LRC Simulation Series: Lesson Three


Welcome to Lesson 3.

Here we will highlight a few issues a business must consider when choosing certain actions that could impact customer loyalty.

Imagine having the option to pay for specific, actionable information on customer needs and behaviors.

Say, for example, that securing this information would indicate that among a defined set of customer experiences, Product is a “strong driver” in customer behaviors that describe customer loyalty while, similar to our findings in Lesson 2, Price and Delivery have little to no impact.

You decide to allocate resources to improving customers’ experiences with your product.

In turn, improved experiences will be indicated by customers providing higher ratings.

As we have seen, improving a rating for a key experience by even one level can lead to a significant improvement in customer loyalty.

Question: Do you think that improving the rating for Product by more than one level will further improve customer loyalty? This is really an issue of whether the marginal impact of Product on Loyalty still exceeds that of Price, Service and Delivery. Now, please make selections for the following choices and review their outcomes.

Thus improving the rating for Product by more than one level may indeed further improve customer loyalty.

This shows that improving areas that are strong drivers are worth the investment of resources.

However, would these changes impact revenue and profit? At what cost? Is the improvement worth the investment?

To illustrate, please review the following set of options for improved revenue and profit.

For this example, increasing Product while holding the other experiences fixed shows loyalty, revenue and profit increasing up to Product = 7 (“Very High”).

Note the declining marginal impact on revenue.  Do the profit figures suggest an increasing marginal cost?  They do seem to indicate that improving Product becomes more and more difficult.

What about across-the-board improvements – incrementally raising levels of all experiences? Try these combinations.

Note for this example, at least, that while revenue continues to increase with loyalty, profit does not. This amounts to “buying” loyalty – not a strategy a firm usually wants to pursue. Financial results for your business will depend on a number of factors, but the overall message endures. Again, results from this example show that while both loyalty and revenue continue to increase with improving across-the-board scores, profit crests at a level of 6 (“Very Good”). Striving to be top-rated at everything may be a suboptimal goal.

How did you do? What did you learn? How will you apply it?

The takeaway is that some areas do not merit added investment.

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