers with problems or questions never complain to anyone; about 45 percent complain to someone at a front-line level; and barely 5 percent contact the corporate office.

In general, customers who do not complain are about 15 percent less loyal to the company that customers who do complain. Loyalty for customers who do complain and can be satisfied through effective measures increase by about 20 percent. Finally, customers who are completely satisfied often exhibit no less and sometimes greater loyalty than customers who have not experienced a problem. An additional measure of payback and a useful predictor of customer loyalty for problem resolution is word-of-mouth behavior.

Goodman has identified five types of data required for calculating the market impact of improved qualtiy and service:
1. profit value of a customer,
2. number of customers who experience problems,
3. percentage of custoemrs who complain about problems,
4. impact of problems on loyalty, and
5. the impact of the service system on loyalty.

The objectives are (i) estimating the bottom-line impact of quality and service,
(ii)determining potential payback from preventing problems and/or improving customer response systems,and (iii)calculating the return on investment of a customer-driven quality program. Armed with data, quality improvement priorities can be established on the basis of emprirical data collected from custoemrs, NOT management intuition.

Companies can isolate the relative importance of different performance areas by determining the relationship between specific problems and customer loyalty. Once the company determines the percentage of its customer base at risk, priorites can be set accordingly. It should be noted that internal data about custoemr complaints often can conflict becasue custeomrs report eh problem to different people at different times. Multiple reports can lead to conflicting or inconsistent indications about the nature and frequency of the problems. In addition, data may need to be weighted based on where within the company the complaint was received. Companies can easily fall into a measuremnt trap with too much data, too little sensitivity about data interpretation and too complex data integration.

Often, management may find themselves in a situation where analysis assumes priority over action. It is important to use the key drivers of customer satisrfaction to organize the use of internal data. Internal data shold be used to corroborate the nature, frequency and seriousness of customer problems in the key areas, then inform management about the specific nature and solutions for the problems.

A final point about data. Failure to conduct routine follow-up measurements will jeopardize the execution of quality improvement processes.

When reports quantify bottom-line impact, set priorities and dianose potential solutions, an increased investment in measurement activities can be justified. A tracking system, designed to determine the effectiveness of its customer loyalty management system, requiress five criteria to ensure continued effectiveness according to Goodman.

1. transaction-based questionnaires,
2. cost-effectiveness with ease of implementation,
3. minimized response burden for customers,
4. manage by exception, and
5. useful data.

The bottom line is that most companies that have loyalty programs do not manage them and then they wonder what happened. Duh!
5

Some Thoughts on Building Customer Loyalty

Most companies recognize the need to achieve product quality and deliver good customer service that meets or exceeds the customer's expectations. In an article from the past autohors David Stum and Alain Thiry describe three common misassumptions that involve efforts to influence a customer's attitude and presume a cause-and-effect relationship:
1. internally-developed quality standards of product and service lead to customer satisfaction;
2. high levels of customer satisfactionresult in a high volume of repeat purchases;
3. measurements of customer satisfaction can predict a customer's future behavior.

Customer satisfaction is not a surrogate for customer retention or customer loyalty.A satisfied customer is a repeat customer, maybe. A loyal customer will keep coming back and will refer others. Between 65 and 85 percent of customers who defect say they were satisfied or very satisfied with their former supplier.

Loyalty-based companies
The primary mission of a loyalty-based company is to deliver superior value to customers. Success or failure can be measured by customer loyalty, best quantified by retention rate, share of purchases or both. Achiving customer loyalty has three effects:revenues grow, costs decline and employee retention increases.

Loyal customers exhibit some or all of the following characteristics: repeat purchases, purchasing across product and service lines, giving referrals and demonstrating an allegiance in spite of the lure of competition. Building a highly loyal customer base cannot be done as an add-on process. It must be integral to the comany's basic business strategy. Companies that recognize customer loyalty is earned by delivering consistently superior value, design their entire business around customer loyalty.

Self-enforcement is the key to achieving outstanding loyalty because the benefits of a customer-driven system are cumulative. First, the company must understand the relationships between customer retention and the rest of the business. Then, they must quantify the relationships between customer loyalty and profits. The program should focus on four aspects of the business, namely: customers, products and/or services, employees and measurement systems. When all these areas align, they reinforce each other and the results are outstanding.

Customers
Customers form the basis of a loyalty-based company and success depends on their staying with the company for a long time. However, not all customer are equal. The company should target the "right" or "best" customers and be ready to "fire" those customers who do not fit the business. The customers to fire are those that either use more resource than the margins they generate, or their needs do not fit well into the company's basic business. (I often suggest that customers who consume too much resource are better to fire and then lead them to your competitor.)

Demographics and purchasing history give some indication of a customer's inherent loyalty. Finding loyal customers requires taking an objective look at the kinds of customer to whom the company can deliver superior value. An accurate analysis will identify a customer segment that is fairly homogeneous that improves the economics of serving those customers.

Products and Services
Once a company identifies the customer it should keep, it must figure out how to keep them. That often means the company must consider adding new products and services to meet customers' evolving and changing needs. Companies that fail to use the intelligence they have gathered about their customers to develop the products and/or services customers need or want become vulnerable to competitive threats from other companies who will lure their customers away. Over time, as a company developes an intimate understanding of those (loyal)customers, it can exercise good intuitive market judgement because it knows the wants and needs of its loyal customers. In addition, it is easier to build sales volume with customers who already know the company than it is to build sales volume with new customers. So, the choice is to create new lines of products and/or services to meet the changing needs of loyal customers or to search for a new market segment and create new customers.

Employees as a resource
Employee retention is another significant aspect of customer retention. A customer's contact with a company is through its employees, NOT the top executives. Those employees who deal directly with customers day after day have a powerful effect on customer loyalty. Learning accumulates as people stay on the job. The longer employees stay with the company, the more familiar they become with the business. The more they learn about the company, the more valuable they become. Long-term employees tend to be more productive and more loyal as well.

When long-term employees leave, the bonds of trust and expectations built between the employee and the customers are broken. Successful customer-driven companies know that their best employees are as important as their best customers; once a company recognizes that it has loyal, long-term employees, they should, and most do, everything possible to keep them. The companies often provide incentives that align the employee's self-interest with the interests of the company such as remuneration based on aggregate customer retention rates and sharing their "loyalty surplus" with employees as well as stockholders.

Loyal employees take pride in delivering value to a customer over time, take satisfaction in contributing to the company's growth and eventually those employees will develop a company loyalty as an integral part of a shared sense of purpose with the company.

I think I will take some time to think about the measurement systems in a company that are necessary to support both employee and customer loyalty becasue they are not necessarily those that are normally in place.

Employee Impact on Customer Loyalty

A recent study by Towers Perrin indicates the level of engagement of employees within their organizations. The statistics are frightening. Their study shows just 21% of the employees surveyed around the world are engaged in their work. Thestudy defines engaged as being willing to go the extra mile to help their companies succeed. 38% are considered partly to fully engaged. This suggests that 62% are not engaged. There has been much written about the impact of employee satisfaction and loyalty on customer satisfaction and loyalty.

