Loyalty Model – part 2

In the previous blog, the general form for the construction of a loyalty model was postulated.  A base equation hypothesized that loyalty could be described by measuring the strength of the relationship between the company and its customers.   A sub-model was proposed to show that the strength of the company-customer relationship could be explained by various factors.  In this blog, the two major components of the model will be discussed.

The two components that describe the company-customer relationship are those that strengthen of the relationship and those that diminish the relationship.

Factors that enhance and strengthen the company-customer relationship may be considered relationship builders; “satisfiers.” Satisfiers represent activities or involvements that yield positive experiences by the customer and also provide value to the company. In the service business, response time tends to act as a satisfier.  For example, when services are requested, the time to respond will strengthen the relationship between the customer the company as long as the response time meets or exceeds the customer’s expectation. Consistently meeting a customer’s expectation of response time for service has been shown to strengthen the relationship with the company. More discussion of satisfiers will be provided in a separate blog.

Factors that diminish the company-customer relationship may be considered “dis-satisfiers.” A dis-satisfier is generally not the opposite extreme of a satisfier. As an example, consider customers who frequent a fast food establishment. Customers expect a reasonable quality of food to be delivered quickly. If either the quality of the food or the service delivery time does not meet the normal expectations, the customers may be disappointed but probably not dis-satisfied. However, if the restroom at the same fast food establishment has not been adequately maintained, many customers may refrain from returning to the restaurant due to a concern that lack of good hygiene in the restroom may be an indicator of lack of good hygiene in the kitchen. In this case, the quality of the hygiene in the restroom can be a dis-satisfier; but the hygiene quality of the restroom is surely not the major attraction of the fast food establishment and is not considered a satisfier. More discussions of dis-satisfiers will be discussed in a separate blog.

Company-customer relationships are not linear.  They are not a function of adding the satisfiers and subtracting the dissatisfiers, which is similar to the NPS metric when it subtracts the detractors from the promoters.  This simplification of the loyalty model makes no sense since it is equally equating positive values (satisfiers) to negative values (of the satisfiers or possibly dissatisfiers).  Beyond the basic NPS score, many analysts mistakenly assume that the relationship between each component of the model has a linear relationship with the strength of the relationship. 

As we examine the components that increase the value of the customer relationship do not assume that each component is independent and has a linear relationship with the strength of the customer relationship. There will be some satisfiers that may increase the strength of the customer relationship dramatically, whereas other satisfiers will only provide an incremental increase of improvement in the strength of the relationship.

The same logic also holds true when we discuss the dis-satisfiers in the future blogs. Always challenge the assumptions! Be curious.   

Building a Loyalty Model

The kind of loyalty model I will be discussing in the next several blogs is a basic business model that is often used in strategic management. The basic premise of the model is that customer loyalty leads to profitability. The purpose of this model is to develop an understanding of the business components that contribute to the loyalty of the customers.

In this blog I will describe the general loyalty model and a sub-model which feeds into the general loyalty model.

The hypothesis upon which the loyalty model is based is that loyalty is a direct function of the strength of the relationship between the company and its customers. Logically this makes sense since a strong relationship between the company and its customers should produce greater loyalty than a weak relationship. The heart of the loyalty model is built around understanding the components that make up the strength of the relationship. There are many variables that contribute positively or negatively to the strength of the relationship. Recent experiences between the customer and company would be an obvious component of the strength of the relationship.  A single experience between customer and the company may not significantly influence the strength of the business relationship. In fact, there is a “zone of tolerance” that ranges from minimally acceptable to extremely exceptional. As long as the other factors exist even an incident that was less than minimally acceptable may not change the strength of the relationship. Of course, this assumes that any negative experience may be resolved by the company. Otherwise, there may indeed be a negative change to the strength of the relationship between that individual customer and the company.

Therefore the simplest form of the loyalty model is as follows:

            Loyalty = constant x (strength of the relationship).

