Customer satisfaction versus loyalty

By Graham Tutton (Vice President of Customer Solutions, DataCo LLC)

Published by The Wise Marketer in October 2007.
Companies have much enthusiasm for customer satisfaction. Many see it as a
way of making customers happy, and others see it as a way of measuring
loyalty. But how important is satisfaction in reality?
Most of us have heard phrases such as "98% of our customers are satisfied", "customer
satisfaction is our priority", and other "satisfaction" type phrases. These phrases are
often an attempt to convey an organization's concern and passion for making customers
happy. To some business leaders, customer satisfaction indicates how well the firm is
performing and how customers view them. To other leaders, it represents a goal or
target for success.
Regardless, should organizations be concerned with satisfaction? Do satisfied customers
demonstrate desirable behaviours such as recommending your product or services,
increasing usage or number of purchases, and even resisting competing offers? All of
this prompts the question - does an organization want, and truly know what to do with,
satisfied customers? The answer is a resounding "no".
What is satisfaction?
As a business leader, have you ever stopped and asked yourself, "What is satisfaction?"
Possibly not. Perhaps a different, more relevant question would be "What does a
satisfied customer mean to my business and what should I do with him or her?"
Satisfaction is a measure that suggests meeting minimum or basic requirements.
Inherently, it falls short of truly helping an organization identify customer needs and
expectations, what to do with them, and why. For example, a leading communications
company found via satisfaction research that those customers proclaiming to be
"extremely or very satisfied" were their least profitable customers in terms of revenue
and product usage indicators.
Customer opinions count
Measuring customer opinions is an important aspect, and really the first step, of
strategic business management. In addition, gathering opinions and feedback through
customer surveys is an excellent method of demonstrating a true interest in and
concern for customers' needs and expectations. Good research will identify problems,
successes and unmet customer needs. Hundreds of millions of dollars are spent each
year on measuring satisfaction levels with results often influencing marketing,
advertising, and sales budgets. More often than not, business leaders manage to a
single number - the percent of satisfied customers. However, to improve business
performance and customer relationships, measuring customer satisfaction is simply not
enough.
Customer research has evolved tremendously over the last 30 years. From
"satisfaction" measurement of the 1970's, "value" of the 80's, to the more recent
exploration of "loyalty" - there has been an underlying theme of trying to leverage
customer opinions to affect change in business performance. To that end, measuring
"satisfaction" isn't the best way to provoke change, as it does not strive for excellence
or exceeding customer expectations. Many of the world's leading organizations have
learned the shortcomings of satisfaction and have advanced their approach to
measuring performance excellence and customer relationship loyalty. Think
Nordstrom's, Ritz Carlton, American Express, Tesco, Lexus and many others. They
continually strive to provide exceptional customer experiences, even if it requires
sacrificing short-term revenues or profits. The effect is the creation of lasting, loyal and
profitable customer relationships.
Seeking loyalty through excellence?
Today, the pursuit of excellence and loyal customers are dominant themes in business
management and marketing. Many factors can influence these items, but most are
related to customers' interactions, attitudes and behaviours towards an organization.
Interactions are the actual experiences customers have with an organization, such as
customer service, sales and billing procedures to name a few. Attitudinal items include
images of an organization, such as being customer focused, ease of doing business
with, or proactive customer service. Other, more rational topics may include price,
quality, value and overall performance. Behavioural items include desired customer
actions or outcomes such as recommending the product or service to family and
friends; to continue to use (or increase usage of) the product or service themselves;
and if they were able to resist competitive offers.
Quantifying an organization's performance on interactions, attitudes and behaviours
using an excellence scale rather than a satisfaction scale can help better define superior
business, product and services practices. Specifically, when asking consumers to
evaluate experiences using a satisfaction scale, the ability to distinguish high-end
performance is greatly reduced as you are evaluating against minimum requirements,
not exceeding expectations or needs (see Figure 1). As a result, identifying detailed
actions to surpass basic service levels are stifled. This translates into missed
opportunities, delivering only "average" performance, and spurious customer
relationships.

A good example of missed opportunity is the telecommunications company that

received a prestigious award for overall customer satisfaction in 2005. Their customer
attrition (churn) rates averaged less than 2%, but during the award winning year, their
churn rates were at record highs of 3.5% or higher across all customer segments. If
customers were satisfied, why were they leaving at such an alarming rate?
Prioritizing actions
But gauging performance is only the first step. In order to gain the truest value of
customer research and measurement, organizations must apply the information and
drive change that will affect customer behaviours and improve ROI. But, how do you
prioritize action based on customer opinions? Some would suggest addressing areas
with the lowest performance ratings. Others may ask customers to state what is most
important to them. And in many instances, customer opinions are considered secondary
and priorities are established by non-customer business initiatives.
Through loyalty and data analytics and organization can prioritize areas having the most
impact on consumer opinions and future behaviours. Using techniques such as
regression analysis and other more advanced approaches, a firm can minimize the
subjectivity associated with "stated importance" or the volatility of performance-only
priority setting. Much of the strategic relationship loyalty analysis and modelling is
founded on the social science theory that experiences influence on attitudes, which, in
turn, are powerful predictors of future behaviours (see figure 2, below). Each layer of
the model seeks to identify cause and effect relationships.