Some of the other findings (equally serious) are:
1. Only 38% of employees felt senior management communicates openly and honestly.
2. 44% agreed that senior management tries to be visible and accessible.
3. Just 10% indicated that senior managemnt treats us as if we're the most imporant part of the organization.
4. More than half felt that senior management treats us as if we don't matter.

The Rinko syndrome and its impact on customer loyalty

The rinko syndrome is probably most common in older businesses where tradition and policy are well-defined and well-known among all the employees. However, it is also evident in businesses which hire people and give them customer contact jobs with inadequate training.

You may have already guessed or at least have a good idea what the rinko syndrome is. Let me give you the background on the name so that you too can appreciate the robustness of this concept. It seems there was once a small printing company somewhere in the Midwest that was run by a man named “Rinko.” He was very good at printing and was successful. He worked on a job-by-job basis where each job was done for a fixed price.

The limitation of the printing company was that it could only produce certain kinds of documents with certain kinds of fonts on certain types of paper. When a particular job met the guidelines of document, font and paper type, the job was sure to be a success. However, these constraints never held Rinko back from taking a job, any job. On the other hand, customers were never made aware of these constraints. Are you beginning to see the customer problem?

Don’t jump to the conclusion that Rinko just did what he wanted within his constraints. In fact, Rinko was very customer oriented and took time with each customer. He would carefully listen to each situation and try to understand the customer’s needs. If it was unclear, he would ask enough questions to clarify the job so that he understood what they wanted.

It was here that the Rinko syndrome occurred. He would take the customer information and redefine it so that it would fit his operational constraints. So, the rinko syndrome can be defined as:
Rinko syndrome: the redefinition of the customer problem to fit a standard product (or service) even when the resultant product (or service) may not meet the requirements of the customer.

Many customers would not even be aware of how their job was changed and some were so naïve as to be unaware that the job was changed. Since he was a good salesman as well as printer, the customers were often led to believe that his product was the best they could have or that his solution was the best one for their particular requirements. Some customers would be happy because they felt that an expert had accurately evaluated their job and given them the best solution. There will not be a negative side for the timid or naïve customer, however, as customers become more sophisticated, the rinko syndrome can have a very negative impact.
When the analogy is made to technical service operations, the implications are equally serious. Consider where the rinko syndrome can occur in technical service operations.

1. Selling contract service – The customer is guided into choosing the service contract that is the “standard” for the company or industry instead of what best meets the needs of the customer. An example is selling a customer next day service (since that is all you can provide) when the customer really needs two hour response because of the critical application of the product in his business.

I had a client several years ago who had a large field service organization around the United States and provided 4 hour response time for on-site service. He was very proud of meeting that level of performance for his customers until we asked his customers what they wanted. We found that 43% wanted 2-hour response and 27% would be happy with next-day service. By changing his dispatch procedures he was able to meet the varying customer needs and by charging more for the 2-hour response add more than $100,000 to his bottom line without adding any additional resources.

2. On-site service – The customer is guided into believing the equipment needs a new part although the failed part is repairable (perhaps because the service tech gets a commission on parts sales). Another way is the customer is told the equipment failure is very complicated so the service tech changes many parts. This can happen when the service tech really doesn’t know exactly what is wrong and solves the problem by swapping out many parts (rather than taking the time to solve the problem or appearing not to know how to solve the problem).

The use of a parts-swapping repair strategy may actually be the correct strategy when downtime is very expensive and the swapped parts are included in the service contract. It is when the parts swapping is done for other reasons that the rinko syndrome is an appropriate descriptor.

3. Tech support – The customer is guided through diagnostics until the tech support personnel can go no further. The customer-oriented person will find the next step toward solving the customer problem. The rinko syndrome person will give up on the problem and tell the customer some story to get rid of him or he will create solutions by trial-and-error until the customer problem is fixed or the customer leaves from exasperation.

I am sure you have seen the rinko syndrome in your service operation. The questions you may have are:
1. Is the rinko syndrome really that bad?
2. Can I eliminate it from my organization?
3. How will I know when it’s gone?

Yes, the rinko syndrome is really that bad! It is the lazy way to solve customer problems. You essentially put all problems (pegs) into the solutions (holes) you offer. The old adage applies: you can fool some of the people some of the time, but …

The rinko syndrome really says to the customer that he is one of many and not special enough to solve his PARTICULAR problem. This insidious process eventually erodes customer confidence in your organization while allowing your personnel to get sloppy about their attention to the customers. If you are trying to differentiate your company from the pack by providing excellent service, STAY AWAY FROM THE RINKO SYNDROME.

The way to eliminate the rinko syndrome from your organization is through training and measurement. Train personnel to be attentive to specific problems and not to compromise the customer requirements! When customer-contact personnel believe their role is to really take care of the customer, and know that management supports this policy, they become aware of the importance of their role. There are service organizations that have incentive programs aimed specifically at rewarding customer-focused behaviors. The type of training that will accomplish this is focused on valuing the customer. This training is NOT a one-time program. Rather it should be an on-going refresher program that is repeated periodically to re-enforce the concept and remind each customer-contact employee of the management commitment to the customer.

Equally important is the need to eliminate performance measurements that encourage rinko performance. (Yes, some performance measures encourage rinko.) Avoid performance measure such as number of customer contacts per day or number of completed calls in a specific time. These speed measures are excellent measures of productivity but they can also backfire when activity level is high. If productivity measures are used, they must be balanced with other measures that focus on taking the time and effort necessary to resolve customer problems. Institute measurements that support effective problem solving and do not encourage front-line service personnel to offer and provide the “quick fix” that ignores the real need of the customer. The measurements of customer retention and customer satisfaction can provide the balance.

The rinko syndrome will disappear (and you will know it) when you have developed the customer-contact personnel in your organization through the appropriate training to the level where they believe their primary mission is to support the customer and your performance measurements are consistent with this policy.

You Call That a Loyalty Program?

I just can't stand it anymore. If I read one more blog or news release about a loyalty program that is nothing more than a discount program I will go kick a tree. I wonder who the dimwit was that decided that a discount program (a loyalty program that does nothing more than give the customer a discount for additional purchases) should be called a "loyalty program." It seems to me that the company that initiates a "loyalty program" that is characterized by offering points which lead to future discounts is really telling the customer that their products, services and personal attention are not sufficient to draw the customer back. THAT IS NOT A LOYALTY PROGRAM!!!

There is another aspect to this discount program that seems to be overlooked; and that is that the discount program has two very important negatives. The first negative is that the discount program directly reduces profit margin both in the discount as well as in the administration of the program. The second negative is that it is susceptible to competitive discount programs. For example, I think we can see a number of credit card companies offering dicounts and paybacks for using their cards. The discounts offered are themselves facing competition between different banks. So, following this logic, the "loyalty program" is only as good as its performance against other "loyalty programs.

My question is: WHY NOT SPEND THE MONEY ALLOTED TO THE "LOYALTY PROGRAM" ON IMPROVING YOUR PRODUCTS, SERVICES AND CUSTOMER RELATIONSHIPS?

