From the Trenches: A Discussion on Customer Loyalty

Tom Connelly: Until recently, you could not turn on a TV or go online without seeing the buzz surrounding the release of the new iPhone 5. Along with the release came impassioned reviews and critiques – is the new design better? How will the new power source impact consumers with old Apple products? Amongst these enthusiastic individuals is a segment I would like to focus on: loyalists. These would be supporters of Apple, and specifically the iPhone, under virtually any circumstances.

There is no denying having loyal customers is a primary goal for companies, regardless of industry. After all, a loyal customer base is fundamental to sustaining and growing a business. What is more complex though, is determining which questions are required to address loyalty.

Most often the primary questions for loyalty are Satisfaction, Retention and Recommendation. Some have tried to simplify loyalty to one metric, “How likely are you to recommend X to family and friends,” with the creation of the Net Promoter Score (NPS). While this addresses a basic concept of brand building, word of mouth promotion, in a simple and straightforward manner for respondents, does it adequately address loyalty? Is the triumvirate of Satisfaction, Retention and Recommendation more appropriate? Do we need more metrics? Do we need fewer? Or do we need to ask a different set of questions?

Lance Henik:  Immediately, I thought of the ads with “the most interesting man in the world” and how our sophisticated, well-storied friend mentions he does not always drink beer, but when he does, he prefers Dos Equis. How does this recommendation inform us of his loyalty to the brand?

To start, I am interested in metrics around the consideration set and frequency of consumption.

As I see these ads conclude with the phrase “Stay thirsty, my friends,” I am drawn in to find out what else our friend is drinking. With a wide range of beverages available, to what extent is our interesting friend loyal to Dos Equis compared to other beers, other alcoholic beverages or all other beverages?

Next, we should consider metrics around frequency of usage/consumption. As you can imagine, the implications differ if our interesting friend drinks beer on Saturday evenings versus just special occasions. Furthermore, given the revenue implications around loyalty, it may be similarly important to understand how frequently he purchases beer: does he buy one or two while out on the town, does he show up at your dinner with a six-pack in tow or does he keep 24 bottles at home, “just-in case…”?

Brian Ebarvia: Lance, I agree with you, there are several factors that define loyalty: 1) Consideration set, or the ability of the consumer to switch brands. Industries with captive markets do not offer a wide range of choices (e.g., cable TV), and companies with little or no competition limit customers’ consideration set (e.g., PC operating systems). Along these lines, consideration set may also be influenced by convenience (e.g., choosing a grocery store based on distance from home). 2) Purchase behavior – depending on the type of product or service, frequency of purchase, repeat purchases and upgrade purchases also help define customer loyalty.

Price tolerance or willingness to pay a premium could also be considered another measure of customer loyalty – it’s not just how frequently consumers purchase a product, but also how much they are willing to spend on it.  One organization taking into account price tolerance is the American Customer Satisfaction IndexTM. The ACSI interviews 80,000 U.S. consumers annually to measure satisfaction with goods and services they have purchased across a range of industries. The ACSI model incorporates likelihood to repurchase and likelihood to purchase at various price points into their definition of customer loyalty.

To answer your question, Tom, we should take into account other attitudinal and behavioral factors beyond satisfaction, retention and likelihood to recommend to understand customer loyalty.

Tom Connelly:  I agree with both of your stances. I don’t think attitudinal questions alone fulfill the need for understanding loyalty measures. Incorporating behavioral and usage questions will ultimately enhance customer loyalty.

Another question I believe should be considered for loyalty is active recommendation of a product/brand. The active recommendation question is similar to a traditional likelihood to recommend, with one distinct difference.  In the active recommendation, the respondent is provided answer options from “I go out of my way to promote the product/brand to others” to “I go out of my way to discourage people from purchasing the product/brand.” By using a discouragement end to the scale, we know which respondents not only wouldn’t recommend a brand, but also would ultimately be a brand antagonist.  Also, along the lines of usage and frequency, we have used the following active recommendation question: “How many times in the last [Week/Month/Year] have you promoted product/brand X to friends and family?”

We are curious what others out there think. Please feel free to leave your thoughts on addressing customer loyalty in the comments section below. We are looking forward to all of your responses and welcome anyone to contact us directly if you would like us to expand on any of our thoughts.

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