Customer-Focussed Outcomes: The Test of Loyalty

September-October 2007 | Source: Chemical World
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What makes customers stay or stray? The quest for more concrete and meaningful answers to this classic consumer behaviour - has spewed forth several models and concepts, which attempt to complement the standard satisfaction criteria. While every organisation recognises the need to acquire new customers, very few succeed in retaining their existing customer base. The measurement of outcomes related to customer-directed operations is vital to ensuring sustainability and long-term value creation. An insight…

In an economy where customer is king, customer satisfaction is the key to profitability. Satisfied customers are loyal customers who stand by you and keep adding to your bottomline. Right? Wrong, and wrong again.

Consider this: Frederick Reicheld, an authority on customer loyalty, estimates that around 65 per cent to 85 per cent of customers who defect to another brand or service state that they were satisfied or extremely satisfied with the previous company. In the automobile industry, the average rate of customer satisfaction is 90 per cent, whereas repurchase rates are as low as 40 per cent.

What these figures highlight is a plain truth that firms across the global business landscape are beginning to assimilate - customer satisfaction, though important, is no longer a sufficient measure of an organisation’s customer-focussed performance outcomes. In order to predict and aid sustainability, measurement of customer satisfaction should be part of a balanced framework that incorporates other long-term results.

Redefining Satisfaction
Since customer satisfaction is one of the earliest and most widely understood objectives of customer centric businesses, it is a good starting point for a discussion on customer outcomes. Needless to say, satisfaction is a subjective concept - a state of mind where the customers feel that their needs and expectations have been fulfilled or exceeded. Traditional approaches to the measurement of customer satisfaction have certain inherent drawbacks:

  • They do not link satisfaction with business objectives like growth and profit. Thus, they fail to justify the cost incurred on customer-focussed activities
  • They do not address the customer’s perception of quality relative to competition
  • They do not distinguish between what the customers say and how they behave in reality
  • They fail to measure real time performance
  • Finally, they often focus on short term outcomes and are subject to the ‘recency effect’. Customer satisfaction surveys typically lose sight of the complex factors that sustain a long-term relationship

The quest for more concrete and meaningful answers to the classic consumer behaviour enigma - what makes customers stay or stray - has spewed forth several models and concepts, which attempt to complement the standard satisfaction criteria.

Loyalty and retention: While loyalty and retention flow from customer satisfaction, the reverse is not always true. Satisfaction refers to an immediate outcome of a process whereas loyalty refers to a relationship. Loyalty is an intense emotional bond that almost permanently connects the customer to the organisation, brand or service. Experts point to some key dimensions which render loyalty more accurate metric than satisfaction:

  • Loyal customers abide by you, come rain or fair weather. Satisfied customers move on when they find a more appealing alternative
  • Loyal customers are always willing to give you positive referrals
  • Satisfied customers may default on payment, but not the loyal customer
  • The satisfied customer sees you as a provide; the loyal customer is your partner
  • Satisfaction is usually linked to products and processes; loyalty is more often a function of relationships and emotions

Sure, measuring satisfaction is essential to keep track of performance and learn from past experience. But understanding the concept of loyalty helps reduce customer churn and enhance competitiveness.

Customer engagement: Just as the concept of employee engagement links the relationship between the employee and the organisation to productivity, customer engagement offers an in depth perspective on the impact of customers on the organisation’s growth and goals. Gallup has identified four measures of customer engagement:

  • Confidence: Belief that the firm will always deliver on its promises
  • Integrity: Faith in the organisation’s commitment to quality, customers and ethics
  • Pride: Ownership of the brand, feeling of personal association
  • Passion: Intense attachment, belief that the product or service is the perfect solution to their requirements

Gallup research suggests that customers who score high on all the four metrics of engagement contribute 23 per cent more than the average customer to profitability.