In my simple definition a loyalty program is one that aims to develop and then provide product, service and customer relationships that are sufficiently enticing that the customer has no inclination to seek other alternatives. These are the three legs of loyalty that I keep espousing as the real foundation of customer loyalty.

My message to those companies that think their "loyalty program" is really creating customer loyalty - YOU ARE WRONG. SO STOP IT.

I will now get down off my soap box.

Satisfaction versus Loyalty

I amy be going over old ground but I think it is time to document some basic issues. Customer loyalty and customer satisfaction are mistaken for each other and otherwise misinterpreted much too often. There are enough differences between these two concepts that I believe should be pointed out.

Some basic Flaws
A logical step in the business process is that if you can truly satisfy your customers, they will remain loyal, and you can achieve the envious position of dramatically cutting the cost of sales by selling to a large satisfied customer base. In other words, the general "leap-of-faith" in one's thinking is that all satisfied customers are loyal customers. Certainly there is a convincing argument that a loyal customer must be a satisfied customer; however, the reverse does not present nearly as strong an argument that a satisfied customer must be a loyal customer.

One statistical approach shows that loyalty increases as satisfaction increases. With this approach, two pieces of information are examined and analyzed for a specific company. The first piece of information is the level of customer satisfaction taken from a survey of customers. The second piece also is taken from the same survey, and it represents the loyalty measure and makes the assumption that if the customer says he would continue to purchase from the company or would recommend the company based on on his experience, he is loyal.

However, the real question is how do you know whether the person asnwering the question actually does any purchasing or has any influence in purchasing or even recommends purchasing additional products or services. A further step would be to be able to verify that the additional products or services did take place. The studies of which I am aware have not shown the relationship to be anything other than statistical for specific companies. Unfortunately, statistical relationships never require cause-and-effect to be valid.

So, what is the real difference between satisfaction and loyalty. Experience tells me, as do the definitions in several dictionaries, that satisfacion relates to the result of a process. the process may be a sales process, product performance process, or a service process. Loyalty relates to a relationship. Customer loyalty does not occur, but customer satisfaction can occur immediately follwoing a successful process. Loyalty can, in fact, survive a negative process. Loyal customers will continue to purchase from a company even though they may have had a bad experience.

When you examine each of these words, it's clear that customer loyalty is somewhat dependent on satisfaction, but satisfaction does not depend on customer loyalty. That's the difference.

Frederick Reichheld noted several years ago that betwen 65 and 85 percent of customers who defect said they were satisfied to very satisfeid with their former supplier. As an example, Reichheld used the auto industry to make his point by showing that satisfaction scores are between 85 and 95 percent, while repurchase rates avereage only 40 percent.

Now that we can see tht satisfaction and loyalty are not the same, it is time show how nicely they link. Many companies have leaped onto the customer satisfaction bandwagon. Companies believe, as I do, that is a good thing to do. A general statement that can be made with some validity is that customer satisfaction is the cornerstone in building the bridge between the company and the customer.

Most companies have limited their vision to building the cornerstone and couldn't see the extension of the vision to customer loyalty. Once the company vision has changed to customer loyalty, customer satisfaction attains a more significant role but it is not the only goal. Customer loyalty also will be affected by finding the right customers in the first place, always having the right products and services to meet their ever-changing needs, and having employees who build levels of trust with the customers through long-term contact with the same customers.

Finally, if you wnat to change the vision from customer satisfaction to customer loyalty, you must change the mearuement system normally used for customer satisfaction. Measures taken of the customer must include those aspects of the business that have cause-and-effect relationships between company operations and the customers. In general, the most direct measure of customer loyalty will be retention rate. A secondary measure could be the share of purchases that a company receives from a customer who usually splits purchases among several vendors (share of pocket).

Customer loyalty must be viewed differently than customer satisfaction. The good news is that customer satisfaction is one of the primary ingredients that creates customer loyalty. The next step is to examine company operations to determine those that most directly affect loyalty and then begin the measurement process.

The Trust Factor in Leadership that leads to Customer Loyalty

People have an instinctive need to feel in control. Think of the incredible amount of time and energy spent on trying to be in control of thoughts and feelings, other people and their behavior, situations and circumstances, and outcomes and consequences. The need for control -- order, integrity, direction, and continuity -- is obvious. Yet, control does not mean ‘controlling’ the actions of others.

Because an organization is a living entity made up of people, mechanical static structures cannot be imposed effectively. Instead, an organization is in control by virtue of the parts and the people working interdependently and responsibly to achieve commonly agreed results. Said another way, an organization is accountable to people, individuals are accountable to the organization and all aspects of the enterprise are accountable to each other for the integrity of the whole. The operative word here is AND. One of the key concepts of interdependent functioning is that no one area operates at the expense of another, each is an integral and necessary part of the enterprise. Thus, over time an individual’s needs are not met at the expense of the company’s; neither are the company’s needs met at the expense of its people.

No amount of seminars, workshops or restructuring can resolve an underlying problem of an organization that is unwilling to relinquish its total control in favor of mutual accountability. No leader can possibly have all the answers; solutions come from people closest to the action. As such, effective leaders relinquish control and share power. When trust is high, personal responsibility becomes a practical process because persons have access to knowledge and opportunity and are motivated to empower themselves with performance. Cohesive win-win environments cannot be created; they must be nurtured, much like a garden. Although there is life within a seed, the gardener cannot make it grow. Rather, the gardener can select the best seed and create conditions to maximize growth – correct soil, sunshine, water, fertilizer, weeding, cultivation, time. In an organization, two conditions that will enhance a collaborative culture are 1) a communication system that facilitates open, direct interaction and 2) a compensation system that rewards collaboration among employees.

The essence of leadership is to make sure that the organization knows itself and its fundamental principles, and to embody those values. Leaders must be visible and personally engaged in the enterprise, accessible for honest, direct, open communication and be willing to hold the organization accountable to those principles. The leader sets the tone for the quality of relationships within the organization. Because leaders get results through the committed efforts of others, and most people commit themselves to an effort only if they participate in the decision-making process, essential ingredient of an interdependent operation is an atmosphere of trust. Trust must begin with the respect that stems from a belief in the legitimacy of each person in a relationship and a perceived level of fairness. Consensus and mutual agreement does not mean that everybody is 100 percent sold on every course of action. However, it does mean that persons have a real voice and can block a decision that they cannot live with, provided that they present a viable alternative solution. In order for people to commit themselves to the work of an organization, they must trust their leaders and the leaders have to trust their people. Leaders are required to consistently articulate the organization’s core values, reinforce them in words and actions, and hold persons accountable for their parts of the business in accordance with those values.

To be a credible leader, you must develop a deep understanding and appreciation of the values and hopes of the people around you. Leadership is an interactive relationship; a dialogue not a monologue. Leaders become worthy of trust when persons believe that leaders have their best interests at heart. Credible leaders are not afraid to liberate others by giving them latitude to make choices by keeping them informed, by providing resources, and by encouraging risk-taking and learning from mistakes.

