Valuing Loyalty (Jim Karrh Commentary)

How important is loyalty to your business? We all probably have a gut sense that loyal customers, suppliers, investors and channel partners are more valuable to our organizations than disloyal ones.

Over the past decade, the issue of cultivating, managing and quantifying loyalty has gathered steam to the point where it’s a certifiable Hot Topic among marketing leaders. Having recently attended a seminar devoted to customer loyalty, I wanted to share with you the most current findings, controversies and suggestions.

• Loyalty is not necessarily the same thing as satisfaction. Loyalty means one stays with an original choice, even in the presence of reasonable alternatives.

• Your customer-satisfaction measures probably won’t tell you what you want to know. Most current measures of customer satisfaction fail to consistently predict either retention or growth. Why? Well, most satisfaction measures do exactly what they are designed to do: give managers a heads-up on how customers feel about the status quo. Because the status quo doesn’t linger, satisfaction numbers often fail to predict the future. On the other hand, dissatisfaction has been strongly linked to defections. The lower end of satisfaction scales performs better than the higher end.

• Loyalty means money. One bit of direction I received at the seminar involved ways to group a customer base into loyal, neutral and defector segments. (This is done through a combination of surveys and attention to customer profitability.) Most companies could expect to find about 30 percent of their customers in the loyal category and fully half in a neutral category. The loyals typically account for almost all operating profit and the defectors eat cash in the form of customer-service time, price discounts and promotions, make-goods and misguided advertising. The juice for your business can come from focusing less on the likely defectors and moving even a small percentage of neutrals into the loyal category.

• Measurement is vital, but it means trade-offs. With more and more emphasis being placed on developing and nurturing customer loyalty — including ties to compensation, it will come as little surprise to learn that the search for a lean, valid measure of customer loyalty is a hot topic. In fact, there’s a somewhat heated and public controversy on that topic going on right now.

A story in the Jan. 30 issue of Business Week titled “Would You Recommend Us?” highlights the kerfuffle. Fred Reichheld, founder of Bain & Co.’s loyalty consulting practice first put forth a radical idea in 2003. Reichheld advises companies to ask a single question of customers to measure their loyalty. The idea then is to calculate a “net promoter score.” Companies such as GE Healthcare and American Express have enthusiastically adopted the measure, replacing lengthy and expensive satisfaction surveys. Many other researchers and consultants worry that companies will use something overly faddish and simplistic and fail to do the homework necessary to learn why their customers feel the way they do.

(Jim Karrh, Ph.D., is chief marketing officer of Mountain Valley Spring Co. E-mail him at [email protected].)