The Loyalty Factor
By: Theo Muller, Managing Director MMResearch™. April 2012
Customer satisfaction or customer loyalty? Don’t get the two confused; they are two different concepts, although customer loyalty without satisfaction is hard to imagine. “Customer Satisfaction is Worthless, Customer Loyalty is Priceless”, according to Jeffrey Gitomer, author of the book that carries the same title. It’s not a recently published book or a new and revolutionary concept; many marketers, researchers and sales gurus have laboured this point over the last decade or so and yet, companies and organizations continue to conduct customer satisfaction surveys. And when the final tally is in, they proudly publish the results in their annual reports. 92% satisfied! What they don’t put in their annual report is that customer churn was 70%; 70% of customers switched brands and most of them must have been satisfied customers. A scene of collective head-scratching followed in the senior management meeting; how is this possible?
It’s simple, really. Satisfied customers are receptive to accepting a better deal when one is on offer. It could be a better price, more favourable terms, better service, more convenience or indeed a simple recommendation from a friend or colleague. Satisfaction is all in the head; there is nothing that bonds the customer emotionally to the brand they have just walked away from. And here is lesson number one; if this was your brand, what have you done, or more likely, what have you not done, to develop a relationship with this customer that made him or her stick with your brand come hell or high water?
Like millions before you, you have been tricked into believing that a satisfied customer is a loyal customer. Not so. The converse is probably true; a loyal customer is most probably a satisfied customer. A loyal customer loves your brand – and I don’t mean just the specific product, service or company that carries its name. They love everything the brand stands for: reliability, service, friendly faces, trust, promptness and responsiveness, convenience, recognition, thankfulness, ambiance and there are probably a host of other illustrations that personify – and I use that word deliberately – an emotional connection to the brand. So it’s the loyal customer that counts and not just the satisfied customer, although I accept that satisfaction is a likely prerequisite for loyalty. As I said before, it is hard to imagine a loyal customer who is not satisfied.
It is not my intention in this essay to develop strategies for growing a loyal customer base – the internet is full of them. As a researcher, I would like you to start thinking about measuring customer loyalty and not just satisfaction. How do you go about this?
Loyalty is not a concept that can be measured by simply asking a customer in a survey “how loyal are you?” or “using this 5-point scale, please indicate your level of loyalty to this brand”. The reason for this is that loyalty embraces a collection of attributes, including satisfaction with a brand, the level of pride in a brand or service as well as the willingness to recommend a brand or service to others. Combining these factors will produce a robust indicator of loyalty.
I have elsewhere made the case that customer satisfaction is in itself not an indicator of loyalty . That is to say, satisfied customers may still readily switch brands. So what then is a good indicator of loyalty?
First and foremost, the customer has to be satisfied. But as noted above that is not enough for loyalty. Loyalty expresses itself in a number of ways. Gallup Group, for example proposes 11 indicators that it combines to call Customer Engagement.
It is my view that the three measures mentioned above – satisfaction, pride and willingness to recommend, are sufficient to develop a sound and stable indicator of customer loyalty. Let’s look at each one of them.
Most managers are familiar with the relevant questions in a typical customer satisfaction survey. Most customer satisfaction surveys use a scale question to determine whether the customer is satisfied or dissatisfied with the product, service or company. The analysis of a question like that produces a total satisfaction score by combining the satisfied and very satisfied scores. In our experience a combined score below the 80% mark should be viewed with concern.
The literature, backed up by research, shows overwhelmingly that satisfied customers don’t think twice of switching brands. So, assuming loyalty based on a single customer satisfaction score is unwise.
Being proud of something (an achievement, belonging) or somebody (son/daughter) is a state of excitement; something that you can’t help but want to share with other people. It is very difficult for a proud parent to not want to share their pride in their child with others. Try and hide your pride in your child’s achievement at school, on the rugby field or netball court, or their career development. It’s hardly possible. As emotional human beings we don’t need much encouragement, if any, to talk about it with others.