“To become a leader, you must become yourself, become the maker of your own life,” observes Warren Bennis. “Until you truly know yourself, strengths and weaknesses, know what you want to do and why you want to do it, you cannot succeed in any but the most superficial sense of the word.” The need for self-reflection is critical to overcome resistance to and fear of change. Who are you? What do you believe in? What do you stand for? To be credible and trustworthy as a leader, you must first clarify your own values. Your competence gives you the skills to turn your ideas into actions. Trust in yourself and your abilities gives you the resolve to pursue a course of action.

Personal growth, as in a garden, must come from the inside out. As such, leaders must focus first on changing themselves before they expand into other areas of influence. Insight alone does not produce change. Personal change is a process that requires us to challenge old ideas and behaviors, to gain awareness and consider new possibilities, and to experiment with new ways of doing things that are congruent with what we really want. Max DePree observes that, “We cannot become what we need to be by remaining what we are.”

Leaders are measured by their behavior. People expect leaders to be accountable for equity, for treating everyone fairly and balancing the needs and interests of the enterprise with the interests of individuals. Trust derives from a serious pursuit by both leaders and followers. It begins with a personal commitment to respect others and to take everyone seriously. It grows when people see leaders translate their personal integrity into actions. Trust derives from truth telling and promise keeping. Our values and moral purpose need to be expressed and demonstrated repeatedly. In an organization, trust depends on the reasonable assumption that leaders can be depended on to do the right thing. The building of trust requires leaders to hold the enterprise accountable. Leaders must demonstrate competence in their jobs, just like everyone else. Earning trust is not easy. It does not happen quickly. Earning trust is difficult demanding work and comes only with genuine effort. True leaders take time to develop the persistence, patience and discipline that will ultimately result in trust. Trust can only be earned slowly, but it can be lost in the blink of an eye. Once we have built it, we should treasure and protect it. When trust permeates an organization, great things are possible, not the least of which is a true opportunity to stretch and reach our potential.

Leaders face the challenge of creating environments in which people will more likely choose to empower themselves. People who know who they are, who have a voice, and who stand for something are extremely compelling. We need and want people who will say, “The emperor has no clothes.” The way to instigate change is to attract people into a risk-taking process, to teach, exemplify and reinforce a willingness to engage in the enterprise. Despite the popularity of the Dilbert phenomenon and the number of people who identify with its message of cynicism, people are hungry for meaning in their work and in their workplace. In a Fortune 500 survey of managers, Gretchen Spreitzer identifies four dimensions of empowerment: a) a sense of meaning, b) a sense of competence, c) a sense of self-determination, and d) a sense of impact. Managers cannot direct people to be entrepreneurial; they can only hope to inspire them to try something new. People understand values and vision by looking at the feet of the people who matter. Obviously, a manager, by virtue of authority and position cannot empower anybody. Individuals must ultimately decide to empower themselves.

Mutually beneficial agreements can create a synergy not possible by either party alone. Such win-win agreements require five distinct areas of mutual understanding:
Desired results (specific identification of what is to be done and when; not how it to be accomplished)
Parameters (guidelines, principles and policies within which results are to be accomplished)
Resources (human, financial, technical, organizational support)
Accountability (standards of performance, measurements, time and methods of evaluation)
Consequences (what will happen as a result of the evaluation – good, bad, natural, logical – give reasons why).

In the final analysis, mutually beneficial agreements, logical processes and objective measurements certainly contribute to a company’s effective operations. However, without trustworthy leaders, who are competent and genuine, business models alone will ultimately fall short. A leader’s personal connectedness provides accessibility that engenders trust and respect. Leaders who are congruent about accountability and honesty, in themselves and others, promote trust throughout an entire organization. Effective leaders are always teaching and learning. When organizations learn collectively to understand the customer, they share responsibility for solving the customers’ problems. When organizations function interdependently and have common understanding of the business, it provides the commitment and discipline that drives the execution of the common business goals.

Trust is a Process That Leads to Loyalty

In previous blogs, I have suggested that trust forms the basis of customer loyalty. I have discussed how to develop trust and customer loyalty. In this blog I will explore the many ways that trust develops and how it starts at different levels based on circumstances.

In The Beginning

Trust doesn’t always have to start at ground zero. Trust often starts at some other level. If we always assume that there is no trust at the beginning of a customer relationship then there would be no trust during the initial contact between the company and the customer. If this were true, initial customer interactions would be wary or adversarial on a fairly regular basis. Maybe this is why companies employ persons who are disarming as a way to engage customers and dispel their initial mistrust. On a personal note I can say that most car salespeople I have encountered have been quite disarming. The most disarming ones have been successful in selling me a car.

While I am wary and mistrustful of car salespeople, I am not nearly as wary of salespeople in a local computer store. For one thing, I am not going to be spending as much money on a computer as I would on a car, and I know more about computers than I do about new automobiles. As a general rule, I am not mistrustful of people. However, I become resistant when I feel uncomfortable with a sales or service situation or I believe that my interests are not being considered fairly or respectfully.

Let’s explore the starting points of trust by looking at several scenarios.

Starting With A High Level of Trust

There are a number of ways that a company can start with a high level of trust with new or potential customers. The first way is to have a good reputation in the community or industry. For example, customers who shop at Nordstrom usually have a high level of trust because the company has built its reputation on good products and excellent service. In the computer industry, IBM has had a very positive reputation for many years that was built on a foundation of “doing whatever it takes” to get the customer problem fixed. Customers expected that their problem would be resolved because they trusted in IBM’s excellent reputation.

Another way to start with a high level of trust is to have a product with an excellent reputation. Honda has built its reputation on the quality and durability of its automobiles. People have come to trust Honda because of the high quality of the products it produces. When people shop for automobiles, they have a high degree of trust that if they buy a Honda it will be reliable and last a long time. Compaq computer had the reputation of having the highest out-of-box quality for PCs for a long time. They built their reputation by getting the initial bugs out of their PCs by burning them in for a number of hours before shipping them. Hence, the probability that they would function properly when taken out of the box was higher than for most other computer manufacturers. Consequently they were the industry leader for many years because the customer’s initial trust was based on the reputation of the product. This may have been one of the many aspects of Compaq that made them an acquisition candidate for HP.

Reputations are usually built by a combination of word-of-mouth, advertising and experience. It is certainly possible for a company to ‘spin’ or ‘sell’ an image or perception about a product or service that is contrary to the objective reality. However, over time, as customers have their own experiences and talk with each other, the truth will ultimately be known. There are a number of surveys showing that a customer with a negative experience will tell about 10 other people on average and a customer with a positive experience will tell an average of only about 2 other people. In either case, word-of-mouth will influence new and potential customers because most people ask friends about their experiences with products, services and companies before they shop.

Starting With A Neutral Level of Trust

Obviously it is better to start with a neutral level of trust rather than a negative level of trust. This situation often occurs when customers have little or no information about the company, its products or its people. This circumstance can also occur when contact between customer and company has been either minimal or superficial. Often the company’s products or services dictate the nature of such interaction. For instance, in cases where products are extremely similar, customers can be easily swayed by price. In this case, people are more susceptible to influence by marketing information and/or social pressures.

