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Customer Loyalty Behavior Modeling: What Works in the Real World, What Doesn’t, and Why

Blog post by on August 8, 2012 No Comments

It seems that there’s a model, or a framework, for just about everything in business these days. Organizations and management have been guided by evolving models for over 100 years. They are used for corporate architecture, overall business planning, decision-making guidance (such as strength/weakness/opportunity/threat, or SWOT, analysis), customer lifetime value, nnovation, and financial resource allocation.

There have been models for understanding, or endeavoring to understand, human behavior, dating back to Freud, Jung, and, classically, Abraham Maslow (Hierarchy of Needs) and Herbert Simon (Utility Theory).

Formal research on customer opinions has been going on since the 1950s. Much of it had to do with perceptions of product/service quality and satisfaction, engagement, and eventually loyalty and recommendation. For decades, data on these attitudes and feelings was sufficient to provide companies with general insight and direction, and models of customer behavior reflected the focus on perceived emotional and rational elements of value. Customer research has seen its share of models over the past twenty years or so. Without naming names, some of the more prominent ones include:

- Model C – an 11 element model which identifies strength of customer relationship with a brand or company based on levels of engagement. In this model, customers can be considered to be in states ranging from full engagement to active disengagement.

- Model I – a model containing questions which identify components of attitudinal loyalty, behavioral loyalty, and customer value

- Model N – a ‘one number’, or single question, metric which hypothesizes that revenue growth can be achieved by understanding, on an aggregated basis, the level of recommendation customers give to a brand, product or company

- Model M – a complex model which contains loyalty ‘ingredients’, such as marketplace factors (availability, price, etc.), individual customer differences (risk aversion, variety-seeking, etc.), experience attributes (sales channel, service), and measures of intention and past behavior

- Model W – a model based on 1994 academic research which identifies attachment driven by the degree of customer conviction about the product or service, and perceived product or service differentiation. The model segments customers based on multiple states of attachment and purchase.

- Model S – a model which considers customer behavior from the perspective of the competition in the marketplace, based on opportunities and barriers that the competitors present to customers.

By the early 1990′s, control of brand and supplier selection had shifted away from companies and moved to consumers, a result of several pivotal, converging factors:

1) Growing Internet penetration and mobile device usage, as communications enablers

2) Over-saturation of ‘push’ advertising and promotional messaging through traditional mass electronic and print media, and

3) Heightened public distrust in the honesty and authenticity of corporations, in both B2B and B2C business sectors.

This was a major, seismic change in the way businesses regarded customers, and the nature of information needed from them. Significantly, none of the models cited above took these changes into consideration. Instead, they continued to view the customer through a lens where the company controlled, or at least managed, customer decision-making rather than the other way around. These models did not incorporate the customers’ ownership of company and brand selection, or what elements contributed to both choice and loyalty behaivor.

Beginning around 2000, major consulting organizations began to recognize that these critical changes were likely to have profound impact on businesses. Instead of relying solely on such historic measures as satisfaction, loyalty, engagement and recommendation, companies would need to identify and focus on something more contemporary, more actionable, and more predictive of key monetizing business outcomes, such as share of wallet. That ‘something’ was ultimately defined as customer advocacy, i.e. behavior driven by a strong relationship and bond with the preferred brand and active, voluntary online and offline word-of-mouth on behalf of that brand.

The consulting companies conducted many insightful advocacy studies, issuing statements such as:

“Advocacy is a deeply-rooted, emotional connection which relies on trusted, effective non-traditional communication and engagement channels.”

“Word-of-mouth is the primary factor behind 20 to 50% of all purchasing decisions. And its influence will probably grow…………..”

“Leading companies want to build strong bases of loyal profitable customers who are also advocates for the organization. Advocates spend more, remain customers longer, and refer family and friends, thus increasing the quality of the existing customer base and new acquisitions.”

“We predict that customer advocacy will be the new focus for business leaders. Customer advocacy will become the single most important initiative that cutting-edge, forward thinking companies will adopt.”

Having identified the power of customer advocacy to influence the customer’s own behavior and the behavior of others, the next challenge was to create, and prove the effectiveness of, a state of the art research metric, or framework, for measuring and leveraging it.

So, customer advocacy, as identified by these consulting companies, could now provide organizations with many valuable business outcome benefits. This new consumer influence also meant that market research companies would need to evolve beyond historic methods of interpreting customer attitudes, and determining how those attitudes could impact behavior, to incorporate drivers of customer advocacy. Some new models were created, principally to evaluate emotional connection; however, in general, the market research industry has not embraced the new realities of customer decision-making represented by customer advocacy.

Advocacy, principally based on customer word-of-mouth and impression of the brand or vendor, has tremendous power and potential to create desired high-end customer behavior. Word-of-mouth, however, is a double-edged sword; and customers’ negative communication, as much as praise, can have damaging effect on other customers and non-customers, as well as the communicating customer himself or herself. Advocacy segmentation research and analysis, as we conduct it, provides a number of value-add benefits:

1) Based on actual past behavior, it is perhaps the most reliable barometer and predictor of customer behavior available

2) The ability to blend attitudes with positive and negative word-of-mouth and emotional brand connection, creating customer groups whose behavior has direct linkage to business outcomes

3) Enables action prioritization of image, performance, and messaging factors to optimize advocacy and loyalty, minimize alienation

4) Application to any customer segment (demographic, dollar value, product, usage frequency, etc.) in virtually any industry, and any value or experience delivery component (such as customer service). Can be applied to transactional, brand and communication, and strategic relationship studies, offering both independent topic and conjoined research

5) Identifies strength of brand franchise in the marketplace, especially in monetizing factors, relative to competitors

As concluded in a Peppers & Rogers 2011 white paper (Cultivating Customer Advocates: More Than Satisfaction and Loyalty): “The benefits of building advocacy can’t be ignored. Satisfaction and loyalty are important, but they’re old news. It’s a new dawn in customer experience strategy, where the customer controls over 50 percent of the brand message. Forward thinking companies will be the ones that identify and work with their customer advocates to genuinely build trust in the brand, the customer base, and the bottom line.”

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