Combine performance data and analytics

The combination of analytic results and performance data provides a powerful, unbiased
management tool that can aid in decision-making and resource allocation. Those areas
with the highest level of influence and lowest performance are considered the top
priority for management to address. In contrast, areas with high impact and high
performance are often strengths that can be promoted or leveraged with customers.

Added to this, actual behaviour and profile information from your existing customer
database and the focus of action becomes even more targeted and completes the cycle
of information. By leveraging existing customer database information, you can identify
segments most likely to exhibit specific behaviours, such as profitability, response to
communications, and purchase of products or services. With this information, business
leaders have a multi-pronged approach that helps target and drive product and service
offering improvements, which in turn will have positive effects on customer loyalty and
financial results.
Conclusions
So what can we learn from all this? We hear and strive for customers to be "satisfied".
If customers have had an exceptional experience, they will share that news with
colleagues. Then we have the foundation for longer-term, more profitable and loyal
relationships.
Enhancing your business performance is a never-ending process. World-class
organizations do not want "satisfied" customers. Developing strong, loyal relationships
with customers, effectively managing these relationships, and applying the latest
thinking to measuring and managing customer perceptions, are the keys to turn
satisfied customers to loyal customers. By asking the right questions, analyzing the
responses, leveraging the existing information and applying the findings, business can
to help achieve performance objectives and business success beyond what even the
businesses' investors could even imagine.

Loyalty marketing... for real facts, figures, research, case studies, best practices,
practical how-to's, technologies & examples, The Loyalty Guide 4 is the world's
most complete report (1,000+ pages) that covers it all. Costing less than a
conference pass, details of this electronic report's contents, chapter samples, pricing,
and ordering details are online now at www.TheLoyaltyGuide.com.

CUSTOMER LOYALTY &

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About the author...

Located in Chicago, USA, DataCo LLC specializes in data analytics and qualitative
research solutions (including bench marketing, forecasting, and product sequencing) for
a variety of clients including financial services, consumer membership, IT, and
telecommunications. By addressing customer retention and loyalty across all phases of
the customer lifecycle, DataCo helps its clients to digest customer data and create
comprehensive marketing strategies that work more effectively. The company can be
contacted online at http://www.datacosolutions.com.

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The 6 key factors that influence customer loyalty

By Peter Clark (Co-author, The Loyalty Guide reports)

Published by The Wise Marketer in August 2007.
Customer loyalty is widely accepted as being worth nurturing, but what are the main
business factors that directly influence the loyalty of your customers?
 There are six major factors that play key roles in influencing the loyalty and commitment of
customers:

Figure 1: Factors that influence customer loyalty

Source: The Loyalty Guide (TheLoyaltyGuide.com)
In this article, we've drawn guidance from The Loyalty Guide report, to offer practical insights into
the workings of customer loyalty programmes and the ways in which they can positively influence
shoppers' behaviour toward the company. The result is that customer retention is not only increased
but customer lifetime value and profitability are also likely to increase significantly thanks to longer-
lasting and more relevant customer relationships.
Factors influencing loyalty
Looking in more detail at the major factors that influence consumers' loyalty - not only to retailers but
also to suppliers in all sectors, including business to business (B2B) - the six key areas of focus
identified in the report can be summarised as follows:
1. Core offering
The companies that boast the highest levels of fiercely loyal customers have built that loyalty not on
card programmes or gimmicks, but on a solid, dependable, core offering that appeals to their
customers. These companies have focused intently on what they know appeals to the type of
customers they want to attract, and have determinedly concentrated on delivering what is expected
every time. North American retailer, Nordstrom (www.nordstrom.com), is well known for the loyalty of
its customers. It built this loyalty by understanding what its customers wanted and then empowering
its employees to deliver those needs consistently.
Clearly, the data from a good loyalty programme should help the operator to improve this core
offering by tailoring and moulding it more closely to the customers' needs and desires.
Elements of the core offering that have a large role in building customer loyalty include:
• Location and premises
Location and premises clearly play a part in engendering loyalty. The Three L's of retail
- "location, location and location" - are undoubtedly important, and attractive and
functional premises are equally so.

• Service
Whether selling services or products, the level of service perceived by the customer is
generally key to generating loyalty. It can be argued that some customers buy only on
price, so all that is necessary to retain their loyalty is consistently low prices. To
certain extent that is true. But in most cases, any loyalty shown will be only to the
prices instead of the business. Should a competitor offer even lower prices, those
customers are likely to defect. Companies that have adopted a policy of every day low
 prices (EDLP) can be more vulnerable to competition than those who have built their
customers' loyalty on superior products or service.
The UK supermarket chain Asda has chosen EDLP instead of a loyalty programme as a
strategy, with great success. Why has this worked so well? Because Asda offers great
levels of service and a comprehensive range of products as well as low prices. In other
words, it differentiates itself from other supermarkets that rely purely on EDLP to draw
and keep customers. Asda's customers are loyal not only to low prices but to the
whole shopping experience.

