2011-10-06

Customer satisfaction, loyalty, and profit

Stephen Hampshire

Understanding the links 

Customers are becoming more demanding, and often have more options to choose from than before. At the same time, perceived switching barriers – the inconveniences of changing suppliers – are being reduced. A good illustration of the effect of these changes is in the financial market, where the growth of Internet and telephone banking has presented consumers with a breadth of new alternatives.

Different markets show varied customer loyalty profiles. In some manufacturing sectors, customers may have very little choice of supplier. This can lead to complacency and the feeling that customer loyalty is irrelevant, since they have no option but to come back. Such reasoning is flawed on two counts: 1) Customer loyalty goes beyond mere retention to a range of attitudes and behaviours; and 2) Customers do come back when they have no other choice, but they will be vulnerable if a competitor arrives on the scene. Companies that are in a virtual monopoly situation can be vulnerable to this way of thinking.

The difference between markets is due to a combination of factors – the amount of competition, the sophistication of the customers, and the perceived switching barriers. If all competitors were equally easy to use, we would expect an almost perfect correlation between customer satisfaction and loyalty. Figure 1 shows the relationship between satisfaction and loyalty. The higher the satisfaction, the more loyal customers are.

 

Why does customer loyalty matter?

What is customer loyalty? On most of its surveys, The Leadership Factor, the author of this article, measures customer loyalty in two ways: Loyalty behaviour is gauged by a measure of retention, or intention to buy again; and loyalty attitudes are termed commitment.

 

Why Should You Worry About Customer Retention?

• Customer lifetime value. This phrase relates to a very simple concept: Every interaction you have with a customer should be done on the basis that their value to you is the total of all the purchases they will ever make, not that one sale. For example, your most valuable customers are probably not those who make the biggest purchases, but the ones who come back again and again. This way of thinking allows you to consider marketing approaches that don’t require you to make back the cost of acquiring a customer in a single sale.
• The cost of acquisition. It is up to 20 times more expensive to acquire a new customer than it is to keep an existing one. A traditional sales approach can be likened to pouring new customers into a bucket with a hole in the bottom – the weaker your levels of customer retention, the larger the hole.

 

Why should you worry about customer commitment?

Committed customers demonstrate a number of beneficial behaviours. For example, they tend to:

• Come to you. One key benefit of establishing a good level of customer loyalty is that you don’t have to sell to them; they will come to you when they need a product or service, and they may even come on spec to see if you have new products.
• Buy more often. Loyal customers come back more and more often, since they enjoy the service they receive from you. If customers find themselves forced to use you against their will, they will come as little as possible.
• Try new products. If customers are happy with what they’ve bought from you before, they will be more willing to try new products. Perhaps they will even trust you to suggest products suitable for them.
• Recommend you. Loyal customers can become your most effective marketing tool – far more trustworthy than salesmen in the eyes of other customers – and they’re free.
• Buy only from you. A strong relationship of trust means that customers will prefer you, even if it is more difficult or more costly to use you than a competitor.
• Look only at you. The holy grail of customer loyalty – customers at this stage trust you to provide a good product/service at a reasonable cost and will not go to the trouble of shopping around before buying.

Key to reaping these benefits is establishing trust based on good service, reputation, and image. To illustrate how this works, imagine that you have just started dealing with a supplier. To begin with, you probably check every invoice carefully, but after a while, if they’ve all been correct, you’ll tend to assume that the invoice will be accurate. Eventually you may not even bother checking the invoice unless something catches your eye. Of course, the moment something goes wrong you go back to checking every item. Similarly if someone else tells you of a problem, your trust in the supplier would be damaged.

 

Why should you monitor customer satisfaction?

Any breach of this trust can seriously damage the relationship you’ve built. Thus it is essential to monitor customer satisfaction and correct any problem areas. Where a complaints system allows you to see why those few customers who bother to complain are unhappy, a customer satisfaction measurement (CSM) program enables you to actively identify specific problem areas based on statistically sound information and correct them.

