Why we need to understand customer loyalty drivers better in these challenging times

As we have been described to be in the ‘experience era’ (digital and binary), there has been more and more emphasis on customer loyalty scores as the measure of success of customer experience, customer engagement, customer advocacy, customer satisfaction, etc., programs. But are we oversimplifying a complex goal in our reliance on one KPI?

In addition, other market dynamics today are driving our need to understand our performance in loyalty measures better. Currently, nearly every industry is impacted by some supply issue. Serious supply disruption events are becoming more frequent and more extreme. In these challenging times, we learn whom our ‘friends and allies’ are, demonstrating supplier & customer loyalty versus those who take advantage of the shifting power dynamics. Concurrently we are amid the digital revolution where we push customers to self-serve, and our intimacy takes a degree of separation. When we take the digital path, we rely even more on data to tell us about our customers’ needs, wants, and expectations that we previously would have learnt from individual connections. The reliance on that data means we need to understand it better and not use it to reassure us of our preconceptions. Ultimately it is being brave and having the confidence to have an outside-in view. Knowing that the outcome of investing and building a bank of loyal, value-creating customers will, in turn, create positive organisational results.

The connection between loyalty and profitability

The importance of customer loyalty in driving profitability was first described by Harvard Business School professors James Heskett, Earl Sasser, Jr. and Leonard Schlesinger in the book ‘Service Profit Chain’. Their research in the 1990s established relationships between profitability, customer loyalty, employee satisfaction, and productivity. They identified that profit and organic growth were partly a result of customer loyalty. Loyalty profits arise from retention, referrals, and related sales, also known as the 3Rs. At the same time, loyalty was a direct result of customer satisfaction. Notably, later, mere ‘satisfaction’ of the customer was shown not to be enough, but a customer must be ‘very satisfied’ to be genuinely loyal. This need for customers to have high satisfaction levels may have given rise to the emphasis in focus on dazzling, wowing, etc., in the Customer Experience (CX) movement we see today. Whilst customer satisfaction, returning to the profit chain description, was primarily influenced by the value of the product and services provided to customers. Critically it was the customers’ perception versus their expectations. ?Going one step further up the chain, product quality and high levels of customer service were linked to employee satisfaction and engagement. Employee execution, attentiveness and ownership were deemed directly related to their satisfaction with the company and their role. Employee performance was also linked to organisational structure, such as high-quality support services and policies enabling employees to deliver customer results. ?

So ultimately, long-term value for a company can be generated by creating highly satisfied, loyal, and productive employees who, in turn, make highly satisfied and loyal customers.

Earlier I mentioned that loyalty profits stem from the 3Rs. Often now, you see the 3Rs have been iterated to 5Rs.

The 5 Rs of loyalty profit

Retention- loyal customers return and keep buying, so we have reoccurring sales. A statistic commonly quoted relating to the impact of retention is that it costs five times more to bring a new customer than to keep an existing one.

Related sales- because they are already customers, this allows for selling other products and services. Having already built loyalty, you should have a competitive advantage. This is often referred to as the wallet share effect. Loyal customers give larger wallet shares of the available business to suppliers they are loyal to.

Referrals- loyal customers speak well of you; recommend to friends and colleagues; give you good online reviews and ratings. Which ultimately helps generate new customers. This can also be known as customer advocacy which is discussed later.

Resilience- loyalty has earned you trust and ‘the last right of refusal’. Therefore, loyal customers are less willing to change suppliers due to minor pricing changes.

Re-entry costs- Like retention, but in this case, it is not a new customer but the impact of ‘churn’. With customer churn, you join the race to the bottom with your competitor as you fight to recover the one that got away. The cost, in this case, comes from lost margins and compromises given as the customer-supplier relationship swings firmly into the transactional.

Loyalty is not the same as customer retention.

When we look at the dictionary definition of ‘loyalty’- the quality of being faithful in your support of someone or something—a feeling or attitude of devoted attachment and affection, in the case of customer loyalty - A deeply held commitment to rebuy, loyal customers consistently re-patronize a preferred product service despite situational influences and marketing efforts to cause switching behaviour. In these definitions, it is critical to recognise that loyalty can be emotional and driven by feelings but ultimately demonstrated by behaviour. ?

