Customer Loyalty

How to Earn It, How to Keep It
By Jill Griffin

John Wiley & Sons

ISBN: 0-7879-6388-7

Chapter One

Customer Loyalty The Way to Many Happy Returns

I'm often asked, "Does customer loyalty still exist?" Many think it has forever vanished and that lowest price is the only thing that keeps a customer returning. But, take heart. Customer loyalty is alive and well. Look no further than computer systems manufacturer Dell Computer, affinity credit card issuer MBNA, or home improvement retailer Home Depot and you'll find companies that are consistently earning customer loyalty while their competitors struggle. But each of these companies would also tell you that in today's unforgiving marketplace, creating and maintaining customer loyalty is more complex than ever. Here's why.

Two dovetailing events have dramatically expanded how companies pursue customer loyalty. First, widespread use of the Internet has changed how customers expect relationship-building to work. No longer is marketing and sales information simply pushed toward the customer. Now, a company must also allow customers to pull the marketing information they want, when they want it, and complete the purchase process on their terms.

Second, technology breakthroughs, particularly in the area of knowledge management, offer new and innovative ways to nurture customer relationships. Now a company's ability to thrive depends on capturing appropriate customer data from multiple points of customer contact: a Website click stream, e-mail, telephone, fax, a call center, a kiosk or store, a reseller, or a direct sales force. When used correctly, this data enables the company to individualize its response to each customer interaction in what's often referred to as "mass customization."

These two dovetailing advances have created customers of a new breed, with one distinguishing quality: they want to buy the way they want to buy. Yet most companies have not caught up with this newly empowered customer, and the customer experience has suffered. Consequently, the customer feels under-whelmed, overpromised, and underdelivered. Little wonder, then, that the level of customer loyalty is so low!

In a period of unprecedented marketing innovation like what we've experienced since the mid-1990s, it's tempting to dismiss many of the true principles for building customer loyalty and instead rely solely on a perceived panacea or silver bullet. We've seen plenty. From loyalty card schemes and point programs to CRM (customer relationship management) software to massive data warehousing efforts, firms have plowed millions of dollars into such areas in search of a quick fix. But not surprisingly, many firms report disappointing results. Headlines such as "The Truth about CRM: What You Need to Fight the Hype" and "Delusions of Loyalty: Where Loyalty Programs Go Wrong" are increasingly appearing in industry publications, reflecting confusion, concern, and an urgent search for a better way.

Your best insurance for building a strong loyalty strategy in the new millennium is to make sure your programs are built around the tried-and-true principles of loyalty. Without a doubt, more and more breakthrough technologies will evolve. The best way to leverage these exciting new tools is to ensure that they are applied to plans and programs that embrace strong loyalty principles. Otherwise, your probability of real success is limited. As Willie Nelson croons, "It's time to get back to the basics of life"; that's what this book is all about. Let's get started.


Although customer satisfaction is necessary to any successful business, we are learning that satisfaction alone is not enough to build a loyal customer base. In the 1980s and 1990s, customer satisfaction was the watchword for business. Everyone was rushing around to find a way to make customers happy by meeting and even exceeding their expectations. The theory was that if customers are satisfied, they buy more and do so more often. Books, articles, and seminars touted such buzzwords as customer service, service quality, and service excellence. Behind all this was the belief that customer satisfaction produces positive financial results, especially in repeat purchase. Yet the latest research findings suggest otherwise: a high level of customer satisfaction does not necessarily translate into repeat purchases and increased sales. Consider these findings:

Forum Corporation reports that up to 40 percent of the customers in its study who claimed to be satisfied switched suppliers without hesitation.

Harvard Business Review reports that between 65 and 85 percent of customers who chose a new supplier say they were satisfied or very satisfied with the former one.

Peter ZanDan, whose company Intelliquest conducts market research studies for computer manufacturers worldwide, reports that in more than thirty thousand interviews, his company has never found a high level of customer satisfaction to be a reliable predictor of repeat purchase.

Research conducted by the Juran Institute reveals that in excess of 90 percent of top managers from more than two hundred of America's largest companies agree with the statement "maximizing customer satisfaction will maximize profitability and market share." Yet, fewer than 2 percent of the two-hundred-plus respondents were able to measure a bottom-line improvement from a documented increase in the level of customer satisfaction.

Most managers assume that a positive correlation exists between customer satisfaction scores and customer buying behavior. The general belief is that increasingly higher satisfaction scores from a customer are followed by an increase in the customer's share of spending, rate of referral, and willingness to pay a premium price. Yet, as the findings I've cited illustrate, this correlation is unreliable. Satisfaction level does not necessarily translate into higher sales and profits.

What accounts for this disparity? Why would customers indicate one thing, yet do another? A number of factors contribute to the problem. At the time customers are queried about their satisfaction, they are unaware of future decisions and actions. For example, a software company analyzed the satisfaction ratings of a group of customers taken a short time before they defected to a competitor and found the ratings virtually identical to those of an equally large group of customers who remained with the company. Yet these reportedly satisfied customers went to a competitor once they became aware of greater value.

Another reason satisfaction scores are unreliable is that people often use these surveys as a way to communicate desires beyond the norm of sufficiency. This is often the case with price. The Juran Institute reported that for more than 70 percent of businesses studied, price scored first or second as the feature with which customers were least satisfied. Even so, when nearly all of the customers who had shifted spending to competing suppliers were interviewed, in no case were more than 10 percent of the lost customers motivated to switch because of price. In addition, a representative sample of customers who had exhibited the most loyalty in terms of buying behavior were as likely to report the same level of dissatisfaction with price as the lost customers.

