Customer Loyalty 2.0, Part 1: Measurement and Meaning of Customer Loyalty

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The measurement of customer loyalty has been a hot topic lately. With the latest critiques of the Net Promoter Score coming in from both practitioners and academic researchers, there is much debate on how companies should measure customer loyalty. I wanted to formally write my thoughts on this topic to get feedback from this community of users. Much of what I will present here will be included in the third edition of my book, Measuring Customer Satisfaction. I welcome your thoughts and critiques. Due to the length of the present discussion, I have broken down the entire discussion into several parts. I will post one each week. (Read Part 2 and Part 3).

Background
The use of customer loyalty survey data to help manage customer relationships has received much technological innovation over the past decade. Web-based surveys provide an easy vehicle for customers to provide feedback. For example, individual customer concerns are addressed through the use of automated prompts (typically in the form of emails) to Account team members who are responsible for quickly resolving specific causes of customer loyalty. Additionally, organization-wide customer loyalty issues are identified through automated analyses (e.g., driver analysis) which highlight common causes of customer loyalty/disloyalty. Furthermore, customer survey results are accessible 24×7 by all employees through Web-based reporting tools. Finally, companies even link customer survey data to their CRM systems to enhance day-to-day account management with both attitudinal data and operational data. It is clear that efforts in the field of customer loyalty have simplified the process of data collection, analysis, reporting, and integration with existing business systems.

While the quality of the customer loyalty survey process has seen a great deal of improvement in business settings, the quality of the measurement and meaning of customer loyalty has not kept pace. Our latest research on customer loyalty, however, tries to narrow this gap. Customer Loyalty 2.0 represents this advancement in the measurement and meaning of customer loyalty. The purpose of the discussion is to provide an overview of measures of customer loyalty and highlight my latest research findings on attitudinal measures of customer loyalty. Specifically, I will introduce the idea that customer loyalty measured through surveys is best conceptualized as a multidimensional entity. That is, customer loyalty is not a single entity. Finally, I will provide real-life illustrations regarding the merits of conceptualizing customer loyalty in this multidimensional framework that can help companies increase growth through new and existing customers.



Customer Relationship Management and Customer Loyalty
While many objective measures of customer loyalty exist (e.g., defection rate, number of referrals), customer surveys remain a frequently used way to assess customer loyalty. There are a few reasons for the popularity of customer survey use in customer experience management. First, customer surveys allow companies to quickly and easily gauge levels of customer loyalty. Companies may not have easy access to objective customer loyalty data or may simply not even gather such data. Second, results from customer surveys can be more easily used to change organizational business process. Customer surveys commonly include questions about customer loyalty as well as the customer experience (e.g., product, service, support). Used jointly, both business attribute items and loyalty indices can be used (e.g., driver analysis, segmentation analysis) to identify reasons why customers are loyal or disloyal. Finally, objective measures of customer loyalty provide a backwards look into customer loyalty levels (e.g., defection rates, repurchase rates). Customer surveys, however, allow companies to examine customer loyalty in real-time. Surveys ask about expected levels of loyalty-related behavior and lets companies “look into the future” regarding customer loyalty.

While there has been a change in business nomenclature around the application of customer surveys from "customer relationship management” to “customer experience management," the analytical techniques used to understand the survey data (e.g., segmentation analysis, driver analysis) remain exactly the same. The ultimate goal of customer loyalty survey analyses, no matter what business nomenclature you use, is to identify the reasons why customers are loyal or disloyal. You might think of customer loyalty as the ultimate criterion in customer relationship/experience management.