Starting With a Negative Attitude

In this case, the person has no trust and a negative perception about a company. The trust has either been broken or not allowed to develop. A former customer may be dissatisfied or hostile or a prospective customer may have a negative attitude about dealing with a company because of influence or personal experience of a peripheral nature. This situation can be remedied only if the company is aware of the problem and is willing and able to engage with the disenfranchised customer. Obviously the customer must be willing to deal with the company on some level and at some point.

Developing Trust Within a Customer Relationship

First of all, let’s understand two important things: 1) There is more than one aspect to the earning of trust, and 2) The elements of trust depend, in part, upon the people and their circumstances. For instance, in dealing with a highly technical product or service, keeping promises, paying attention to details and responsiveness might be the customer’s top priorities. On the other hand, in a frequent and on-going relationship of a non-technical nature, having the customer’s best interest at heart, maintaining effective communication, and emotional care and concern may be paramount.

Trust is essentially the confidence and faith that implies an absolute and assured belief in something or someone that will not fail you. It can be trust in a person (a sales person at Nordstrom) or in a product (Honda) or in a process (Fed EX). It implies not only an attitude or feeling but also an objective expression in action, such as the reliance on a physician’s skill. It implies conviction and certainty about the credibility and reliability of a person or thing. When customers develop this kind of attachment to a company, they are loyal. Obviously there is a reciprocal engagement to mutual advantage when this level of trust exists.

It is possible to describe key aspects of a trusting relationship. The following elements are significant components in the building of trust that is the foundation for loyalty.

Confidence. Customers need to feel secure in the belief that you will deliver what you say, each and every time. You must keep your promises! Your accountable behavior demonstrates your reliability and consistently. Customers don’t want to worry about whether or not you will come through. They need to concentrate on their own business.

Reliance. Be proactive in responding to your customers. Pay attention to what matters most to your customers then deliver it flawlessly. When you pay attention to the details, consistently over time, you earn confidence and respect. Look for ways to be genuinely helpful to your customers and welcome the opportunity to serve; go above and beyond. Be clever and creative about solving their problems. Be the ‘go-to’ guy and deliver the goods, consistently and cheerfully. Sam Walton’s attitude towards customers describes this element well.
“Exceed your customers’ expectations. If you do, they’ll come back over and over. Give them what they want and little more. Let them know you appreciate them. Make good on all your mistakes, and don’t make excuses … apologize. Stand behind everything you do. “Satisfaction guaranteed” will make all the difference.”

Effective communication. Listen actively and respectfully, giving full attention to understanding your customer’s meaning. Then, take responsibility for communicating your meaning so that your customer accurately understands you. Good communication is based on reciprocity and mutual understanding. It requires patience and persistence to ensure that the lines of clean clear communication remain open. You can’t serve a customer effectively if you don’t understand him and know what he needs and wants.

Emotional investment. Care genuinely about what your customer needs and wants and be empathic to those needs and desires and demonstrate that concern with your enthusiasm and energy. A positive attitude is an outer expression of your inner feeling. Pay attention and connect emotionally in order to understand what they feel and why. Surveys show that approximately 68% of customers who defect, leave because of the perception of the company’s indifference. Enjoy your customers and appreciate the opportunity to serve them. Put them at ease and make it easy for them to deal with you. The L.L. Bean credo expresses this idea very well.

“A customer is the most important person ever in this office, in person or by mail. A customer is not dependent on us; we are dependent on him. A customer is not an interruption to our work; he is the purpose of it. We are not doing him a favor by serving him, he is doing us a favor by giving us the opportunity to do so.”

Consistency. You must have a clear and consistent focus about your own business. Who are you and what business are you in? Consistency builds credibility. Be authentic and congruent over time so that your customers can depend on who you are and what you stand for.

The Final Analysis

Although people, their companies, their relationships, their situations and processes are unique, there are, nonetheless, a few common denominators.
Think about your own experience of being a loyal customer. What specifically is it about that relationship that has caused you to trust? Now, think of another example. Are your reasons and processes the same for how you have come to trust? The development of trust in any relationship is an unfolding process; a progression through necessary stages. The gradual growth and differentiation through a series of changes in the relationship is an unscientific process. Although we sometimes offer our trust on good faith to someone, or something, it must still be developed through experiential verification over time. Because trust must be earned over time, it is a precious commodity. It can be lost in a moment and can take years to rebuild.

Building Trust (and loyalty) with Customers

The logic that is being built in this series of blogs is that building market share can be created through loyalty and customer loyalty is built upon trust. This blog will take the next step and discuss some specific ways that trust can be built. It will include ways that can easily be taught to employees so that customer interactions will be positive and will increase the level of trust with your organization.

Ethical Treatment and the Golden Rule

The basis for building trust with customers is ethical treatment. In a book entitled Business Ethics in a Changing Culture by Richard Chewning, the author notes:

“…Ethics, as an expression of reality, is predicated upon the assumption that there are right and wrong motives, attitudes, traits of character, and actions that are exhibited in interpersonal relationships. Respectful social interaction is considered a norm by almost everyone.”

He goes on to say “the overwhelming majority of people perceive others to be ethical when they observe what is considered to be their genuine kindness, consideration, politeness, empathy, and fairness in their interpersonal relationships. When these are absent, and unkindness, inconsideration, rudeness, hardness, and injustice are present, the people exhibiting such conduct are considered unethical. A genuine consideration of others is essential to an ethical life.”

Perhaps the simplest expression of ethical treatment is the Golden Rule. While there may be some business situations where the Golden rule may not be tenable, the general application is a worthy ingredient in any customer interaction. This may become very difficult in a sales situation when the salesperson feels enormous pressure to make the sale, sometimes to the extent of not finding the “best” solution for the customer but rather the “best” solution for the salesperson or the company.

In an article by Anna Muoio entitled The Experienced Customer which was published in Net Company magazine (Fall, 1999), she notes that a company should “let the customers reveal themselves at their own pace – so they can learn to trust you and so that you can serve them one at a time. Don’t force them to follow a one-size-fits-all, information-gathering approach.”

Some eCommerce Examples

There are some excellent examples of how companies on the web have developed techniques for letting customers reveal themselves at their own pace. The following list represents just a few ideas of how to “let customers reveal themselves”

1. Lands’End website (www.landsend.com) allows customers to order swatches of fabric at no cost so they can see and feel the fabric before they make a purchase.
2. Amazon.com (www.amazon.com) has a customer bill of rights that is honest and fair and conveys the essence of the Golden Rule.
3. The website for the Gap (www.gap.com) allows a customer to put an outfit together online. The website builds the outfit and keeps track of the costs so that the customer can visually see the outfit on the computer screen and know the price at every stage of the purchase.
4. Garden.com (www.garden.com) has offered an unmatched guarantee. It will reimburse a customer 110% of the purchase price within one year if the customer is not satisfied with the purchase.

In each of these examples, the company is providing the customer with some form of reassurance that they will get ethical treatment. The customer that comes to your website is really in a self-service environment. That fact is often overlooked and often the website design may be pretty but it may also be confusing. The website should offer the same friendliness as a personal contact. It should be easy to use, intuitive to understand and allow the customer to get information that will help make a purchase decision.

