Management Update: Understand and Identify the Key Customer Loyalty Components

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1 IGG A. Sarner Article 20 August 2003 Management Update: Understand and Identify the Key Customer Loyalty Components The dynamics of customer loyalty are not the same in all industries. Enterprises will have better chances for success if they understand the key components of customer loyalty. The dynamics of customer loyalty are not the same in all industries. Enterprises will have better chances for success if they understand the key components of customer loyalty. Loyalty and Branding Loyalty is far more likely to occur when involvement with the product or service is strong (that is, the purchase is personal or important to an enterprise, and the transaction is more complex than routine) and less likely when it is not. However, enterprises can create loyalty to what an enterprise stands for. That is the essence of branding. Many successful brands have come from the fast-moving consumer goods world (also known as consumer packaged goods), where the involvement in product or service is low. Therefore, enterprises should employ measurements to understand better how their customers perceive the enterprise s product or service. Customer Satisfaction and Loyalty Measurement Customer satisfaction and loyalty measurement indicators include: Brand: The company image and the core value proposition Quality: The perceived quality or professionalism of the enterprise, the service and products Interrelationship: The degree to which needs are met, plus the amount of use, dependence and convenience all in the context of competition Performance: Service delivery, product reliability and response times Many loyalty measurement studies are blunt tools that focus on performance while ignoring the other key components. Gartner Entire contents 2003 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Action Item: Begin measuring loyalty indicators using the four components of satisfaction and loyalty: brand, quality, interrelationship and performance. Evaluating Relationships The four components of satisfaction and loyalty can be used to: Determine the enterprise s key differentiating brand values Discover the real drivers of customer loyalty Establish areas of cost reduction in which over performance is compared with customer requirements Firm up on the requirements of the enterprise s customer segments The first step is to evaluate the strength of customer relationships by combining measures of satisfaction and loyalty (see Figure 6). This step groups customers into advocates, mercenaries, hostages or rebels, based on the security or fragility of the relationship. Figure 6 Evaluate the Strength of the Customer Relationship High Must be watched Most secure Mercenaries Advocates Customer Satisfaction a Rebels Hostages Low Greatest danger Nowheretogo Customer Loyalty High

3 Advocates: The relationship is most secure. Mercenaries: They must be watched, and efforts must be made to increase loyalty. They seem satisfied, but they are not loyal and are open prey to competition Hostages: They are often either inert or have nowhere else to go. Beware of market changes. Rebels: The relationship is highly fragile and in the greatest danger. Aligning Value The next element to establish is the state of the customer asset base. How strong is the relationship with the customers? How much do they value the enterprise? Compare that to how valuable the enterprise considers them to be. The result is a customer asset matrix that combines the supplier s view of customer value segments (those that are derived by combining current profitability and expectations of future potential) with a measure of the current strength of the relationship from the customer s perspective, which is arrived at by looking at satisfaction and loyalty (see Figure 7). Figure 7 Customer Asset Matrix: Align Relationship Strength With Value to the Enterprise Key Protect position Invest to protect Invest to win over Damage limitation Customer Potential (value to company) Large share of wallet Some potential Counter competition profitability Invest to build Build selectively Win the opportunity revenue Careful management revenue T Transactional profitability profitability revenue Consider divesting Advocates Mercenaries Hostages Strength of Relationship (value to customer) Rebels Measurements of current and future profitability are often the first things enterprises turn to in estimating relationship value, even though the allocation of costs may be difficult. Action Item: Understand that the strength of a relationship from the customer s perspective is equally important, and methods to measure this are increasingly available and rigorous.

4 Assessing Loyalty Factors Establishing the key factors of satisfaction and loyalty can be done in a market research study that produces a relationship investment guide. The guide will show the presumed importance of a range of rational and emotional service delivery factors (for example, brand values and satisfaction with account manager contact time) and plot that against the relevance of the factor on customers behavior (see Figure 8). Figure 8 A Customer Relationship Investment Guide Ma intain efficiently Claim ed Importance High 4 Hygiene factors 5 Motivators Invest Well above average Above average Average Below average Lo w 9 Overspending Hidden opportunities Poor Trim Lo w Real Relevance High Study or invest The results show: The factors that will motivate loyalty where investment is needed Factors that engender satisfaction, so they should be done only to a certain hygiene level Factors that really do not matter and where costs can be cut back Any hidden factors that the enterprise had not realized were important All of this can be shown against competitors and detailed by customer segment. To achieve this, enterprises should review the ways and factors with which they measure customer satisfaction and loyalty. They should establish the key elements of their proposition and service delivery that truly drive customer loyalty as the customer sees it. At the same time, they can

5 establish areas where they are over delivering on customer requirements and, thus, make cost savings without affecting loyalty. Managing Loyalty Initiatives A hierarchy of customer needs must be satisfied within successful loyalty management. Each stage contributes to true loyalty management, which is the point at which the enterprise s processes, technologies and goals are aligned with the long-term life plans and goals (that is, the life cycle) of the customers. The five levels in the hierarchy leading up to a life-cycle relationship are (see Figure 9): Figure 9 Levels Leading Up to the Life-Cycle Relationship Loyalty Hierarchy of Needs Be in tune to evolving needs Be in tune with my needs Make it easier to satisfy my needs Entice me. Get to know me Relationship Building Alignment Communicating Optimizing Understanding Collecting Reporting Benchmarking Satisfy my needs Promise me something that I need

6 Promise me something that I need. This is the understanding of why customers are coming to the enterprise in the first place, and the ability for the enterprise to communicate the promise to deliver. Satisfy my needs. This is a baseline of loyalty. This is achieving satisfaction so customers feel their needs are met. Did the enterprise deliver on its promise? Entice me. Get to know me. At this stage, the customer has been satisfied, but he or she wants good reasons to come back. This is where loyalty programs for data collection and future interaction building can be used. Make it easier to satisfy my needs. Once data is collected and reported on, personalization will seek to segment the customer base with more meaningful and easier interactions that are relevant to each customer. Be in-tune with my needs. This is the continued use of interaction to further communicate brand, value proposition and other factors in a coherent and consistent way. It also demonstrates deep customer memory from building on past interactions, as well as an understanding of a valued relationship. Bottom Line Ultimately, traditional customer loyalty program rewards and recognition tactics have become so widespread that customers have increasingly come to expect them, so their impact is now diluted. Consequently, an enterprise needs to extend its loyalty strategy from its core value (that is, the brand). Therefore, it is important to determine the main reasons why customers come to the enterprise in the first place, and create loyalty initiatives that strengthen the core value and do not distract from it. Written by Thomas Berg, Research Products Analytical source: Adam Sarner, Gartner Research For related Inside Gartner articles, see: Management Update: Focus on the Loyal and Profitable Customers, (IGG ) Management Update: CRM Business Transformation Is More Than Just Technology, (IGG ) Management Update: The Eight Building Blocks of CRM, (IGG ) Management Update: Customer Experience Management Is Critical, (IGG )

7 Management Update: Applying Analytic Techniques to Gain Customer Insights, (IGG )