Losing Loyalty

The CMO Council in association with Pointer Media Network recently published a white paper entitled "Losing Loyalty: the Consumer Defection Dilemma." In the white paper they present some startling statistics based on an analysis of the individual buying patterns of more than 32 million consumers in 2007 and 2008 across 685 leading CPG (consumer packaged goods) brands. All consumers tracked in the study were consistent shoppers who shopped at least twice in every eight weeks.

Some of the more dramatic statistics are:
1. Only 48% of high loyal consumers in 2007 remained highly loyal in 2008.
2. Only four out of ten brands retained 50% or more of their highly loyal consumers from year to year.
3. About one-third of all highly loyal consumers in 2007 completely defected to another brand in the same category in 2008.
4. Some of the major brands could have increased revenues by 20% in 2008 if they had eliminated brand defection.

These statistics indicate that much of the lost loyalty is due to churn rather than defection. They make the point that the two leading drivers of loyalty churn are variety and value. Consumers seek new experiences in terms of product attribute and are likely to try new products which may include switching brands. During this economic downturn, consumers are interested in saving money and are more likely to switch brands if lower cost alternatives are available.

Customer churn and defection can be found even in the best economy. However, the current economy is driving churn and defection to unforeseen high levels. The report suggests that both manufacturers and retailers need to take direct actions to increase loyalty, retention and customer value. This translates into a marketing strategy with a focus on better communications to their high value customers to demonstrate the real value of their products. This may include incentives, rewards and targeted advertising.

The bottom line is that churn and defection are always present. it just so happens that this economy is exacerbating the magnitude of churn and defection. The good news is that companies that survive and prosper in this economy, will be well positioned when the economy turns around. The bad news for those companies that do not manage the churn and defection well in this economy, may find that their lost customers have found new loyalties.

Predictive Versus Reflective Measures

Many companies seem to think that customer satisfaction measures are predictive. Other companies see customer satisfaction measures are reflective. I believe that once the terms predicative and reflective are carefully examined, it will become clear which term is more appropriate for customer satisfaction.

The dictionary gives a brief definition of predictive as: "being able to tell in advance usually based on facts." The synonyms of predictive are "forecast" and "prophesy". When we ask customers to report their satisfaction with a product or service, we are gaining perceived knowledge about a specific event, in most cases. Of course, customers are also asked strategic questions that are not event specific. In either case we have a measure of the customer's perception of past experiences.

On the other hand, the dictionary defines reflective as: "Something which reflects, or redirects back to the source; e.g.Mirrors are reflective. Thinking back on the past; e.g. He always becomes reflective in preparation for the new year. Thus customer satisfaction is more nearly related to be reflective than predictive.

So, if customer satisfaction is more reflective than predictive, what value does it bring to a company. There are a number of ways that a customer satisfaction measurement provides value. The following list provides some of the value components:
1. It is a measure of how the organization has performed in the past.
2. It may indicate organizational problems that are present and may impact future performance in a negative way.
3. When it is positive it can become an internal motivator.
4. It provides an on-going interest in the customer at all levels of management.
5. It can guide be used as a component of resource allocation.

One of the major misuses or customer satisfaction is using the measure as a predictor of future performance of the organization. Customer satisfaction is often referred to, correctly in my opinion, as a rear view mirror perspective of the organization's performance. Some would ask whether or not it is appropriate to use customer satisfaction measurements for predictive purposes. The obvious answer is no.

The bottom line is that customer satisfaction is a valuable measure of an organization's performance with respect to the customer. It is an historic measure since it is only capable of measuring past events. As the investor's guide usually states "past performance is no guarantee of future performance." When used properly, a valid measure of customer satisfaction is an excellent diagnostic tool for the organization and can be used to optimize the use of limited resources. It can also breed loyalty in both customers and employees.