The Big Blue Example

For those or us who can remember the computer industry in the 1960’s and 70’s will remember the impact of “Big Blue” (IBM for those of the younger crowd). IBM had a very high market share of the large computer users. If fact, it dominated the market to the extent that some competitors said at the time, “we worry each day that Big Blue will do something that will put us out of business.” During this period of time IBM was not the industry leader in technology nor was it the low cost alternative.

How could a company with technology that lagged the industry simultaneously charge some of the highest prices in the computer industry and stay in business? The answer was commitment to the customer that was total and complete. When a customer purchased a computer system from IBM there was complete trust that the system would be installed properly and all aspects of the system would meet the customer’s requirements. Although this wasn’t always the case, the perception continued.

When competitors would compete with IBM, the phrase that most of them heard when they lost the bid was that the company could depend on IBM to make sure that everything would work. The person at the company would say something to the effect “I can’t be fired if I select IBM.” What that person was also saying was that he trusted IBM and so did his management. If he selected another vendor and the system did not work as specified, he ran the risk of being fired. But if he selected IBM and it did not work, he was still safe because he had selected “the best” alternative (rightly or wrongly).

Even when the personal computer was first introduced in the early 80’s IBM was the vendor of choice and held the largest market share. It was the same criteria for PCs that was used for the mainframe computer systems; namely, if I select IBM I can’t be fired for selecting the best (even if it costs more). I know this is true because at the time, I owned a small computer repair company that built PCs. Our price was less than ½ the cost of the IBM. We were completely unsuccessful in selling to large corporations and the answer we got when our bid was turned down was the one noted above “I can’t be fired for buying IBM but I can if I buy your computer and we have problems.”

The lesson: IBM had such a huge reputation of total customer commitment that companies blindly trusted IBM to do what was right, and even if it cost more, the security of buying from a trustworthy company was worth it.

Some Other Examples

IBM used a strategy of total customer commitment to build loyalty. There are some other strategies that have also worked.

Nordstrom has taken the strategy of delighting their customers. In general, Nordstrom trains their employees to pursue excellence in customer service. They empower their employees go out of their way to exceed customer expectations – another way of saying delight the customer by giving more than expected. They are taught to use good business judgment in making decisions regarding refunds-on-the-spot with no questions asked. With this strategy, Nordstrom has been one of the fastest growing retailers in the US and has had higher than industry average profit margins (even with refunds-on-the-spot). They have built loyalty on a base of giving a little more than the customer expected rather than just enough or just a little less.

Another very different strategy for building trust and loyalty has been taken by Southwest Airlines. They have chosen to dignify the customer during a period in airline travel when other airlines are treating their customers with less and less dignity. (Some people say that they feel more like herded cattle than people when dealing with their airline. Southwest has taken the course of making the relationship with its customers as pleasant as possible and still minimize its costs. The executive vice president, Ms. Colleen Barrett has said, “we will never jump on employees for leaning too far toward the customer, but we come down on them hard for not using common sense.”

The Bottom Line

There are a number of strategies that can be used to build customer trust as noted by the examples above: such as commitment to customers, delighting customers and dignifying customers. They all have several ingredients that are common. The following list appears to capture some of these common elements.
1. The corporate mission is clear and it is frequently and unambiguously voiced by upper management.
2. Employees are given responsibility to take action and make decisions on the spot.
3. These organizations work hard at reducing internal bureaucracy and internal politicking.
4. They are frequently asking the customer what is important and how are they doing.
5. They focus their products and services to be what the customer wants.
6. They encourage teamwork.
7. They work at being a partner with their customers – they try to build the partnership at every interaction whether sales, service or accounts receivable.
8. They exemplify trust in all their interactions with their customers. They do this by treating customers in ways that convince them that the company will never take advantage of a customer even when the customer is most vulnerable.

Trust: The Key to Loyalty

It seems intuitive that customers must have some trust in the company in order to be loyal. This blog will consider the concept of trust and identify some elements that may develop trust and loyalty.

The first question is, “What is trust?” Webster’s dictionary defines trust as “assured reliance on the character, ability, strength of someone or something.” The word was probably borrowed from the Old Norse word traust that meant help, confidence, or firmness. The German word trost and the Dutch word troost originated about the same time with similar meanings. These ancient words give a little better sense of trust, especially the notion of confidence.

The Oxford Dictionary defines trust as “a firm belief in reliability, honesty, veracity, justice, strength of a person or thing; reliance on truth of statements without examination; confident expectation; accept without evidence.” Webster’s New Dictionary of Synonyms describes trust as “confidence, reliance, dependence, faith in the fact of feeling sure that a person or thing will not fail him.” Trust implies an absolute and assured resting on something or someone; often suggesting a basis upon other grounds than experience or sensible proofs. The point is that trust implies a deep reliance upon a person or thing.

A Personal Service Story

As I was thinking about trust and what it is, I recalled a personal example. Several years ago I bought an Audi. The car had a sunroof and one day the sunroof decided not to close. I took it to the dealer and found they could not schedule it for repair until the following day. Since there was a slight chance of rain, I decided to seek an alternative. I found a small repair shop that specialized in German cars. The owner came to the car and removed a panel in the roof inside the car and quickly examined the sliding mechanism. He commented that this was a simple repair, got his screwdriver and within less than 5 minutes the sunroof was completely operational. When asked what the charge was he said “No charge but please keep him in mind the next time my car needed service. He began to earn my trust and loyalty in three important ways:
1. He was competent
2. He was proactive in wanting to solve my problem
3. He did not take advantage of me – even though he could have.

He has remained consistent and congruent in these behaviors over time and I still trust him and am a loyal customer.

The ideas of Dr. John Richardson and Linnea McCord in their article Trust in the Marketplace are very similar. They note that there are three aspects of trust that relate to interaction between consumers, employees and companies in the marketplace:
1. Consumers and employees must have confidence in organizational promises or claims made to them.
2. Consumers and employees require that integrity and consistency follow a known set of values, beliefs, and practices; clear expectations.
3. Consumers and employees require concern for the well-being and respectful treatment of others.

In short, a company should meet customer requirements and expectations consistently over time and to demonstrate that they (the customers) are valued and appreciated.

Untrustworthiness

It may be easier to describe and understand untrustworthiness or lack or trust rather than trust. We are all aware of examples that demonstrate untrustworthiness and its implications. One current high profile case is Firestone tires on Ford Explorers. It seems that both Firestone and Ford did not disclose some important relevant information to the public. Now that the information is known, the reputation of Firestone (and to a lesser extent Ford) is tarnished and trust in Firestone tires has been seriously damaged. Because the nature and extent of injury and loss of life that is directly attributable to tire defects (Firestone) and their use on Ford Explorers, the damage to the credibility and reliability of one or both of these companies may be permanent, or at least long-term. The new CEO of Firestone is now appearing in commercials that focus on Firestone’s commitment to producing quality tires. These commercials are certainly an attempt to respond to the public’s lack of trust in Firestone tires and to recover from sales losses that resulted from the disclosures of their failure to deal forthrightly and swiftly with information about defective tires.

Companies usually lose customer trust and confidence when they either mislead, misrepresent or exaggerate claims about their products or services. The loss of customer trust is very expensive and very difficult to restore, if not impossible.