Customer Loyalty and Financial Performance
There are several objective measures of customer loyalty:

  • Number of referrals:
  • Word of mouth/Word of mouse
  • Purchase again
  • Purchase different products
  • Increase purchase size
  • Customer retention/defection rates
  • Based on the objective measures of customer loyalty, we can see how company financial growth can occur through the increase in customer loyalty. Through the referral process, companies can grow through the acquisition of new customers. The idea is that the customer acquisition process relies on existing customers to promote/recommend the company to their friends, who, in turn, become customers. Another way of strengthening the financial growth of a company is through increased purchasing behavior (e.g., increase amount of purchases, purchase different products/services) of existing customers. Finally, company growth is dependent on its ability to not lose existing customers at a faster rate than they acquire them. For example, customer defection rate is an important metric in the wireless service industry where customer defections are common.
    Measurement and Meaning of Customer Loyalty
    Customer loyalty, when measured through surveys, is typically assessed through the use of standard questions or items, mirroring the objective measures listed earlier. For each item, customers are asked to rate their level of affinity for, endorsement of, and approval of a company. The items usually ask for a rating that reflects the likelihood that the customer will exhibit positive behaviors toward a company. Commonly used customer loyalty survey questions include the following items:

  • Overall satisfaction
  • Likelihood to choose again for the first time
  • Likelihood to recommend
  • Likelihood to continue purchasing same products/services
  • Likelihood to purchase different products/services
  • Likelihood to increase frequency of purchasing
  • Likelihood to switch to a different provider
  • The first question is rated on a scale (e.g., 0 = Extremely dissatisfied to 10 = Extremely satisfied. The remaining questions allow respondents to indicate their likelihood of behaving in different ways toward the company (e.g., 0 = Not at all likely to 10 = Extremely likely. Higher ratings reflect higher levels of customer loyalty.

    Attitudinal Measures of Psychological Constructs

    Constructs are unobservable entities we use to describe a set of observable indicators. In the survey world, these observable indicators are responses to questions. We use constructs in everyday life when we describe the state of people. We say Mary is "happy" because she laughs, smiles, and jokes. We say that John is "depressed" because he is frowning, slouching, and is looking downward. In this case of attitudinal measures, we use constructs to describe a set of responses to standard questions. Tests/Surveys are developed that measure "anxiety," "job satisfaction," "supervisor support," "introversion/extroversion," and "customer loyalty." The questions on these tests/surveys bring the constructs into the observable world. Questions in inventories measure personality traits; questions in surveys measure customer loyalty; questions in employee surveys measure supervisor support. Figure one illustrates the relationship between the construct and the observable indicators (questions).



    When measuring a particular psychological construct, researchers develop many items in order to calculate an overall score as a measure of that particular construct. Everything being equal, we know that scores based on many questions are more reliable than any one of the single scores. Consider measuring your child’s math ability in college. In general, you would have more confidence that a score based on a 50-item math test would be a more reliable indicator of your child’s math ability than a score based on any single item from that test.

    Individual Loyalty Items vs. Composite Loyalty Scores

    Customer surveys, oftentimes, include multiple loyalty questions. There are different approaches in how these loyalty questions are used. One approach is to use single loyalty questions as the loyalty measure. For example, Reichheld (2006) recommends the use of the "likelihood to recommend" as the single best question to use as a measure of customer loyalty. Still other researchers use "overall satisfaction" as their key measure of customer loyalty (Fornell, et al., 2006). Another approach is to use a composite score (typically averaging across items) based on several loyalty questions. The question now becomes, "When multiple loyalty items are used in a customer survey, should we use a composite score as our ultimate loyalty criterion or use each item as unique measures of customer loyalty?"

    References



    Fornell, C., Mithas, S., Morgensen, F. V., Krishan, M. S. (2006). Customer satisfaction and stock prices: High returns, low risk. Journal of Marketing, 70 (January), 1-14.

    Reichheld, F. F. (2006). The ultimate question: driving good profits and true growth. Harvard Business School Press. Boston.

    7 COMMENTS

    1. Bob

      Loyalty is clearly an interesting topic. But what exactly do you think loyalty is?

      And how does it differ from the other popular customer business construct, ‘retention’?

      And how is loyalty related to satisfaction and delight come to that?

      I think we need to develop a common understanding of what these things are, of how they differ from one another and of how they are related to each other, before we can start to meaningfully measure them.

