Customer Loyalty ACSI / SID : 2009 ME 1 Quality and Satisfaction Bring Further Gains High Quality, Satisfaction Low Quality, Dissatisfaction Recommendation, Loyalty - Retention Market share Revenue Negative WOM, Complaint, No Loyalty - Defection 2 1
Customer Retention and Loyalty It is important to distinguish between customer retention which is about the strategy the firm implements and customer loyalty which is a psychological state the customer has or has not 3 Customer Loyalty is Slipping Kraft s measure: a loyal customer is one who bought over 70% of the same brand over the last three years. 1970s: 40% loyal customers 2000s: 15% loyal customers 4 2
Customer Loyalty Customer loyalty constitutes an underlying objective for CRM and represents an important basis for developing a sustainable competitive advantage The basis of most Consumer Behaviour 5 Customer Loyalty - Conceptual Definition Customer loyalty is a deeply held commitment to rebuy or repatronise (1) preferred product or service (2) consistently in the future (3),, despite situational influences and marketing efforts having the potential to cause switching behaviour. Oliver (1997) (1) a 1 = allegiance; 2 = preference; 3 = attitude 6 3
Customer Loyalty Evolution Over the years the loyalty concept has evolved in both width and depth In terms of width, the loyalty foci includes: Brand loyalty Product loyalty Vendor loyalty Store loyalty Service loyalty 7 Behaviour Loyalty Initial focus of loyalty was on the behavioral outcomes measured in various ways Purchase Sequence Proportion of Purchase, Probability of purchases, Capture only the outcome of a dynamic process 8 4
The Role of Attitudes Behavioural definitions are insufficient to explain how and why brand loyalty is developed and / or modified Day (1969) viewed loyalty as consisting of repeat purchases prompted by a strong internal disposition. Brand loyalty is a two-dimensional construct incorporating both a behavioural and an attitudinal component (Jacoby, 1969; 1971) 9 Attitudinal Loyalty Involves a generalised sense of a higher positive regard for, a liking of, and an enjoyment of, the product experience Measured via indices based on composites of behavioural and attitudinal measures 10 5
Customer Loyalty Using a Fishbein model (Oliver 1997), it is envisaged that the Customer Loyalty construct has four dimensions: Cognitive loyalty Affective loyalty Conative loyalty Behaviour loyalty The three states of Cognitive, Affective and Conative Loyalty are assumed to be in synchrony 11 Cognitive Loyalty Cognitive Loyalty: involves a conscious rational decision making process by consumers in the evaluation of brands before purchase The beliefs (from conscious information processing, e.g. on Quality) held by consumers must point to the focal brand as being superiour to what is known of competitive products 12 6
Affective Loyalty Affective Loyalty: Involves a generalised sense of a higher positive regard for, a liking of, and an enjoyment of, the product experience A clear effective preference for the focal brand exists 13 Conative Loyalty Conative Loyalty: Involves level of intention of future exchange based on a favourable evaluation of the current experience that is accompanied by a willingness to make efforts at maintaining a relationship The consumer must intend to buy the focal brand, as opposed to alternative brands when a purchase decision arises 14 7
The Loyalty Model: Sustainers and Vulnerabilities Cognitive Sustainers Cost, benefits, quality Vulnerabilities Cost, benefits, quality Affective Conative Satisfaction, involvement, liking, preference, cognitive consistency Commitment, cognitive consistency Dissatisfaction, persuasion, trial Persuasion, trial - weak Action Inertia, sunk costs Persuasion, trial - habit; thought suppressed 15 Switching Costs Burnham, Frels and Mahajan (2003) Contractual Switching Costs Benefit loss cost Monetary loss cost Relational Switching Costs Personal relationship loss cost Brand relationship loss costs Informational Switching Costs Economic risk costs Evaluation risk cost Learning cost Set-up cost Cognative Loyalty Affective/ Connative Loyalty Action Loyalty 16 8
Effect of customer retention strategies Customer retention has a more powerful impact on bottom line than market share, economies of scale, and many other factors usually associated with competitive advantage Small increases in retention rates can have a dramatic effect on the profits of a company. Reducing defections 5% boosts profits 25% to 85% 17 Profitability arises because... Existing customers tend to purchase more than new customers The efficiencies in dealing with them is greater Compared with the cost of winning new customers, selling costs to present customers are much lower (only about 20% as much) 18 9
Defecting customers.. Send a clear signal: profit slump ahead 19 The value of a customer Today s accounting systems do not capture the value of a loyal customer. They focus on current period costs and revenues. The true value of a customer is the amount that person would have spent while involved in a business relationship with a company over a lifetime 20 10
Steps to foil defections Watch the door Interview defectors Analyse complaint and service data 21 11