A look at e-commerce

In a recent study of 50 e-businesses, six components were identified as being important in developing trust:
1. Provide state-of-the-art security
2. Show legitimacy (by aligning with an established brand)
3. Fill orders promptly and accurately
4. Assure customers they are in control of the buying process
5. Treat customers with care (be sensitive to their mood)
6. Allow customers to chat with other customers.

These components reflect for the need for businesses to cultivate qualities of competence, pro-active attitude, concern and respect. The chat room is the internet version of providing assurance to the customer that he/she is receiving a fair deal and good value by allowing them to communicate with other customers, who are otherwise invisible and unbiased, to discuss the products, prices and services.

A trustmark

Another study discusses the concept of a “trustmark.” The author of the study defines a ‘trustmark’ as:

“a distinctive name or symbol that emotionally binds a company with the desires and aspirations of its customers. It’s an emotional connection – and it’s bigger and more powerful than the uses that we traditionally associate with a trademark…”

The key point about the trustmark is that it emphasizes the key differences between satisfaction and loyalty. Satisfaction is a passive state. Customers can be passive about your company, products and services and still claim that they are satisfied. For example, I bought my wife’s computer based on price, features and availability. While it was an excellent deal, my experience with the store was very good, and my wife is very happy with the laptop, I am not necessarily loyal to that brand of computer. Hence, my attitude about the computer company is passive; I have no emotional investment in purchasing from them again. Now, base on performance and experience with the computer, my satisfaction could grow into loyalty. It should also be said that, in this example, my wife will form her own opinion about the computer based on her individual experiences. At this point, she is predisposed favorably towards the company because she’s engaged with it and her needs and expectations are being met.

On the other hand, loyalty and trust are not passive states. They are active in the sense that loyalty and trust require an emotional connection to the company through a variety of means: experience with products, services, employees, word-of-mouth awareness, advertising, promotion, image, share of heart. A loyal customer trusts that the company will meet and/or exceed their expectations in connection with the delivery of its products and services. It is the emotional link that brings the customer back and acts as a barrier to competitive pressures. When a customer gives a company his trust, he is simultaneously relinquishing some of the wariness that would normally be present in a decision-making process to purchase a good or service. The loyal customer expects that they can rely on certain assertions made by the company to provide quality and service at the best price. The same customer, when dealing with a company to which he is not loyal, will have a more skeptical attitude and challenge the information provided by the company. Consumers are more educated than ever. They have vast resources for information and easy access to a multitude of options.

The emotional connection lubricates and smooths the way for the buying process. For example, once I trusted the Audi mechanic, the buying process for service is simple: take the car in and describe the problem. I know that the problem will be fixed and that the price will be fair and competitive. There would be no extra parts or hidden or bogus costs. I am able to ‘enjoy’ the process, as much as I can enjoy spending money on car repair, rather than being on edge and wondering whether I’ve asked the right questions or whether the job will be done right.
Trust is built, one transaction at a time! People want to know where they stand with each other. They may not always like what they hear, but if they can count on what is being said as being true, then they are in a position to decide how they want to handle the situation or the relationship. Customers and employees have the option to choose the companies with which they invest their precious time, energy and money. Often times, the only face of the company is presented by the employee who is serving the customer. The company is understood through multiple means (advertising and marketing, multiple employee contacts, public relations, word-of-mouth information, images).

It is the emotional connectedness that impacts people over time. The concept of ‘share of heart’ comes from this idea of touching the emotions of a customer through some type of exchange or contact, personal or otherwise. That is why companies work so diligently to create a positive experience with each customer. Sometimes it is personal, sometimes by association. This is the reason that many companies engage in significant community service efforts and contributions, to demonstrate their regard for things that are important to their customers and to earn good will and respect.

Auto Dealership Loyalty

A brief press release of a survey of UK motorists indicated a dramatic decline in customers' loyalty to their dealerships between 2005 and 2007. The survey was performed by Capgeminis Cars Online 07/08 study that included 2800 consumers. The loyalty plunged from 46 percent to 32 percent. It appears the decline is primarily the result of increasing demands from customers on dealers. However, the UK motorists do not appear to be buying their cars online as much as other Europeans. Only 15% of UK motorists indicated they were likely to buy a car on line compared with the European average of 18%.

These numbers suggest that relationship loyalty does not appear to have a large role in automobile purchasing in the UK. It may also indicate greater price elasticity for car purchases there. It will be interesting to see how this trend will compare with the car purchases in the US where loyalty to dealerships has been near the same levels as those in England.

Loyalty in Virtual Relationships

Jim Kane, a partner in the Brookeside Group located in Boston has posed a very interesting concept. Jim is suggesting that since loyalty is based on relationships many of those relationships are now becoming virtual in many areas. He posits that the same elements that exist in human relationships now exist in virtual relationships. There are six elements that he believes affect loyalty. They are:
1. Integrity - the customer must perceive the company/virtual person to be honest and fair.
2. Competency - the customer believes the company/virtual person can deliver what it commits to.
3. Recognition - the customer believes he/she is being perceived as an individual.
4. Proactivity - the customer will see the company/virtual person as a trusted advisor.
5. Saavy - the customer believes the company/virtual person understands the challenges the he (the customer) is facing.
6. Chemistry - the customer likes working with the company/virtual person.

Mr. Kane notes that he is not aware if a human works at Amazon, yet Amazon and the virtual people do all of those things very well.

These virtual relationships are occuring every day in the online, internet-driven, e-commerce-oriented world.

I think one of the most important aspects of this view of customers as both physical and virtual through technology is that the technology that companies use is now directly affecting customers. As Mr. Kane so aptly puts it "CIOs are essentially building relationships with the company's customers through technology." The down side to this technology connection is that if the customer interface is not done properly, the technology can affect the customers in a negative way and create a barrier to customer loyalty.

The bottom line for me is that we must become more aware of the impact of the technology used by a company and pay close attention to its impact on customers.

The New Science of Customer Relationships

There is a large number of people making a living by telling companies how to improve customer relationships. Some of them are just mouthing words and platitudes while some have some real knowledge to impart. I believe the reason so many are working in this area is because customer relationships are recognized by the business community as an important component of customer loyalty. I believe, based on the recent work published by Dr. Daniel Goleman, that we may have a science that will allow us to examine customer relationships in a more systematic, scientific way.

Dr. Daniel Goleman, the author of "Emotional Intelligence" has a complementary book that appears to indicate the science of human relationships. This new book is titled "Social Intelligence, the Revolutionary New Science of Human Realtionships."
I do not intend to either review nor abstract his book on this site. Rather, I am offering some brief excerpts that have convinced me that this may be a science that gives those of us in the customer loyalty field some insight that has always been obvious but difficult to translate into a systematic, repeatable set of rules that would withstand the rigor of scientific scrutiny.

According to Dr. Goleman, people seem to be programmed to want to connect with other people. He postulates there are two roads to connecting with another person; namely the "low road" and the "high road." The "low road" is circuitry that operates beneath our awareness, automatically and effortlessly, with immense speed. For example, quoting from Dr. Goleman, "when we are captivated by an attractive face, or sense the sarcasm in a remark, we have the low road to thank.