Can one be proud of being a certain organisation’s customer? It might be hard to imagine being a proud customer of a petrol station, supermarket or electricity provider. However, one can be a proud member of a sports club or professional body or service club like Rotary or Lions. Master Builders proudly display the Registered Master Builders logo on their trucks and many engineers proudly show that they are a member of the Institute of Professional Engineers on their business card. Rotarians carry the Rotary badge on the lapel of their jacket. These people are truly proud of being a member of their respective organisations.
We can be proud owners of the car we drive or motor bike we ride, the brand of clothes we wear, the stereo equipment we have at home and, with a little stretch of the imagination, we can be proud of our dentist, doctor, accountant, personal banker or insurance advisor. Pride is relevant in any situation where there is potential to develop a personal relationship or an emotional bond with someone or something, including a brand or organisation.
However, some customers (who may well consider themselves as very loyal to a brand) are just not comfortable in associating pride with a brand or organisation – pride for them only applies to close human relationships. So assuming customer loyalty by a single measure of pride in the brand is also unwise.
Willingness to recommend
Frederick Reichheld is arguably the foremost thinker on loyalty research. His books include The Loyalty Effect (1996), Loyalty Rules! (2001), and The Ultimate Question: Driving Good Profits and True Growth (2006). The latter introduces the Net Promoter Score or NPS, subject of an earlier article in Harvard Business Review (2003). The NPS is obtained by asking customers a single question on a 0 to 10 rating scale, where 10 is "extremely likely" and 0 is "not at all likely": "How likely is it that you would recommend our company (or brand) to a friend or colleague?" The NPS score is obtained as follows:
Reichheld et al assert that an NPS score is the only veritable indicator of customer loyalty. Many companies and organisations have adopted the NPS as a measure for customer loyalty.
However, the NPS also has its critics. The most often mentioned criticism refers to the calculation methodology, claiming that by collapsing an 11-point scale to three components (e.g., Promoters, Passives and Detractors), significant information is lost and statistical variability of the result increases.
Another criticism refers to people’s propensity to recommend; it is simply not in everybody’s nature to make recommendations about their suppliers, products or brands and yet, they may well regard themselves as very loyal customers. And here is another observation about the NPS; what people say and what people do are two different things. I may say that I would recommend XYZ to my friends, but do I actually do so. Talk is easy!
While an NPS score taken over a period of time provides some indication of loyalty, it is not prudent to assume customer loyalty only on the basis of a positive NPS score.
The Loyalty Factor as a composite indicator
As we have seen, satisfaction is merely a pre-condition and neither pride nor promoters in the NPS can represent true loyalty in isolation, and, as we have seen above, they are subject to flaws. Pride is a concept that not everyone can relate to, so many truly loyal customers may not report themselves as being proud. Promoters are very strong recommenders, but for a variety of reasons many customers (including loyal ones) are simply not comfortable with making recommendations about products, services, brands or organisations. But by combining the three indicators we arrive at a very robust Loyalty Factor. The formula for The Loyalty Factor is as follows:
Very Satisfied Customers [scoring 9 or 10 on the satisfaction rating] AND Very Proud [scoring 5 on the pride rating] AND/OR Promoters [scoring 9 or 10 on willingness to recommend]
In combining the three indicators we advocate a “tough” approach – only include those customers who score very satisfied, very proud and very willing to recommend.
Research we have recently conducted in the financial services sector produced a 55% Loyalty Factor in 2011 and 54% in the first quarter of 2012. Customers in these surveys were asked the conventional satisfaction question, a question on pride and their willingness to recommend.
While there was some fluctuation between the two measures, the Loyalty Factor appeared to be the great leveler. What this research is saying is that over half of this organisation’s customers are truly loyal customers – customers who stick with them through thick and thin.
The Loyalty Factor as described above is a very sound and robust metric and a true cornerstone for developing the future direction of any organization.