A CSM program will also help you prioritize improvement based on an understanding of the key drivers of satisfaction and the areas that will have the greatest impact in improving customers’ overall perception of you. Once a program has been established, it can be monitored and fed back to customers over time, informing them of actions you are taking, and sending a strong message about your commitment to customer service.

 

Building customer loyaltyCustomers who have already used a company and had a good experience are more likely to come straight to this company without considering competitors. This fits in with the theory that satisfied and loyal customers become less price driven.

Figure 2 shows the value of a loyal customer base. Reputation influenced 44% of a company’s customers to use them, 23% were repeat users, and 14% chose this supplier based on a recommendation.

 

What makes up customer loyalty?

Surveys have consistently shown strong correlations between customer satisfaction and loyalty. Customer loyalty is driven by a combination of such customer perceptions as satisfaction, image, and perceived value, and is further subject to loyalty personality, innate differences in the way customers form their opinions. These differences can often be predicted by such demographic factors as age, gender, occupation, and location.

Figure 3 shows how customer satisfaction and loyalty vary by age. Note that the shape of the lines is different – satisfaction personality is not the same as loyalty personality, though they are usually similar. In both cases, scores tend to get higher with age.

 

Common loyalty personality divisions

Innovation/risk aversion. Some people will always be looking for the latest product or trend. If you’re not making the most up-to-date product, you may have to resign yourself to losing these customers, however good your service is. Rest assured, though, that they’re no more likely to remain loyal to your competitors, and tend to be less profitable in the long run than customers who need a reason for switching.

Customers who moved to telephone banking when it first came out fall into this category. How many of them are still using telephone banking accounts, and how many have moved on to Internet banking? How much money did they make for the telephone bank?

Level of involvement. Some markets are more high involvement than others, reflecting the importance to customers of making the right purchasing decision. Beyond market-wide trends, however, the most significant difference is in how involved your customers feel with you.

Barriers to switching. Switching barriers are the perceived obstacles to changing suppliers. The key word here is ‘perceived’.

One often missed message is that it can be okay to write off customers. Some customers cannot be kept loyal, just as some cannot be kept happy. Increasingly, the concept of firing customers is growing in currency, and it is a valuable idea. The important thing is to make sure you focus on keeping the right customers. The most damaging customer is one who takes up your resources but doesn’t yield commensurate gains. Worst of all, they may be damaging you by criticizing your performance. You are better off without these customers since they’re losing your business and you’re probably making a loss on them anyway.

 

Concrete advantages 

At the end of the day, what’s in it for you? You’ve surveyed your customers’ levels of satisfaction and loyalty; you’ve focused on improving the drivers of satisfaction and loyalty and seen these soar as a result; and you’ve let go of those customers you are better off without. Almost every organization that improves customer satisfaction also improves customer loyalty, which in turn improves profit.

To predict what an improvement in satisfaction will mean to you in terms of loyalty and profit, you have to model the relationships between these items. Only a small number of companies at the cutting edge of customer research have managed to model the links between satisfaction, loyalty, and profit. Most perceive that the process is very complex and requires enormous amounts of data; however, this is far from the case. The more data that are available, the more reliable and precise a model will be; but chances are you could make a start with existing financial data.

Looking back at Figure 1, you can see that as satisfaction goes up, so does loyalty.

Getting at the specifics of this relationship and understanding how reliable the equation is requires some statistical knowledge; however, unless you have a statistical background, it is probably best to let an outside agency do the work for you.

As a final thought, if you are still unconvinced about the concrete benefits of making your customers satisfied and loyal, consider this: Markets are becoming more and more competitive, and consumers are getting more demanding. If you’re experiencing high customer turnover, but your competitors are locking in customers by targeting loyalty, you’ll soon run out of prospects to pour in at the top of the bucket.

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Excerpt reprinted with the permission of Stephen Hampshire for The Leadership Factor. The Leadership Factor specializes in measuring and improving satisfaction and loyalty, and has offices in the UK, Australia, France, USA, Italy, Portugal, Spain and Russia. www.leadershipfactor.com