Add 1 Tablespoon Experience, Blend and Serve: The Experience-Loyalty-Value Connection

The buzz in the Customer Sat world is all about Customer Experience. Great customer experiences can help solidify customer relationships — while bad experiences can undermine customer relationships, increase churn and harm brand reputations through negative word of mouth.

Despite its importance, however, the customer experience is a means, not an end. Too often, companies view (and measure) customer experiences in a vacuum – good, bad, indifferent – and stop there. Instead, experiences need to be seen in the larger contexts of customer loyalty and business objectives.

For marketers to make prudent decisions, customer experiences must be designed and evaluated in terms of their contribution to strengthening loyalty and creating value for the company.

Loyalty is a relationship-level concept. Regardless of the specific customer experiences, loyalty is more than the simple sum of all experiences. Every experience, however, is a link in the relationship chain, which is only as strong as its weakest link. These experiences can range from fleeting transactions, mechanical contacts or simple exposure to brand messages to prolonged, multi-channel interactions and “immersion” in the product/service/brand.

Each and every experience is an opportunity to strengthen the relationship, to reinforce the relationship chain, or to weaken and even undermine customer loyalty.

So why is loyalty important? Rather than being thought of as an abstraction, loyalty needs to be understood in terms of loyalty behaviors, the actions customers take that create value for a company – such as continuing to be a customer, giving a company a larger share of their spend or recommending the firm to others. This is where the rubber of good experiences meets the road of commerce; if there is traction, dollars will follow. The best loyalty metric, therefore, is one that is the most predictive of those behaviors.

Since the ultimate goal of marketing is to influence customers to behave in those ways that create value for the company, marketers need this best loyalty metric to understand what customer experiences and other performance criteria are “driving” loyalty. Then they need to validate the measure in terms of business outcomes.

The key business outcomes might be growth in same-store sales; customer retention/churn; customer revenue, profitability, and tenure – preferably based on actual customer and business data. For one credit card issuer, for example, we demonstrated that their least loyal cardholders defected at 12 times the rate of their most loyal, while generating only 60% as much profit. An upscale retailer learned that a great shopping experience translated into a boost of more than 50% in average monthly spend compared to a more lackluster experience. And one hotel brand realized that properties with the strongest loyalty scores saw occupancy rates increase at three times the rate of growth of their overall portfolio.

Linking business and financial outcomes to loyalty and experience measures is critical both to confirm (or improve) the loyalty metrics being used and to determine the value of stronger customer bonds, as this is the rationale for ongoing investments in improving the customer experience.

An essential part of any accurate and meaningful loyalty metric is the customer’s expectation. Behavioral economics teaches us that we perceive the world through a relative lens, by comparisons, not in an abstract void. So, banks need to be measured against what customers expect from a bank (or experience at another bank), while telecom providers should be rated relative to what customers expect from a telecom carrier, Internet provider or cable TV firm. Those relative measures, moreover, require anchors to be meaningful, rather than relying on an abstract scale that lacks inherent significance to customers.

It is only by exceeding expectations on those criteria and experiences that really matter to customers that firms can earn and keep brand loyalty. As our examples show, the right loyalty metric for your business is almost certainly not the same as that for a company in another category, and perhaps not even the same as for your closest competitor. Because businesses and brands have different value propositions, business models and channel strategies – not to mention different histories, selling points, and goals – it is not enough to take a cookie cutter approach to experience and loyalty measurement. Defining the value of experience is very much a custom endeavor, not a syndicated one.

Modeling can be another powerful tool in this process of linking experience to loyalty and, finally, value. Modeling can tell us what experiences matter most to customers — but we need to move beyond linear approaches that simply say more is good, less is bad.

A model is a representation of reality – and we do not live in a linear world, or one in which poor performance can be erased by the simple addition of positive perceptions on other criteria. So it’s time to look beyond regression-based approaches, with their “lines of best fit” and penchant for adding beta weights confounded by problems of multicollinearity. Key driver modeling, moreover, should distinguish between the “positive,” upside drivers of loyalty and the “negative,” downside drivers of customer dissatisfaction and disaffection. This distinction recognizes the non-linear nature of the world, as well as the precept of behavioral economics that people receive process, remember and act on negative information differently from positive information.

In the hospitality sector, for example, downside risks often center on such issues as the cleanliness and timely availability of rooms and accuracy of reservations, aspects that guests take for granted. Performance miscues on these components of the guest experience are highly problematic, as they are failures to meet basic expectations. Because these performance criteria are simply assumed, however, meeting expectations on these dimensions doesn’t earn the hotel high grades, either. Differentiated hotel experiences that positively drive guest loyalty might center on great service delivered by staff.

The maxim that anything that isn’t measured can’t be managed still holds. Measurement in a void, however – such as defining satisfaction with customer experiences but then failing to relate those experiences to the larger context of customer loyalty and business outcomes – is a half-baked idea. Customer experiences – be they high impact, multi-dimensional and memorable or basic, perhaps even fleeting — are the stepping stones in the continuous journey of customer loyalty and the customer relationship. Each and every step may be critical, but no single step is its own destination; and the importance of each step hinges upon its impact on customer loyalty and the customer behaviors that translate experiences into dollars.