A Closer Look at Customer Loyalty: Knowing What s Best to Measure for Your Business. D. Randall Brandt Vice President Customer Experience & Loyalty

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1 A Closer Look at Customer Loyalty: Knowing What s Best to Measure for Your Business D. Randall Brandt Vice President Customer Experience & Loyalty

2 This Session What Is a Core Customer Metric? Does One Size Fit All? Should Your Core Customer Metric Focus on Customer Loyalty? What Should Your Organization Do? Summary Questions and Answers

3 What Is a Core Customer Metric?

4 Core Measures versus Performance Drivers We have found that companies generally select two sets of measures to capture their customers perspective. The first set captures generic measures that virtually all companies want to use, such as customer satisfaction, market share, and customer retention The second set represents the performance drivers They answer the question: What must the company deliver to its customers to achieve high degrees of satisfaction, retention, and market share? Robert Kaplan and David Norton The Balanced Scorecard

5 Core Customer Metric: Our View A key measure of organizational health and performance with respect to: How strongly customers embrace your brand How committed they are to continuing to buy from or do business with you A leading and explanatory indicator of financial and other downstream business results

6 Does One Size Fit All?

7 The Ultimate Question If growth is what you re after, you won t learn much from complex measurements of customer satisfaction and retention. You simply need to know what your customers tell their friends about you. Fredrick Reichheld The One Number You Need to Grow Harvard Business Review, December, 2003.

8 Why One Size Does Not Fit All The best measure of customer loyalty varies by industry, market, and customer type. Even when willing to recommend performs well, other measures may perform better. The ultimate question may lead managers to focus on the wrong priorities for improving customer loyalty. The NPS has several technical characteristics that inhibit its interpretability and usefulness in data analysis. Attempting to use willing to recommend ratings in isolation ignores competitive context.

9 The Best Measure Varies By Industry, Market, and Customer Type In some situations, willing to recommend was simply irrelevant. In database software or computer systems, for instance, senior executives select vendors asking users of the system whether they would recommend the system seemed a little abstract, as they had no choice in the matter. In these cases, we found that sets the standard for excellence and deserves your loyalty questions were more predictive. Fredrick Reichheld The One Number You Need to Grow Harvard Business Review, December, 2003.

10 The Best Measure Varies By Industry, Market, and Customer Type When willingness to recommend and NPS may not be the best measure: Certain industries (e.g., database software) Monopolistic or oligopolistic markets B2B versus B2C Also, in some sectors/industries, loyalty is not even the right customer metric with respect to providing a lead indicator of business results.

11 Even When Willing to Recommend is Good, Other Measures Perform Better For example, in a longitudinal study of retail shoppers, Maritz compared three loyalty measures: Willing to recommend Three-item index Probability allocation The probability allocation measure outperformed the others with respect to correlation with customer behavior and discriminating power.

12 Correlation of Alternative Survey-Based Loyalty Indices with Customer Behavior: Retail r =.36 r =.47 r =.71

13 Correlation of Alternative Survey-Based Loyalty Indices with Customer Behavior: Financial Services Average Monthly Balance Frequency of Usage Higher Correlation with Actual Customer Behavior Lower Likely to Recommend Likely to Use Again Share of Purchase Occasions

14 The Ultimate Question May Lead Managers to Focus on the Wrong Performance Drivers Using data from the same study of retail shoppers mentioned earlier, Maritz performed three separate key driver analyses, each employing a different dependent variable: Willing to recommend Probability allocation Actual customer behavior The probability allocation measure yielded priorities more similar to those produced when customer behavior serves as the dependent variable than did willing to recommend.

15 Results of Key Driver Analyses Using Alternative Dependent Variables Key Driver Parking Specials Location Layout Service Ranking of Key Drivers by Importance Actual Probability Willing to Share Allocation Recommend Price Quality Service Layout Location Specials Parking Quality Price Lower Actual Share Probability Allocation Willing to Recommend Higher Derived Importance

16 Some Technical Limitations of NPS NPS cannot be analyzed at individual customer level Willing to recommend can be analyzed at individual customer level, but NPS procedure reduces precision and accuracy Important because linkage of loyalty measure to customer behavior and/or key business results often requires this level of analysis Different combinations of promoters and detractors can yield the same NPS

17 Are These Scenarios the Same?...NPS Alone Would Say Yes. Promoters 70% 60% 50% 40% Detractors 30% 20% 10% 0% NPS

18 Context Matters The competitive context of customer evaluation and choice strongly influences actual behavior: A customer might enthusiastically endorse two or more brands Need to understand his/her projected allocation of purchases/usages among the brands to accurately predict behavior Not limited to willingness to recommend other rating questions (e.g., satisfaction, future intent) also suffer from this limitation Problem can be addressed by gathering ratings for multiple brands but there goes your simplicity

19 Does One Size Fit All?... The Short Answer Is No.

20 Should Your Organization Focus on Customer Loyalty?

21 Alternative Constructs & Measures Satisfaction Quality Performance to Expectations Value Preference Intent to Repurchase/Continue Doing Business Willingness to Recommend

22 The ACSI Integrates Multiple Constructs & Measures Source:

23 AT&T Found Customer-Perceived Value to be the Best Leading Indicator of Market Share Customer-Perceived Value AT&T Market Share Source: Gale, B. (1994). Managing Customer Value. New York: Free Press; p.82.

24 The Relevance and Appropriateness of Loyalty as a Core Customer Metric Often Varies by Market Type In a B2B context, Loyalty has greater impact than Value Personal Computers 65% Loyalty Value 35% Loyalty 41% but in a B2C context, Value has greater impact than Loyalty 59% Value Loyalty 44% In a B2C context, Loyalty has greater impact than Value 56% Value 59% Loyalty Value 41% Hotel/Lodging but in a B2B context, Value has greater impact than Loyalty Source: Brandt, D.R., Gupta, K., and Kershaw, J. (2004). Developing a Core Customer Index: An Empirical Assessment of Alternative Approaches. American Marketing Association Advanced Research Techniques (ART) Forum, Whistler, British Columbia, June.

25 What Should Your Organization Do?

26 In the Words of Mr. Reichheld. I don t want to overstate the case. Though the would recommend question is far and away the best predictor of customer behavior across a range of industries, it s not the best for every industry So companies need to do their homework. They need to validate the link between survey answers and behavior for their own business and their own customers. Fredrick Reichheld The Ultimate Question

27 A Recommended Approach Define the critical business results of interest Identify candidate measures of customer satisfaction, value, and loyalty Gather baseline survey data on these measures from a sample of customers or buyers/users Monitor the shopping and buying behavior of these same customers over time. Conduct analyses to determine the extent to which the survey items, individually or in combination, correlate with and/or can be used to predict the customer behavior which leads to the critical business result. Construct the index from the item or items that are most strongly correlated with and/or predictive of the critical customer behavior and business results.

28 Factors to Consider Industry and Market Type Availability of Buyer Options Degree of Market Differentiation Market Cycles & Conditions Consumption Frequency & Cycles Formality of Buyer-Seller Relationship

29 Summary A core customer metric is both a key performance measure and leading indicator of business results. One size does not fit all. Customer loyalty may or may not be the right metric. Select the measure that is most appropriate for your business.

30 Questions & Answers

31 Thanks for your time and participation today! For copies of today s presentation or to replay this webcast (recording generally available within 24 hours) Go to: To contact today s speaker: randy.brandt@maritz.com

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