Market share depends upon an organization’s capacity not only to acquire new customers, but also to keep them. It makes no sense to invest resources to capture new customers only to lose them to competitors. This is where customer management comes in – a strategy focused on creating loyal customers by providing superior value.
Unfortunately, customer management is built upon a weak foundation of myths that are actually counterproductive to creating loyalty. The following are five myths that are being exposed by a growing knowledge base regarding customer loyalty.
Myth 1: Satisfied Customers are Loyal Customers
This myth is a logical fallacy – a belief that, at face value, is logical, but is actually wrong. As companies become more aware of the importance of loyalty, they are finding predictors of loyalty. And, surprisingly to many, customer satisfaction is not a good predictor. Here is a sampling of the empirical evidence: A study by the Corporate Executive Board titled, “Shifting the Loyalty Curve: Mitigating Disloyalty by Reducing Customer Effort” (2009) debunks the role of satisfaction is creating loyalty. The study of 17,968 customers found that the relationship between loyalty and satisfaction produced a R2 of .13. In other words, 87 percent of loyalty is explained by other factors.
This study is buttressed by one done by Magnus Soderlund and Mats Vilgon, who studied the relationship between customer satisfaction and customer profitability (“Customer Satisfaction and Links to Customer Profitability: An Empirical Examination of the Association Between Attitudes and Behavior,” SSE/EFI Working Paper Series in Business Administration, 1999). Loyalty was measured by repurchase intentions, number of orders, purchase volume and purchase amount. There were no significant relationships between satisfaction and the different measures of loyalty.
Adam Ramshaw, director of consulting firm Genroe, sums it up when he writes:
“Organizations are beginning to understand that it’s not just about satisfaction. In order to improve their businesses, they have to implement customer loyalty programs. Customer loyalty programs are different to normal customer satisfaction surveys because the latter use outcome as an indicator of past success. The real goal is to understand and improve the areas of the business that drive customer loyalty… Let’s face it, good customer satisfaction is now table stakes – you have to do it better to keep them loyal.” (“Five Steps to Effective Customer Loyalty Programs,” Genroe.com, 2010).
Myth 2: Call Centers Increase Loyalty
Many companies equate call centers with customer management and loyalty enhancement, and put a lot of resources, money and people into the centers in a hope to assuage discontented customers. However, these organizations that are dependent on call centers to manage customer loyalty may be doing too little, too late. A call center should not be the first way an organization discovers that a customer is not getting the value that they had expected from a brand or organization. This is akin to finding out that your marriage is over because you saw your spouse kissing your neighbor.
Instead, organizations should begin customer loyalty initiatives from the first day that a buyer agrees to buy the brand or service and become a customer. These initiatives should include a value-laden sales process, and continue throughout the entire value delivery system over the course of the customer relationship. The lifetime economic value of a customer is only as valid as the organization’s capacity to deliver customer value.
Myth 3: Customer Relationship Management Software Improves Loyalty
Customer relationship management (CRM), in too many organizations, means buying CRM software to mine stored data and find predictors of loyalty. But CRM is so much more than software – it is a state of mind that recognizes that the most important asset a company has is its customer base. No software program is going to boost loyalty unless the operator has a disciplined, focused approach to understanding what drives loyalty.
Software can be an important tool, as long as it has access to the right kind of data. Being able to profile your current customer base in terms of your performance on the critical-to-quality factors that make up value is essential. If this information can be tied to other customer information, such as number of purchases, the amount of an average purchase, length of time as a customer and the number of complaints made by the customer, the organization’s customer loyalty manager can make specific customer interventions to save profitable customers. Equally important is the ability of CRM software to explore systemic issues in the form of people, product or process factors that are sabotaging value delivery systems.
Myth 4: Net Promoter Score Drives Customer Loyalty
The Net Promoter Score (NPS) has burst on the loyalty scene with a force and promise previously unwitnessed. An organization’s NPS is derived by asking a simple question: How likely would you be to recommend (Company X) to a friend or colleague?
The score is calculated by subtracting the percentage of those who responded with a 0 to 6 (on a 10-point scale, where 1 = not likely and 10 = very likely) from the percentage of those who responded with a 9 or 10. The former are detractors while the latter are promoters. This score indicates the percentage of customers who are recommending a company to others.
Here’s the problem. Not only do organizations have to measure loyalty, but they also have to manage it. The NPS does not give any clue as to how to manage loyalty; it is simply a measure. Unfortunately, in some organizations, to measure is to manage.
Think about this. If an organization has an NPS of 45 percent, how do they improve it? Are the detractors associated with a specific customer group? If so, what are the factors that drive their lack of willingness to recommend? If an organization is going to measure customer loyalty, it also must be prepared to answer these questions.
Myth 5: You Can Outsell Churn
Believe it or not, many companies have an unstated strategy of “outselling churn.” Like the Red Queen in Alice in Wonderland, these companies have to run faster and faster just to stay in place. Churn, or a lack of loyalty that leads to defections, has a significant cost that often goes unnoticed.
Here are some of the hidden costs of ignoring customer loyalty and focusing instead on customer acquisition:
- Evidence shows that acquiring a new customer is five times more expensive than keeping a current customer happy (“Creating Customer Evangelists: How Loyal Customers Become a Volunteer Sales Force,” Ben McConnell and Jackie Huba, 2002).
- The average annual revenue growth rate of loyalty leaders (companies that excel in creating loyalty) over a three-year period exceeds the comparable rate of loyalty laggards by 20 percentage points; the three-year average operating margin of loyalty leaders is 22 percentage points higher than the financial results for loyalty laggards (“Study: Customer satisfaction Does Not Mean Customer Loyalty,” InsideIndianaBusiness.com, 2005).
- A 5 percent improvement in customer loyalty can cause an increase in profitability of between 25 and 85 percent depending on the industry (“Zero Defects: Quality Comes to Services,” Fredrick Reichheld and W. Sasser, Harvard Business Review, Sept/Oct 1990).
No Easy Outs
Customer loyalty has to be earned. There is no easy way to create loyal customers. The first thing an organization must do is to determine whether they are relying on myths to drive their loyalty efforts. Focusing on satisfaction is probably the biggest myth that undermines many customer loyalty efforts. The “contented customer” theory of marketing is being exposed for what it is – a logical fallacy.
Customer value – as determined by the market – is the real driver of market share. This means that organizations must learn how to measure customer value – how to ask the right questions, use analytic tools, and drive this critical information to the key strategic and operational areas of the business.