Measuring customer centric results
Whether one looks at it as customer satisfaction, loyalty or engagement, it is essential to translate your relationship with the customer into tangible results. This is especially true since any effort to appease the customer involves a cost - often huge - and customer focussed efforts are a cost centre in the short run. Customer retention and engagement efforts cannot succeed without buy-in from the top management and other functions within the organisation. Outcome metrics should, hence, be quantifiable and linked to the mission and strategic focus of the organisation. The balanced scorecard, for instance, effectively links outcomes to financial results & objectives and presents them in an integrated manner. In recent years, other measures have emerged, which specifically address customer outcomes in the light of profitability and competitiveness.

Customer-perceived value (CPV): The perception of value lies at the core of customer loyalty, retention and repeat purchase. Customer-perceived value has been defined from various perspectives to suit diverse industries and contexts. Essentially, CPV is a cost-benefit analysis of a product or service - especially in comparison with alternatives. A fundamental characteristic of CPV is that it is usually implicit and abstract. CPV is rarely put down with pen, paper and numbers - the customer more often than not evaluates the worth of a product or service at an intuitive level though it may be based on previous knowledge and experience. This highlights the need for a two-way process to identify CPV - the organisation needs to communicate relevant facts and data to the customer, and at the same time listen to the customer’s voice.

A big advantage of CPV is that it is relative and allows for benchmarking. Through CPV, you get to know not only where you stand in the eyes of the customer, but also how you measure up against the competition. Like any good metric or measurement tool, CPV is dynamic. Customers’ preferences. Change, competition changes; hence, it is essential to track CPV on a continuous basis and take proactive strategic action to maintain a consistently high value.

Net promoter score (NPS): Can one simple question measure customer loyalty or engagement and also predict future performance? Yes, according to Frederick Reicheld of Bain & Company and Dr Laura Brooks, who jointly developed NPS as a tool for measuring loyalty. NPS is based on just one question fielded to the customer - “How likely is it that you would recommend this product/service to a friend or colleague?” Customer responses are solicited on a scale of 0 to 10, where 0 indicates no likelihood of referrals and 10 means that the customer will certainly make a positive recommendation. Based on the scores, customers are grouped into three categories: promoters (those who marked 9-10), neutral (7-8) and detractors (0-6). The difference between the percentage of promoters and that of detractors makes up the net promoter score.

NPS is ideally tracked on a monthly basis to ensure that the organisation has more promoters than detractors at any given point. Survey results show that when applied across an entire customer set, NPS can accurately predict a company’s growth potential. While the average company has an NPS of only 5 per cent to 10 per cent, the leaders in customer loyalty like Southwest Airlines and American Express cross the 50 per cent mark.

Share of wallet (SOW): McDonald’s calls it ‘share of the stomach’, while at General Motors, it is share of the garage. The concept, which forms the basis for penetration marketing, measures the percentage of the customer’s purchase or use of a particular brand against their total product usage. Share of wallet is being increasingly recognised as a more effective predictor of long-term performance than of market share. Increasing the share of wallet also generates more return on investment (Rol) than efforts to increase the market share do. The measurement of share of wallet is accompanied by various strategies to ‘dig deeper’ into the customer’s wallet. A popular strategy used by many firms is upselling - persuading the customer to buy larger volumes or advanced versions of a product. Another SOW strategy is cross-selling, where the firm offers additional products or services to go with a particular product.

The Industry Perspective

Google: From book searches to custom-search option for bloggers and Google maps, the ingenious search engine company has been constantly looking for ways to gain and engage its customers. Google bases all its strategic decisions on customer surveys and feedback. The latest in Google’s series of customer-led strategic moves is its acquisition of YouTube, the media company, which enables people to watch and share videos through the web. In the face of stiff competition, Google continues to grow, with a market share of 54 per cent and an astounding referral rate of 80 per cent.

General Electric: It was among the first corporations to adopt NPS as a measure to increase the focus on customer outcomes. The company analyses the results of NPS surveys using the principles of six sigma and lean manufacturing. The organisation’s commitment to customer engagement is such that NPS is used as the metric for deciding the compensation of its top executives. Within one year of implementing NPS, GE recorded a 10 per cent increase in revenue.

Frito-Lay: It introduced Tostito salsa as an accompaniment to its popular Tostito tortilla crisps. An obvious move to increase the share of wallet, this created a new market and simultaneously increased the market share of Tostito chips.