      Graham Hill
      Independent CRM Consultant
      Interim CRM Manager

    2. Bob,
      Your article seems to reflect a high level of confidence in online surveys. How confident are you really?
      IF you can be sure that a meaningful number of customers take the survey, and IF that number of respondents represents a true cross-section of your customers, and IF the survey is composed of fair questions with a full range of responses allowed, only then can you hope to gain real insights into customer behavior.
      I doubt that most online surveys get an accurate sampling of customers. (Even though I am a marketing guy and I tend to extend professional courtesy toward my fellow marketers, I refuse most requests for online surveys.)
      The majority of online surveys that I have completed (or attempted to complete) were poorly designed. Loaded questions, ratings scales that lean heavily toward “happy” or “satisfied”… And my personal pet peeve, surveys that REQUIRE an answer to every question, even when some questions do not apply to my purchase or none of the answers offered are applicable to my situation, forcing me to either abandon the survey or enter false information so I can get to the next question. (Nether option appeals to me.)
      Based on my experience with online customer surveys, I’d hate to think that my company’s future is being guided by such a questionable source of information.

    3. Graham,

      Thanks for your questions. It’s always nice to get questions; they help me clarify my thinking on the topic. While I hope to address most of your questions in my upcoming posts on the topic, I’ll briefly provide some answers below.

      1. I think that the term, “loyalty,” is thrown around the business world without much thought. Some use it as an area of study; others use it as an outcome variable. I choose the latter. Given that, in psychological terms. Here is a definition I use:

      Customer loyalty is the degree to which customers experience positive feelings for, possess allegiance to, and exhibit positive behaviors toward a company.

      This definition is based on my analyses of customers’ responses to survey-based loyalty questions. Loyalty seems to be a general attitude toward an entity.

      2. We need to first make the distinction between objective measures of loyalty and subjective measures of loyalty. Using objective measurement, all measures of customer loyalty are distinct based on the different measurements used to collect the data; retention is different than sales. I’m not saying that these measures of customer loyalty are unrelated, but that they are different constructs (similar to the fact that height and weight are different constructs but are related to each other – taller people tend to weigh more than shorter people).

      Using subjective measures (e.g., questions in surveys) to measure customer loyalty, seemingly different questions of customer loyalty (e.g., likelihood to repurchase, likelihood to buy again) are not distinct from each other. That is the nature of surveys.

      3. I will show that satisfaction with business attributes (e.g., product quality, service quality) are positively related to customer loyalty. That is, higher levels of satisfaction lead to higher levels of customer loyalty.

      Bob E. Hayes, Ph.D.
      Business Over Broadway

    4. My confidence in surveys depends on the survey itself. As you pointed out, there are many potential pitfalls of surveys. When I conduct research for companies using their existing survey data, one of the first things I do is validate the survey process. I want to ensure the data from the survey process provide reliable, valid and useful. If possible, I calculate reliability estimates (internal consistency estimates, inter-respondent agreement across a company, test-retest reliability) to understand the types of measurement error with which I’m dealing. Additionally, I test theories of customer satisfaction to see if the survey data support some existing theory of customer satisfaction (e.g., satisfaction leads to increased value which leads to increased loyalty). Additionally, you can compare the demographics of the respondents with the demographics of your actual customers.

      So, rather than say all surveys are suspect, I take the approach of validating the survey process to understand the quality of the resulting data.

      Bob E. Hayes, Ph.D.
      Business Over Broadway

    5. so how can we evaluate an individual customer’s loyalty to us?
      how can we rate our customers in the loyalty criteria?

    6. Dear Bob

      Sorry for bringig up the thoughts given below as they are a bit off topic but I think that it will be more and more important to understand the real cost of loyalty.

      The customer loyalty is absolut must for every company either small or big or at least everyone around seems to think so. Based on that almost every book about customer service, customer loyalty etc tells us that it is much cheaper to keep customer loyal than to win over new ones. At the same time every company spend a lot to keep their customer (customer magazines, events, special websites etc) loyal. I have never seen real evaluation of those costs compared to cost spent purely to obtain new customers! I would like to see analyse about that and my guts feeling tells me that the loyalty isn´t cheap any more.

      Heikki Laidma

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