Perhaps the biggest reason for the disparity between satisfaction rating and repeat purchase is the measurement of satisfaction itself. Recent studies confirm that current satisfaction measurement systems are not a reliable predictor of repeat purchase. Some of the most convincing evidence is found in the research of Professor Robert Peterson of the University of Texas, who found that in most surveys of customer satisfaction, a substantial 85 percent of an organization's customers claim to be "satisfied" but still show willingness to wander away to another provider.

This lack of correlation between customer satisfaction and repeat purchase may be partly due to the difficulty of accurately and reliably measuring customer satisfaction. Satisfaction measures are largely self-reported, which means that a customer answers a series of questions, usually in the form of a written survey. A number of factors can inflate a self-reported satisfaction rating:

Question formation. A question posed in positive terms ("How satisfied are you?" versus "How dissatisfied are you?") gets a more favorable response. The majority of satisfaction survey questions are posed in positive terms.

Measurement timing. Measurements taken immediately after purchase are likely to yield more favorable responses than measurements taken later.

Mood of respondent. A respondent's overall mood at the time of the survey can affect response.

An additional factor contributing to an overstated customer satisfaction rating is customer reluctance to admit having made a bad purchase. They feel a low satisfaction rating reflects badly on their purchase behavior or judgment. Therefore, they compensate by distorting their satisfaction with a higher-than-deserved rating.

Given the many problems with satisfaction measurement, it is little wonder that many companies are failing to find a strong relationship between customer satisfaction measures and economic performance. For example, the CEO of a manufacturing company that produces industrial equipment was feeling intense frustration with the lack of results from his firm's satisfaction program when he remarked, "It gives me a warm feeling to know that the customer satisfaction score is up again for the fourth straight year. Now, can someone tell me why profitability and market share are down again?"

From the customer's inclination to overstate satisfaction to questionable extrapolation of data into sales and profit projections, one thing is certain: current satisfaction measurement systems cannot be used as a reliable predictor of repeat purchase.


If customer satisfaction is unreliable, then what measurement is tied to repeat purchase? The measurement is customer loyalty. In the past, efforts to gain customer satisfaction have attempted to influence the attitude of the customer. The concept of customer loyalty is geared more to behavior than to attitude. When a customer is loyal, she exhibits purchase behavior defined as nonrandom purchase expressed over time by some decision-making unit. The term nonrandom is the key. A loyal customer has a specific bias about what to buy and from whom. Her purchase is not a random event. In addition, loyalty connotes a condition of some duration and requires that the act of purchase occur no less than twice. Finally, decision-making unit indicates that the decision to purchase may be made by more than one person. In such a case, a purchase decision can represent a compromise by an individual in the unit and can explain why he is sometimes not loyal to his most preferred product or service.

Two important conditions associated with loyalty are customer retention and total share of customer. Customer retention describes the length of relationship with a customer. A customer retention rate is the percentage of customers who have met a specified number of repurchases over a finite period of time. Many companies operate under the false impression that a "retained" customer is automatically a loyal customer. For example, the CEO of a burgeoning computer hardware company boasted, "We haven't got a loyalty problem; we've retained virtually every customer we've ever sold to." But on closer inspection, the executive discovered that at least 50 percent of retained customers (those who made a minimum of one purchase annually after the initial sale) were buying add-on systems and services from competitive vendors.10 Retention was not the problem, but share of customer was.

A firm's share of customer denotes the percentage of a customer's budget spent with the firm. For example, a firm captures 100 percent, or total, share of a customer if the customer spends the entire budget for the firm's products or services with that firm. Whenever a firm's competitor captures a percentage of the customer's budget, then the firm has lost that portion, or share, of the customer.

Ideally, both customer retention and total share of customer are essential to loyalty. There are, however, some situations (government accounts, for instance) where the customer is restricted from purchasing from just one vendor. In such a case, earning a 50 percent share of the customer may be the most a firm can accomplish. Likewise, in many packaged goods categories, the buyer can be and frequently is multibrand-loyal. For example, a customer may be equally loyal to two beers, Michelob and Amstel, buying one this week and the other the next. In such circumstances, market conditions and product usage can dictate the limits of loyalty.

If customer retention and total share of customer are essential for loyalty, how are these buying behaviors achieved? An important first step is to notice how a number of well-established business strategies actually work against developing customer loyalty. The most frequently used of these strategies is market share.


Since the 1970s, American companies have waged a fierce battle to win market share. In short, building market share by attracting new customers was considered the way to maximize profits. The belief was so popular that over the last two decades most leading U.S. firms pursued a market share strategy with the expectation that it was the surest way to the greatest profit. Pursuing market share has made many companies more concerned with finding new customers than with holding on to old ones. Statistics show that on average, American businesses spend seven times more money attracting new customers than trying to keep existing ones. Says Bain and Co. consultant Frederick F. Reichheld, "Ask a bank manager how many new accounts he signed up last month and he will probably know off the top of his head. Ask the same person how many accounts he has lost in the past month, and you will most likely draw a blank stare."

Table 1.1 compares the strategy of building market share with that of building loyalty. Note that although both strategies are used under the same market conditions (low-growth, saturated market), this is where the similarity ends. Success and failure in a market share strategy are evaluated in regard to competitors, while success and failure in a loyalty strategy are evaluated in terms of retention and share of customer.


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