Copyright © 2003 Paul Stewart, All Rights Reserved.

Recently while standing at a retail check-out counter with a friend I noticed that, not unlike many people, he had quite a selection of credit cards to choose from. Yet, when it came to selecting one with which to make the purchase, the process occurred without hesitation – he readily pulled out Card “Y”.

When I asked him about it, he said he pretty much always used that particular card. “Why not the others?”, I asked. “I just prefer this one”, he responded. I pointed to another - Card “Z” - and asked how he would rate his satisfaction level with that provider. “Actually pretty good”, he responded.

What is apparent here is that although he is clearly a customer for Card “Z”, and he is relatively happy with the service behind it, it is commanding virtually none of his spending behaviour.

This typical example of consumer behaviour goes right to the crux of an issue that organisations are increasingly grappling with – customer satisfaction ratings are a rather poor indicator of relationship that consumers have with products, services and brands.

One of the reasons is that general service standards have lifted, so the minimum benchmark a company needs to reach has been raised. So, on an absolute basis you can rate quite well, but relative to the alternatives, you simply aren’t good enough.

A second reason is that most consumers afford the benefit of the doubt in their assessments of satisfaction. In their best-selling book Emotional Value, Janelle Barlow and Dianna Maul cite research by Michael Edwardson, who finds that even when they give quite high satisfaction scores (say a 5 on a scale of 1-7), customers are still experiencing more “negative” emotions about the product, service or brand than “positive” ones. It was only when they scored a 6 or 7 that their net feelings were in credit. The research also showed that for scores of 1,2, or 3, the consumers actual view was essentially the same – they hated you!. Even with a score of 4 (i.e. the mid point), negative feelings dominated.

An important out-take from this is that analysing averages in customer satisfaction ratings can be almost meaningless. Indeed, you can improve your average with no significant impact upon market share or revenue.

A much better approach is not to focus on customer satisfaction, but on what drives customer loyalty.

In a recent McKinsey Quarterly article (Customer retention is not enough), Coyles & Gokey document a highly empirical analysis of customer behaviour across a range of industries and organisations. Their over-riding point is that by simply looking at satisfaction levels and defection rates of customers (certainly a good start), companies are ignoring critical links to market share and financial performance.

They say that companies need to focus less on the customers they are losing, and more on the customers they retain, but who are reducing their spending. To cite one example, in a retail bank 5% of cheque-account customers defected annually, taking with them 10% of the bank’s accounts and just 3% of its total balances. In contrast, in the same period 35% of retained customers reduced their balances significantly, and cost the bank 24% of its total balances.

As they suggest, this sort of dynamic is critically important in industries where customers deal with more than one company (such as credit cards, retailing etc).

From this work they have developed a model of customer loyalty dimensions – 6 categories of customers, 3 of which are either maintaining or increasing their spending (loyalists) and 3 which are decreasing their spending (downward migrators). Because behaviour of the customers in each of these categories is driven by different factors, they assert that success comes from understanding the different dynamics of each group, and marketing to them accordingly.

Strangely, they term all three upward categories as “loyalists”: deliberative loyalists (those who frequently reassess purchase decisions); inertial loyalists (who don’t change to something else because it’s not worth the effort) and; emotive loyalists (strongly feel that chosen brand is best for them).

In my view the first two of these categories are clearly mislabelled - by definition they are not loyal. That is, these customers are either ambivalent about the brand or, they have no sustained attachment over and above a logical assessment of the product or service attributes, made at each and very purchase point.

Framing them as “loyal” is misleading and misses the key point that loyalty requires there to be an emotional connection with the product, service or brand – i.e. the emotional loyalists. Quite rightly, Coyles & Gokey suggest that these customers are the “holy grail” for marketers, in business.

And undoubtedly they are. Loyal customers are not only the most profitable (the 80:20 rule applies here) due to: higher proportion of purchases; reduced price sensitivity and; cost of acquisition amortised over a longer period, they are also the strongest advocates of the brand and the basis of referral selling. So, as a rule of thumb (broadly summarising a range of studies), if you can increase the proportion of loyal customers by 5 percentage points, you stand to increase your bottom-line from anywhere between 40-80% (yes really!).

So it pays to understand them and focus your attention on them. Coyles & Gokey are on the mark by categorising customers according to their behavioural patterns. But I believe that organisations should not just focus inwardly on these categories, they should be developing a clear understanding of what it takes to shift more customers into the emotive loyalist demographic. What’s more, everyone involved in representing the brand through service delivery, should share this understanding.

How do we recognise them truly (emotively) loyal customers? Looking at their behaviours and language should give you a few pointers. However, we can also start by coming back to the customer satisfaction ratings. The loyal customers are the one’s right at the top - on a scale of 1-7, they rate you at least a 6, probably a 7.

This need not be rocket-science. However, increasingly best practice organisations are starting to focus on the aspects and attributes that drive the very highest levels of satisfaction (loyalty), and setting performance goals around them.

As one example, when Gary Loveman (former Associate Professor of Harvard Business School), joined Harrahs Casinos, first as COO and later becoming CEO, he based the entire customer service strategy around defining, measuring and building customer loyalty with the objective of increasing the share of existing customer’s spend at Harrahs. Externally, they invested in building the brand and developed an integrated relationship-marketing approach to drive to loyalty-based behaviours. Internally, they focused upon two dimensions: excellence in customer service and leadership. The critical piece here was instilling ownership and responsibility for building “loyalty” into operational staff. Their focus is maintained by ensuring they base decisions upon the customer-behaviour metrics and, by directly linking performance measures to specific the loyalty criteria.

This sharp-end focus has not only increased the proportion of customers who fall within the (emotively) loyal category, but has helped to deliver a 100% improvement in revenue and earnings within 4 years. The loyalty of the “internal” customers has also increased - staff turnover has also reduced by half.

Such a concept is strategically based, but it is operationally driven – particularly across all customer touch-points of the organisation. To bring life to these concepts within your team, you might simply start by asking yourself and your staff these sorts of questions;

- Who are our most loyal (and profitable) customers?
- What are key (emotional) expectations that these customers have?
- What do they find distinctive about the customer experience (relative to your competitors)?
- How consistently do you deliver those sorts or experiences?
- What opportunities do you have to deliver them more regularly?

An important point here is that the customer experience does not have to be consistently extraordinary to create the emotional connection. However, it does have to be of an excellent standard (ideally sprinkled with occasional examples of extraordinary service) and there has to be a sound understanding of what drives customer emotions in relation to that product or service. It also requires that the customer experience you deliver is not just like everyone else’s. Rather, it is quite unique and specific to your brand.

So, roll on credit Card “Y”!