The "high road" is very different since it runs through neural systems that work more methodically and step by step with deliberate effort and is generally part of our consciousness. Dr. Goleman notes "as we ponder ways to approach that attractive person, or search for an artful reposte to sarcasm, we take the high road."

The low road is very emotional and traffics in raw feelings whereas the high road is cooly rational and relatively cerebral and looks to understand what is going on.

So, what does this mean for those of us who analyze customer loyalty? Since I am a believer in the three variable model for customer loyalty (customer relationships is one of the three variables and, in my mind, the most important variable), I see the work of Dr. Goleman as foundational to our building a comprehensive theory about how to train employees. I think one key is the work of Dr. Goleman since it provides a model for understanding what creates and builds a strong customer relationship.

Customer relationships are built on rapport between the customer and the employee. Three elements appear to be required to provide the rapport; namely mutual attention, shared positive feeling and a well-coordinated nonverbal duet. More information about these are described in Dr. Goleman's book.

One of the errors most often made by employees when dealing with customers is simply not paying attention to the customer. Mutual attention is necessary and that means the customer should be given the undivided attention of the employee.

One of my pet peeves is to have an employee at a store where I want to make a purchase start to wait on me before he/she has finished some task. I am not given the undivided attention of the employee and the first thing I feel is that I am not worth their time. I will usually stop interacting with the employee until I have their undivided attention. I will stand quietly and wait until the employee stops or finishes the taks. Sometimes the employee "gets it" and does a great job of recovery by giving me great service while other employees will become rather distant and do whatever it takes to get rid of me ASAP. The store with the latter type of employee will not get much of my business in the future.

I intend to examine the implications of this work by Dr. Goleman and design ways that employees can be trained to build those lasting customer relationships.

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.

More Support for a Three Parameter Loyalty Model

I continue to look for support for a three parameter loyalty model. The three parameters are product, process and relationship. I continue to discount all award programs as contributors to loyalty. My reason for not including these programs is that they do not breed loyalty. Awards offer customers encouragement for buying their product or service but are only as good as the award and does not carry any persistence. The value of the award is only as sustainable as the market allows. As soon as a competitor provides a "better deal", there is no longer any reason to remain "loyal".

Now, the good news. A recent study conducted by M/A/R/C(R) Research and National In-Store found over 16% of consumers said they would stop visiting a store all together as a result of a bad customer experience. The next significant statistic is over 95% of consumers indicate sales associates are very/somewhat important with about 66% indicating they are very important. An interesting quote in the study is "while product and price may bring customers in the door, executing expected level of customer service keeps them from walking out and into a competitor's store".

This study included responses to an online survey from over 12,000 shoppers and in-store audits of almost 4,000 office supply and consumer electronics stores.

The bottom line is that award programs and discounts can bring customers in, but they are NOT a component of loyalty! Loyalty comes from a product that is so attractive, that other products do not compare in the eyes of the customer. Loyalty can also come from a service that is unmatched. And FINALLY, loyalty comes from building a lasting relationship with the customer.

Big Statistics on Customer Satisfaction

I recently completed a study of customer satisfaction using 350,000 survey responses from around the world. I used the data from 10 companies that used a phone survey (translated into the local language. The surveys covered field service, help desk and depot service for technology equipment.

One finding was that countries in North and South America and Asian countries scored higher in cusotmer satisfaction than European countries. I have spoken with some people I consider knowldgeable about technical service and global business about my findings. Much to my surprise, without exception they all nodded affirmatively that the results matched their expectations.

The purpose of the study was to examine customer satisfaction from a cultural perspective and detect differences in satisfaction. The diffrences I found were mostly in Europe and, in general, the satisfaction levels in Europe were lower than other areas of the world. One comment was that the Europeans do not regard service at the same level of importance as those in other areas of the world.

With this amount of data, there will be further investigations into the differences around the world. One of the projects I expect to investigate is to detect the differences, if any, between companies who out-source help desk activities and those that keep the help desk in house. Of course, a country-by-country examination is also an interesting project.

Disloyalty

RightNow Technologies has recently sponsored a survey that was performed by Harris Interactive and which provides some interesting statistics. The source I used did not discuss the methodology of the survey but did note they sampled 2,000 adults. Some of the more interesting findings are:
1. 80% of the respondents vowed never to buy from the same company after a negative experience. This value is up from 68% that was noted in a 2006 survey.
2. About 28% said they cursed as they wrangled with the customer reps during their phone call.
3. About 19% admitted shouting at the customer rep.
4. Harris Interactive provided some further detail by area of the country.
4a. Northeastern customers are unlikely to get emotional - they just take their wallet to another company.
4b. Midwestern customers are most likely to swear (34%).
4c. Southern customers are least likely to swear but 12% fantasized about picketing or defacing the company's headquarters.
4d. Western customers are more likely that the average customer to turn to the web and vent on a blog. 83% said they would never do business again with the offending company.

These statistics are not unreasonable. The customer today is much more sophisticated and more demanding. It is showing up more and more in the research. The companies that maintain a strong customer focus will outperform financially those companies that do not have a customer focus. I demonstrated this effect that improved financial performance coincides with a customer focus with a colleague in a recent article "Customer Focus: One key to Financial Success."

These statistics also support my notion that dissatisfiers are much more important to manage than satisfiers. Customer surveys should focus on the dissatisfiers rather than the "feel good" satisfiers. Managing dissatisfiers is where the action is.

Customer Loyalty Metrics by Accenture

I just read the latest issue of CRM magazine, September, 2007 and read a comment by Woody Driggs who is the global managing partner for the CRM serivce line at Accenture. If I read his column correctly, Accenture has a loyalty metric that has the following components:

1. Involvement with the Product or Service Category - this metric looks into how interested customers are with products and services. Apparently Accenture looks into the degree of involvement by customers with either the product or service or both.
2. Commitment to the Brand - this metric looks at the level of passion that customers have about the brands they buy. They are measuring the degree to which customers are willing to pay a premium for a brand. They also want to know if the customer is an advocate for a brand.
3. Likelihood to reevaluate - this metric measures how prone customers are to reevaluate their buying choices. Apparently they are trying to find the points at which customers are willing to switch.

I have simplified the definitions provided by Mr. Driggs and hope that in my simplification I have not distorted their meanings. If so, I apologize. These three components generally follow the three components of my loyalty model which are product, service and relationship. The component that they include that is not included in my model is brand loyalty.

This brings up an interesting dimension that needs to be evaluated further. The question I must answer is whether or not brand loyalty is just a composite of the three components in my loyalty model or is it really a new variable (component of loyalty). The question that comes to my mind is whether or not you can have brand loyalty without having product, service or relationship loyalty or is this a summary variable that is some function of some of them or all three. Is the brand loyalty variable an independent variable or does it have a high correlation to the three in my model and hence not really a separate variable?

Accenture believes this model will increase a company's ability to improve segmentation and improve their market focus and help them retain the most profitable customers. My previous blog demonstrates that a company with a customer focus will out perform those companies who do not have a customer focus. This suggests that Accenture will improve their client company's performance whether their model is correct or not.

More on the brand loyalty variable issue later.