Starbucks: “If we greet customers, exchange a few words with them and then custom-make a drink to their taste, they will be eager to come back” - true words of wisdom from Howard Schultz, the visionary founder of Starbucks. Innovative customer retention strategies like cosy interiors, plug points for customers to operate their laptops and payment options via pre-paid cards are used by the world’s largest multinational coffee shop chain.

Jet Airways: It was the first Indian airline company to introduce customer loyalty programmes. The company complements its innovative loyalty programmes with new and upgraded services based on passenger feedback. In spite of the entry of new private players, Jet continues to soar high as the market leader in Indian skies and has been repeatedly voted as a Superbrand by customers and the media alike.

Nirma: The Nirma brand is synonymous with value for money. When the company started off as a one-man show in 1969, it revolutionised the detergent market by introducing low-cost products in a field dominated by MNCs. In spite of its tremendous growth over the years, the company has remained loyal to the market segment it created and nurtured - the lower middle class households - and has adhered to the principle of economy in all its product categories. Nirma’s brand recall has enabled it to venture into sectors as diverse as personal care, food and pharmaceuticals.

Amul: India’s largest food brand is a legend in its own right and has struck an emotional chord with Indians of all generations, classes and social strata. The Amul strategy is based on fair prices for its owners - the farmers - and quality for its customers. In the food market coveted by multinational giants, Amul stands tall, with an incredible 85 per cent share in the butter segment, and significant slices of the pie in new segments like cheese, ice creams and pizzas.

Amul has been voted a ‘cult brand’ by customers and constantly emerges the winner in surveys, which ask customers to name brands that they would recommend to friends. Rather than resting on its brand equity, Amul continuously looks for innovative ways to serve its loyal and ever-growing customer base. For instance, it was among the first food companies in India to start a cyberstore for its entire array of products and recently introduced an international pack for its butter to appeal to the young urban consumer.

Lijjat: This company represents empowerment of poor rural Indian woman. The business, which was launched by seven illiterate women with a borrowed sum of Rs 80, has grown into a favoured brand that invokes trust and pride in Indians worldwide. Lijjat became a household name with its unrelenting adherence to quality. With no help from any sophisticated machinery or quality control technique, the women’s group ensures that every single Lijjat papad conforms to high quality standards. Thus, customers are assured of the Lijjat experience every time they consume the product.

Haldirams: Another food brand that has sustained customer loyalty in the wake of stiff competition is Haldirams. The family-owned business, which traditionally made Indian sweets and savouries, has leveraged its brand name and diversified into pastas and other ‘Generation Y’ products and has even entered the restaurant business. Haldirams exports its products to over 25 countries. The brand retains its place in the heart of Indians with its commitment to purity, quality and responsiveness to the changing tastes and demands of the customer.

Indian Railways: The sensational turnaround of Indian Railways is the kind of stuff fairy tales are made of. The transformation of the world’s largest employer from an unwieldy, loss making behemoth to a profit engine and role model for all public sector companies has evoked the admiration of management gurus, corporates and the media across the globe. The Railways doubled its passenger volume over the last two years and has already attracted a number of enquiries from foreign investors.

The organisation achieved all this. without increasing its fares amidst pressure due to increasing fuel prices. At the heart of this success story is the Railways’ understanding of the passenger and his expectations. On-line bookings, frequent traveller programmes and a railway credit card are just a few of the customer-centric steps that kicked off this comeback. It declared 2006 as the year of ‘passenger service with a smile’.

Having implemented a number of measures like sprucing up of trains and stations, and with many more improvements in the pipeline, the entity is indeed having the last laugh.

Customer focus is no longer the responsibility or prerogative of the sales and marketing function. Measures of the value an organisation holds for its customers - whether tangible or abstract - are inextricably linked to the bottom line. Commitment to obtaining, analysing and improving these measures should flow from the leadership and seep through the entire organisational fabric.

CREDITS: Suresh Lulla, Founder & Mentor, Qimpro Consultants Pvt. Ltd.
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