On the other hand, one of the best customer satisfaction definitions I have seen comes from Philip Kotler. He defines customer satisfaction as – a person’s feeling of pleasure or disappointment, which results from comparing a product’s perceived performance or outcome against their expectations.

The apparent contrast here with loyalty is that satisfaction is an attitude/opinion.

Ultimately, I believe at the root of the confusion and complexity over customer loyalty is this understanding of loyalty as a behaviour versus the attitude of loyalty through emotional connection. To this end, loyalty, the ‘behaviour’, is often confused with customer retention. To help distinguish between the types of customer loyalty, Dowling and Hammond, in their article 'Customer loyalty and customer loyalty programs' in the Journal of Consumer Marketing, 2003, described the three separate types of loyalty.

Situational Loyalty- the customers are defined as being loyal through the behaviour of repeat purchases through the situation or circumstances they find themselves in. They have no emotional ties.

Behavioural Loyalty – the customers are defined as being loyal through the behaviour of repeat purchases. They have no strong emotional ties.

Attitudinal Loyalty- the customers have genuine affinity, satisfaction and involvement in the product and brand. The complete freedom of choice over others. They are behaviourally and emotionally invested.

Now we see loyalty because its emotional context can be complex. So why not focus on satisfaction, as this is a critical component of attitudinal loyalty? This is a good question; all I can identify is that customer satisfaction appears to have fallen out of favour because several studies showed that satisfied customers were not particularly loyal. Only highly satisfied or super satisfied customers were demonstrated to be faithful. Because of this critical inflexion point, satisfaction was no longer a target. We need to delight customers, wow customers, and create fans. However, in the race to delight, often the basics were diminished. Often you see organisations spending massive effort trying to outrun their competitor before learning to crawl, let alone walk a little faster.

To share an experience which demonstrates the running before crawling mentality. Some years ago, I got a new company car; brand and model are unimportant but suffice it to say it was a new line with a massive marketing campaign and launch. I was lucky and excited to have one of the first be launched to the public. I was a rep at the time with quite a large region, and I managed to rack up 100,000 miles in 11 months. Because I was doing so many miles, I was finding all the glitches one may find in a new model. One particular glitch I found, was a crack appearing in the corner of the windscreen. I took it to the dealer, who replaced the screen, but a new crack appeared the next day. The second time I took it back, 5 minutes into my drive, building up my speed, I couldn’t hear myself think because of the amount of wind noise in the cabin. Back to the dealer, they fixed the noise, but the crack reappeared a few days later. Anyway, to cut a long story short, for about three months every week, I would be in the garage having the noise or the crack fixed. Now because I was going in so often to dealerships, it was apparent that I would eventually get the famous customer satisfaction call. Here, the principle of trying to delight before trying to satisfy is demonstrated.

Surveyor ‘Dear Mr Evans, did you have car reg XXXX in Garage YYYY on date ZZZZ.’

Me ‘yes’

Surveyor ‘were you greeted in a cordial, friendly manner.’

Me ‘yes’

Surveyor ‘was the technician understanding and courteous to your needs’

Me ‘yes’

Surveyor ‘were you offered a refreshment while you waited’

Me ‘yes’

Surveyor ‘was your car ready for you at the agreed time.’

Me ‘yes’

Surveyor ‘was your car cleaned inside and out.’

Me ‘yes’

Surveyor ‘out of five, how would you rate your overall experience.’

Me ‘zero’

Surveyor ‘sorry, sir, but the lowest rating you can give is 1 star, and I don’t understand why you would rate so low based on your other answers’

Me ‘you never asked if they fixed the problem or how many times, I have attempted to have it fixed’.

Surveyor ‘Sorry, sir, but those are not on my list of questions. Would it be okay if I award one star and we can end the call’

Me ‘sure’

Call ends

I am sure this car manufacturer took it for granted that satisfaction was a given and jumped to delight to gain my loyalty. As customers, we go through the AIDA buying journey (Awareness, Interest, Desire, Action); attitudinal loyalty and satisfaction are earned and perceived through this journey and into after-sales and re-buy. We win attitudinal loyalty through the entire journey and whole enterprise activities and a culture focused on satisfying customers. Looking back on the experience, I have vague recollections of the frustrations built over three months of having a visit every Friday to various dealers, each promising they knew how to fix the problem 'this time'. What is striking is my vivid memory of the emotions stirred from the satisfaction call and how it was designed not to listen but for self-gratification.

