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The Loyalty Research Center Approach to Customer LoyaltyWHAT IS CUSTOMER LOYALTY AND LOYALTY ANALYSIS?Decisions, decisions, decisions. Customers make decisions almost every second about how to spend their time, money, and effort. Organizations compete by making different offers to the market in an attempt to influence those customer decisions. These offers can consist of different products, different prices, different ordering terms, different delivery terms, etc. Organizations try to build offers that will:
generate significant demand by customers, and, if successful; be sustainable over time. Customers, both households and businesses, select the offer they perceive is best for them, based on their current information and situation. Loyalty can be defined as customers continuing to believe that one organization’s product/service offer remains their best option. They take that offer whenever faced with that purchasing decision, and they remain relatively unresponsive to small problems with the offer and to better offers by competing organizations . This definition is simple to state but more difficult to translate into a measurable construct. It is more difficult still for the organization to take that construct and use it to determine specific actions that enhance loyalty in a profitable way. Customer loyalty, when measured properly, is an indicator of the strength of the customer relationship with the organization. Loyal relationships tend to be deeper and more immune from “bumps in the road.” As such, customer loyalty is not only a static measure of where the customer is today, but also a dynamic measure of where the customer is expected to be in the future. A loyal relationship is an exchange . The organization provides the loyal customer with products and services they desire. These loyalty customers consider the product/service offering to be superior to that of the alternatives offered by competing organizations. The more unique it is and the closer it matches to customer needs, the stronger the loyalty relationship with the customer. In return, this exchange evokes more “desired behaviors” from loyal customers. Desired behaviors directly impact profitability through revenues and/or costs.There are three key components to customer loyalty analysis:
THE LOYALTY PROFILE A loyalty profile assigns the respondent base to segments based on the strength of their relationship with the organization. One segmentation scheme that is frequently used categorizes existing customers into Loyal, Neutral, and Vulnerable segments. Since loyalty cannot be measured directly - imagine how difficult it would be to ask your customers directly how loyal they are - it must be indicated by variables that can be measured. These include both attitudes and behaviors. For example, some of the behaviors and attitudes you should expect from a loyal customer include:
You would expect the loyal customer to be strong and consistent across each of these areas. You would not, for example, expect a loyal customer to state a high likelihood to repurchase your product but be unlikely to recommend it. This suggests that the customer might be “locked into” purchasing the product because of high switching costs or some other reason. Loyalty segments should not be formed according to a rigid, unchanging formula. The characteristics that delineate loyalty in one industry may be somewhat different than those in another industry. Because of that, alternative loyalty segmentation schemes should be validated with information outside of the closed system. The Loyalty Research Center (LRC) prefers to validate loyalty segments using actual behavior of customers. Once the loyalty segments are validated, the Loyalty Research Center will provide a complete profile of each loyalty segment and its size, along with other key customer descriptors like their demographics and expenditure profile. An example of a Loyalty Research Center B2B loyalty profile is provided in the following table:
UNDERSTANDING THE LOYALTY SEGMENTSWhy do these segments exist? Why are some customers Loyal and others Vulnerable? The creation of the Loyalty Profile correctly assigns each customer to a loyalty segment, but it does not provide any explanation of why they are in that segment. In order to evoke change, like the migration of a customer to a more attractive loyalty segment, you must have this in-depth understanding. This component of Loyalty Analysis addresses that issue. There
are two reasons for a customer to be in a particular loyalty segment: Their
experiences, perceptions, and beliefs pertaining to the organization’s
product/service offering, particularly on those aspects that are critical to
their value.
Preferences or needs can vary substantially across customers. Those in the B2B market frequently see the demand for
their product/service mix driven by the “customers of their customers,” what
is known as derived demand. For
example, if the end users of paper products (e.g. pizza boxes) use price as
their primary criterion in selecting a vendor, then the pizza box producer
will use price as a key criterion in selecting suppliers of inputs into
their manufacturing process. Providers of wood pulp, pulp substitute, and
ink must be very cognizant of price in building their product/service
offering for these customers. Contrast that with the segment of pizza box
purchasers that want something unique from their suppliers of boxes. These
customers may want special strength, printing, or hinge characteristics that
cannot easily be supplied by the low-cost provider.
Another consideration for each segment is identifying the drivers to
improve the relationship with the current product/service offering. The
Vulnerable segment may have the ordering process as a key driver of their
relationship, while the Loyal/Neutral segments do not.
Finally, the reported experience may vary significantly. Using the
above example, the ordering process is a key driver for only the Vulnerable
segment. Although the experience of all loyalty segments may be low for the
ordering process, this analysis reveals that only the Vulnerable segment
will reward improved performance.
The following table illustrates this example:
Loyal
Neutral
Vulnerable
Percentage who experience
problems
12%
18%
41%
Percentage of problems that
are unresolved
10%
23%
64%
Top 2 Box Evaluations
Order Cycle Time
64%
67%
39%
Desired Delivery Time
71%
41%
44%
Overall Sales
78%
53%
Overall Customer Service
82%
49%
Several things stand out from the results shown in the table above: Why
are certain scores low or uneven, particularly for the Vulnerable segment?
This observation gets to the real issues facing the organization. The
reason for low scores typically falls into one or more of the following
categories: The
final element of Loyalty Analysis is an understanding of segment
strategies. How can
members of the Loyalty segment be protected? To what
extent can the members of the Neutral and Vulnerable segments be migrated to
better segments?
Understanding what is important to the members of each loyalty segment is
critical to this effort, and that requires good information about the
customers. Many times during the past 15 years, we have listened to company
executives discuss frustration with their current customer satisfaction
research. “It just doesn’t work,” they proclaim. We
agree. One key barometer of whether the research is good is the extent
to which it can generate meaningful changes in customer behavior. By
meaningful we mean both profitable and sustainable. The
Loyalty Research Center uses a set of proprietary techniques to uncover the experience issues
that resonate with customers and what it will take to actually change their
behavior. Our experience has led us to develop a process which addresses
the following issues: Understanding the key experience issues for each segment;
Determining the amount of change that must take place in the experience to
change the segment member’s behavior;
Developing
and implementing action plans that actually change the experience in ways
the customers value; Most companies do not understand whether members of a segment will respond to a change or activity-level investment. Further, most organizations do not understand what type of change needs to made to generate behavioral responses by customers. The experience of thousands of programs of this nature has led the Loyalty Research Center to conclude that these questions are paramount to a successful loyalty program. Our experience with clients includes:
These success stories were produced by helping our clients migrate their customers to a more favorable segment. You can read more about these success stories in our case studies. CONCLUSIONHaving over 30 years of experience with thousands of loyalty research programs, the Loyalty Research Center continues to be respected as an authority on loyalty research. The Loyalty Research Center has developed a world-class approach to helping organizations define, understand, and change the loyalty of their customers. The success of the approach is defined by the results – behavioral change on behalf of the organization’s customers. For more information contact:
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