• The product or service

The products or services offered must be what customers want. The days when
businesses could decide what they wanted to sell or supply, and customers would buy
it, are long past. The customers' needs and wants are now paramount. If you don't
meet them, someone else will.

2. Satisfaction
Clearly, satisfaction is important; indeed essential. But, taken in isolation, the level of satisfaction is
not a good measure of loyalty. Many auto manufacturers claim satisfaction levels higher than 90%,
yet few have repurchase levels of even half that. The situation is stacked against the business: if
customer satisfaction levels are low, there will be very little loyalty. However, customer satisfaction
levels can be quite high without a corresponding level of loyalty. Customers have come to expect
satisfaction as part and parcel of the general deal, and the fact that they are satisfied doesn't prevent
them from defecting in droves to a competitor who offers something extra.
The point is that, while high levels of customer satisfaction are needed in order to develop
loyal customers, the measure of customer satisfaction is not a good measure of the level of
loyalty. The two are not measuring the same thing.

3. Elasticity level
Elasticity expresses the importance and weight of a purchasing decision - effectively the level of
involvement or indifference. This applies to both the customer and the business.
• Involvement
The customer's involvement in the category is important: the more important your
product or service is to the customer, the more trouble they have probably taken in
their decision to do business with you, and the more likely they are to stick with what
they have decided. Most customers would be highly involved in the category when
choosing a new car, a new jacket, or a bottle of wine. However, when choosing a new
pair of shoelaces, involvement is not usually high. Businesses dealing in commoditised
products and services cannot expect high involvement and need to earn loyalty in
other ways.

• Ambivalence
The customer's level of ambivalence is also important. Few decisions are clear cut.
There are usually advantages and disadvantages to be balanced, and vacillation is
unstable. Again, we see that the more commoditised a product or service, the more
difficult it is to cultivate loyalty. It is only when points of differentiation are introduced
that the customer has a valid reason for consistently preferring one particular supplier.

4. The marketplace
The marketplace is a key factor in the development of loyalty. The elements most closely involved
are:
• Opportunity to switch
If the number of competing suppliers is high and little effort is required to switch,
switching is clearly more likely. Conversely, the more time and effort invested in the
relationship, the more unlikely switching becomes. The level and quality of competition
 has a significant effect on how easy it is for a customer to switch from any one
particular supplier. When competitors are offering very similar products at similar
prices, with similar levels of service, some means of useful differentiation has to be
found in order to give customers a reason to be loyal.

• Inertia loyalty
This is the opposite of ease of switching. Most banks enjoy a high level of inertia
loyalty simply because it's often so difficult and time-consuming to change to a new
bank and transfer direct debits and standing orders.
5. Demographics
According to Jan Hofmeyr and Butch Rice, developers of The Conversion Model (which enables users
to segment customers not only by their commitment to staying with a brand but also to segment non-
users by their openness to switching to the brand), more affluent and better educated customers are
less likely to be committed to a specific brand. They say that the commitment of less affluent
consumers to the brands they use is often unusually strong - possibly because they cannot afford to
take the risk of trying a brand that might not suit them as well. They also suggest that younger
consumers are less committed to brands than older consumers.
Interestingly, these differences carry over into cultural groups as well: they find that French-
speaking Canadians are more likely to be committed to a brand than English-speaking
Canadians, and Afrikaans-speaking South Africans are more likely to be committed than
English-speaking South Africans. In their excellent book, Commitment-Led Marketing, they
show how commitment norms for the most frequently used brand of beer vary from country to
country. At the two extremes we see both Australia and the UK (58%) and South Africa at
83% - a considerable difference.

6. Share of wallet
As markets become saturated and customers have so much more to choose from, share of wallet
becomes increasingly important. It is cheaper and more profitable to increase your share of what the
customer spends in your sector, than to acquire new customers. After all, that's what loyalty is really
about. Totally loyal customers would give you a 100% share of their spend in your sector.
Where to find more detail...
The Loyalty Guide, our comprehensive guide to customer loyalty,
explains every aspect of loyalty programmes, best practices,
concepts, models and innovations, all backed up with case studies,
original research, illustrations, charts, graphs, tables, and
presentation material. Find out about the principles, practicalities,
metrics, analysis, and bottom-line effects of loyalty, and gain the
expert guidance of dozens of loyalty and relationship marketing
thought-leaders, worldwide.
It will show you exactly how to use customer data to increase
profits, reduce churn, and increase frequency, spend, and share of
wallet. See how and why others have already succeeded, what works, and - more importantly - what
doesn't work. The report's full executive summary, table of contents, downloadable samplers, and
pricing/ordering are all available online - click here.

Loyalty marketing... for real facts, figures, research, case studies, best practices, practical how-to's,
technologies & examples, The Loyalty Guide 4 is the world's most complete report (1,000+
pages) that covers it all. Costing less than a conference pass, details of this electronic report's
contents, chapter samples, pricing, and ordering details are online now at
www.TheLoyaltyGuide.com.