The value of the constant associated with the strength of the relationship will vary with respect to product, geography, and possibly other variables. Thus, a company with multiple products may have a different strength of relationship with their customers based solely on the product. An example would be the strength of the relationship between the Apple iPhone and its customers versus the strength of the relationship between the Apple iPad and its customers. iPhone users are known to have a very strong loyalty connection with Apple; whereas, iPad users may not have the same level of loyalty.

The strength of the relationship (loyalty) is another way of describing the business relationship between the company and its customers. The model proposed would consider variables such as level of satisfaction, recent experience, product quality, commitment to the relationship by either the company or, the customers, and the bonds may exist between the company and its customers.

The bonds that exist between the company and its customers may fall into a number of categories; such as, legal bonds (contracts), technology bonds (shared or licensed technology), knowledge bonds (shared information), social bonds, geographical bonds, cultural or ethnic bonds, and economic bonds. There may be other bonds as well.  The fact is there are many bonds that may exist and give strength to the relationship between the company and its customers (such as loyalty points).

The general form of the model for the strength of relationship is:

            S (Strength of relationship) = function of (recent experience, level of satisfaction, product     quality, service quality, commitment to the relationship, and appropriate bonds).

This model presents a challenge of quantifying each variable and assessing the strength of the relationships between each variable. This model can be simplified by assuming minimum interaction between the variables contributing to the strength of the relationship and assuming the variables are linearly related.

This discussion will be continued in the next blog where a simplified version of this loyalty model will be presented with an example. At this point, a simple loyalty model is presented that includes most of the significant variables that are usually included in loyalty discussions. Be curious.

Another look at your customers

In my previous blog I discussed the tyranny of the urgent and why is such a limiting perspective in understanding customers. I closed the blog by pointing out that the focus should always be on all your customers not just the ones who have urgent concerns. In this blog I will point out several techniques which may be useful in understanding the needs of our customers.

Several years ago I was working with the company that had a very complex product which required significant service support. The concern of the company was that the users of the product were not the decision-makers but had significant influence about decisions regarding the product. The product was a complex computer that used very sophisticated software. The end users of the product were scientists. The computer was managed by the IT department. Neither the users of the product nor the IT department made the decisions regarding the product. The decisions were made at a management level above the IT department and the users department (which included all the scientists).

The challenge with this assignment was that there was no department that was responsible for evaluating the performance of the product. Each of the three groups (users, IT, and management) were involved in the decision-making process regarding the performance of the computer. The measure of satisfaction for any one group is not sufficient to understand how well the product is meeting the needs of the customer. This product required a multidimensional model of customer satisfaction that incorporated satisfaction metrics from each of the three departments. The objectives of the metrics were to assess the satisfaction with each organization department and evaluate any inconsistencies in the measures of satisfaction between them. In other words, although satisfaction of each department was important, it was equally important to determine if there were inconsistencies or discrepancies between the scientists, IT department and upper management.

While the metrics for a current customer is important, and is the basis of most customer surveys, some additional areas of interest include the following:

1.       1. measurement of concerns from lost customers,

2.       2. specific measurements directed toward ultra-valuable customers, and

3.       3. measurement of the gaps between customer expectations and the performance delivered.

Reflecting back on the previous blog, the intention here is to provide some areas of interest beyond the basic customer satisfaction survey. The previous blog pointed out the need to separate normal survey responses from responses to customers with urgent needs for support. Curiosity is the watchword for surveys. There are many dimensions of involvement between the company and its customers. Not all contacts between the customer and company are from the end-user.

As an example, consider a previous assignment with another technology company led to the surprising conclusion that the Accounts Receivable department did not have customer skills training and was the primary reason for customer irritation. In fact, the Accounts Receivable department put IBM on credit hold because their payment was overdue. Needless to say IBM was not happy with this treatment.

If your curiosity is great enough, you may find more connections between your company and the customer that may be worth exploring. You may also find that many of the employees involved in those connections do not have customer management skills training.  Be Curious!