Knowing Whats Best to Measure for Your Business

A Closer Look at Customer Loyalty:

Dr. D. Randall Brandt Vice President, Customer Experience and Loyalty Research, Maritz Research June 25, 2008

Dr. D. Randall Brandt PhD

Vice President, Customer Experience and Loyalty Research Maritz Research

Moderator: Christian Vorwerck

Director of Marketing & PR Maritz Research Europe

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This Web Cast Session

What Is a Core Customer Metric? Does One Size Fit All? Should Your Core Customer Metric Focus on Customer Loyalty? What Should Your Organization Do? Summary Questions and Answers

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What Is a Core Customer Metric?

Core Measures versus Performance Drivers

We have found that companies generally select two sets of measures to capture their customers perspective. The first set captures generic measures that virtually all companies want to use, such as customer satisfaction, market share, and customer retentionThe second set represents the performance driversThey answer the question: What must the company deliver to its customers to achieve high degrees of satisfaction, retention, and market share?
Robert Kaplan and David Norton The Balanced Scorecard

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Core Customer Metric : Our View

A key measure of organizational health and performance with respect to: How strongly customers embrace your brand How committed they are to continuing to buy from or do business with you A leading and explanatory indicator of financial and other downstream business results

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Does One Size Fit All ?

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The Ultimate Question

If growth is what youre after, you wont learn much from complex measurements of customer satisfaction and retention. You simply need to know what your customers tell their friends about you.
Fredrick Reichheld The One Number You Need to Grow Harvard Business Review, December, 2003.

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Why One Size Does Not Fit All

The best measure of customer loyalty varies by industry, market, and customer type. Even when willing to recommend performs well, other measures may perform better. The ultimate question may lead managers to focus on the wrong priorities for improving customer loyalty. The NPS has several technical characteristics that inhibit its interpretability and usefulness in data analysis. Attempting to use willing to recommend ratings in isolation ignores competitive context.

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The Best Measure Varies By Industry, Market, and Customer Type

In some situations, willing to recommend was simply irrelevant. In database software or computer systems, for instance, senior executives select vendorsasking users of the system whether they would recommend the system seemed a little abstract, as they had no choice in the matter. In these cases, we found that sets the standard for excellence and deserves your loyalty questions were more predictive.
Fredrick Reichheld The One Number You Need to Grow Harvard Business Review, December, 2003.

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The Best Measure Varies By Industry, Market, and Customer Type

When willingness to recommend and NPS may not be the best measure: Certain industries (e.g., database software) Monopolistic or oligopolistic markets B2B versus B2C Also, in some sectors/industries, loyalty is not even the right customer metric with respect to providing a lead indicator of business results.

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Even When Willing to Recommend is Good, Other Measures Perform Better

For example, in a longitudinal study of retail shoppers, Maritz compared three loyalty measures: Willing to recommend Three-item index Probability allocation The probability allocation measure outperformed the others with respect to correlation with customer behavior and discriminating power.

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Correlation of Alternative Survey-Based Loyalty Indices with Customer Behavior: Retail

r = .36

r = .47

r = .71

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Correlation of Alternative Survey-Based Loyalty Indices with Customer Behavior: Financial Services

Average Monthly Balance

Frequency of Usage

Higher

Correlation with Actual Customer Behavior

Lower

Likely to Recommend
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Likely to Use Again

Share of Purchase Occasions

The Ultimate Question May Lead Managers to Focus on the Wrong Performance Drivers

Using data from the same study of retail shoppers mentioned earlier, Maritz performed three separate key driver analyses, each employing a different dependent variable: Willing to recommend Probability allocation Actual customer behavior The probability allocation measure yielded priorities more similar to those produced when customer behavior serves as the dependent variable than did willing to recommend.

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Results of Key Driver Analyses Using Alternative Dependent Variables

Ranking of Key Drivers by Importance
Actual Share 1 3 6 4 2 5 7 Probability Allocation 3 1 6 4 2 5 7 Willing to Recommend 3 1 4 2 6 5 7

Parking

Specials

Price Quality Service Layout Location Specials Parking

Key Driver

Location

Layout

Service

Quality

Price
Lower Higher

Actual Share

Probability Allocation

Willing to Recommend

Derived Importance
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Some Technical Limitations of NPS

NPS cannot be analyzed at individual customer level Willing to recommend can be analyzed at individual customer level, but NPS procedure reduces precision and accuracy Important because linkage of loyalty measure to customer behavior and/or key business results often requires this level of analysis Different combinations of promoters and detractors can yield the same NPS

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Are These Scenarios the Same?...NPS Alone Would Say Yes.

Promoters
70% 60% 50% 40%

Detractors
30% 20% 10% 0%

NPS
40 40 40 40

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Context Matters
The competitive context of customer evaluation and choice strongly influences actual behavior: A customer might enthusiastically endorse two or more brands Need to understand his/her projected allocation of purchases/usages among the brands to accurately predict behavior Not limited to willingness to recommend other rating questions (e.g., satisfaction, future intent) also suffer from this limitation Problem can be addressed by gathering ratings for multiple brands but there goes your simplicity

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Does One Size Fit All?...

The Short Answer Is No.

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Should Your Organization Focus on Customer Loyalty?

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Alternative Constructs & Measures

Satisfaction Quality Performance to Expectations Value Preference Intent to Repurchase/Continue Doing Business Willingness to Recommend

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The ACSI Integrates Multiple Constructs & Measures

Source: www.theacsi.org

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AT&T Found Customer-Perceived Value to be the Best Leading Indicator of Market Share
Customer-Perceived Value

AT&T Market Share

1987

1988

1989

Source: Gale, B. (1994). Managing Customer Value. New York: Free Press; p.82.

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The Relevance and Appropriateness of Loyalty as a Core Customer Metric Often Varies by Market Type
In a B2B context, Loyalty has greater impact than Value
Value

35%

Personal Computers
65%
Loyalty

Loyalty

41% 59%
Value

but in a B2C context, Value has greater impact than Loyalty

In a B2C context, Loyalty has greater impact than Value

Value

41%
Loyalty

59%
Loyalty

Hotel/Lodging

44% 56%
Value

but in a B2B context, Value has greater impact than Loyalty

Source: Brandt, D.R., Gupta, K., and Kershaw, J. (2004). Developing a Core Customer Index: An Empirical Assessment of Alternative Approaches. American Marketing Association Advanced Research Techniques (ART) Forum, Whistler, British Columbia, June.
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What Should Your Organization Do?

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In the Words of Mr. Reichheld.

I dont want to overstate the case. Though the would recommend question is far and away the best predictor of customer behavior across a range of industries, its not the best for every industrySo companies need to do their homework. They need to validate the link between survey answers and behavior for their own business and their own customers.
Fredrick Reichheld The Ultimate Question

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A Recommended Approach
Define the critical business results of interest Identify candidate measures of customer satisfaction, value, and loyalty Gather baseline survey data on these measures from a sample of customers or buyers/users Monitor the shopping and buying behavior of these same customers over time. Conduct analyses to determine the extent to which the survey items, individually or in combination, correlate with and/or can be used to predict the customer behavior which leads to the critical business result. Construct the index from the item or items that are most strongly correlated with and/or predictive of the critical customer behavior and business results.

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Factors to Consider

Industry and Market Type Availability of Buyer Options Degree of Market Differentiation Market Cycles & Conditions Consumption Frequency & Cycles Formality of Buyer-Seller Relationship

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Summary

A core customer metric is both a key performance measure and leading indicator of business results. One size does not fit all. Customer loyalty may or may not be the right metric. Select the measure that is most appropriate for your business.

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