Since then, I have been deeply interested in customer satisfaction/loyalty surveys. How they are; designed, deployed, collated, understood and the actions taken. I have been surprised how a very complex topic gets complicated further, manipulated and distilled to answer in the form non-comparable result. After all the work, the surprise, shock, and misunderstandings follow. Why do customers claim to be loyal and change suppliers at the first sign of price increases? Why do customers with such high demands and complexity of service appropriate to have no loyalty? Why do dissatisfaction issues one year seem to be a none subject the next year? One soon realises that a ‘loyalty score’ is a snapshot in time subject to an array of external factors and a genuine attitude. That realisation, in turn, leads to the understanding that achieving attitudinal loyalty requires a deliberate, sustained, consistent, predictable, trustworthy, whole enterprise effort congruent with your brand.

Advocacy as a measure of loyalty

Of course, you cannot talk about customer loyalty without mentioning the connection to customer advocacy, since customer advocacy is frequently used to measure customer loyalty. The principle is that one consequence of loyalty is referral by advocating to friends, family, network, etc. This, on face value, is quite logical; I like a product I have bought; I tell my friends and continue to re-patronise; my friends trust my insight and knowledge, looking for the same product and buy. Therefore, the logical assertion is that if customers are willing to recommend a product or service, they are highly satisfied with the experience. They can be assumed to be loyal. Thereby the link between advocacy is clear and direct. However, today my belief is that a direct connection is not so clear-cut, and the measure of advocacy can be used only as a broad barometer for loyalty.

Strategic responses are the first reason I would share as a weakening of the measures link. Over my career, I have been part of numerous customer feedback initiatives. Over that period, I have had the opportunity to see the responses of specific customers from different supplier perspectives. What struck me was the number of customers who gave low advocacy scores and referenced alternative suppliers as having higher performance. But seeing the same customers provide very different perspectives when responding to another organisation. When we had the opportunity to dive deep into the differences, it could be seen that some customers were responding strategically.

Secondly, I have seen how advocacy scores have led to a false sense of security and ultimately losing the customer. On various occasions, high advocacy scores have turned sour very quickly. High positive scores from specific customers meant emphasis went on other areas. Then someway down the road, something happened, and the customer-supplier relationship became tested. What was striking is the speed of progression, from the positive to the extreme negative, which happens and eventually becomes catastrophic. One apparent reason for this rapid reversal is that; loyalty and advocacy have an emotional investment (e.g., a buyer advocating a certain supplier internally, despite opposing views, is putting their reputation at stake), so when one side feels the trust/nature/expectations are no longer reciprocated it becomes personal.

Thirdly the digital/social media era we live in today. In the past, a referral came by word of mouth or by a company soliciting a customer to put ‘pen to paper’. Nowadays, there are countless ways of leaving reviews, from directly on a company’s website to various review platforms or social media forums. Now that act of referral has so many influencing factors and consequences. As a result, it is not easy to see the genuine from the artificial information.

The consequence of attitudinal loyalty can be advocacy, which can positively impact a company’s profitability. However, today advocacy takes so many formats and motivations (genuine, artificial and strategic) that it is becoming increasingly more challenging to link advocacy and loyalty. Therefore, if advocacy is treated and managed in isolation, it can create half pictures and half-truths, leading to bad strategic decisions.

Whole enterprise thinking for creating attitudinal loyalty

In this article, I wanted to share an understanding of the different types of loyalty and why ‘loyalty’ is perceived to be such a critical indicator of organisational outcomes. Hopefully, I have clarified why the correct type of customer loyalty is essential. Additionally, why is loyalty far more complex than simply retaining customers? Ultimately, we seek the correct type of loyalty with the right customers to drive our profitability. This cannot be oversimplified. I firmly believe that attitudinal loyalty is achieved by having a Customer Intelligent Culture and the discipline that leads within your organisation. Curious and want to know more about having a customer-intelligent culture? I hope I have intrigued you enough to discover more in my next article with a brief insight in the diagram below.