More and more companies these days are thinking about customer loyalty and they absolutely should. Why? Because customer loyalty is a key determinant of a company’s profitability. Research shows that loyal customers are a key driver of profitable business growth because they: (1) tend to be reliable repeat buyers, (2) spend more when they purchase from you, and/or (3) bring new customers, who share similar attributes and are therefore more likely to become loyal customers, to your business. Essentially, loyal customers help ensure long term business sustainability by growing both your customer base and your revenue base.
However you choose to define customer loyalty, it’s clear that it relates to a combination of: (1) the attitudes, emotions, and feelings a customer has relative to, and about, a company, brand, or product/service, AND (2) the associated customer behaviors, including repeat buying and recommending the company, brand, or product/service pro-actively to others.
While many companies look at objective measures of customer loyalty (e.g. customer turnover or retention, number of new customers, and revenue by customer segment) to keep an eye on the progress of their business growth strategy, these are backward looking results that don’t give much insight into what the customer is thinking and how they might act in the future. As a result, smart companies measure customer loyalty using surveys to gain customer insights, predict future customer behavior (and their impact on future business growth), and to take pro-active action when customer loyalty problems are identified.
Research by Dr. Bob E. Hayes, president of the firm Business Over Broadway (see a key article here), has determined that there are basically three customer behavior groupings that form the underlying components of customer loyalty:
Retention = where customers remain with your company and do not defect to competitors
Advocacy = where customers recommend or advocate for your company, brand, or product/service to others who, in turn, become customers too
Purchasing = where customers increase their purchasing behavior because they believe in your company, brand, or product/service
Hayes has found that each of the question categories typically included on the average customer loyalty survey (it turns out there are approximately 11 classes or categories of these questions) are more closely correlated with one of the three customer loyalty dimensions than the other two. Here’s what the breakdown looks like:
Retention: (1) Likelihood to purchase from a competitor; (2) likelihood to stop purchasing from your company; and (3) likelihood to switch to another company
Advocacy: (1) Likelihood to recommend; (2) likelihood to choose your company/brand/product or service again for the first time; (3) likelihood to purchase the same product or service again; and (4) customer satisfaction
Purchasing: (1) Likelihood to purchase more expensive offerings; (2) likelihood to purchase more frequently; (3) likelihood to increase the purchase amount; and (4) likelihood to purchase a different product or service from your company
You might be interested to know that I have listed each associated question category in descending order with the first one listed being the question category with the strongest relationship to its customer loyalty dimension.
Hayes’ research has identified two aspects of customer loyalty and customer loayalty measurement that have important practical implications:
(1) It is not necessary to assess all of the behavior categories associated with each customer loyalty dimension to have a good handle on the current level of customer loyalty for the dimension you are interested in – you can assess responses on as few as two behavior categories without weakening your assessment of the dimension. For example, let’s say you want to assess purchasing loyalty. You could just ask your customers questions relating to their likelihood to purchase more frequently and their likelihood to purchase a different product or service from your company to have a good idea of how your company is currently doing on the customer purchasing loyalty factor. What this finding suggests is that long customer surveys may not be required to accurately assess customer loyalty. This is good news because shorter surveys are less expensive to field and they get better response from customers – giving you a higher number of usable data points.
(2) It turns out that customers are more willing to be advocates for your company than they are to increase their purchasing behavior or even remain a customer. Huh! This is a little bit counter-intuitive but it’s important to know. Practically, what this means is that companies that only measure customer advocacy loyalty may be getting a skewed picture of their customers’ loyalty (and the associated behavior). More importantly, that picture may actually be of little value, or even irrelevant, if the company’s business growth strategy is based predominantly on an increase in the purchasing behavior of existing customers versus growth through the referral of new customers.
Business executives and leaders are specifically interested in the effectiveness of their customer value proposition in attracting customers and building customer loyalty, and the contribution of the resulting customer behaviors to their business growth strategy (and results). Let’s take a closer look at the impact this should have on your focus for building and measuring customer loyalty.
What are the customer growth objectives generally employed by business leaders to grow their customer base (and, in turn, their revenue base)? Well, you can grow your business through your existing customers and/or you can grow by acquiring new customers. Most businesses try to do a combination of both but there is often a slightly greater emphasis on one of these growth objectives over the other in any given company and business model.
For example, a company focused on a customer value proposition of customer intimacy may be inherently focused on their existing customers and getting to know them so well that they can get these customers to buy more products from them more frequently by making customized offers to them. While this company may be happy to acquire new customers, their business model is predominantly focused on growing through the purchasing behavior of their existing customer base. Just think about companies like amazon.com that start pro-actively marketing products to you (an existing customer) based on their knowledge of your past buying behavior. This is an example of a customer intimacy value proposition driving a focus on business growth through existing customers.
It turns out that when a company’s business growth objective is growing through existing customers, there are two strategies they can utilize to achieve their objective: (1) decreasing or preventing customer churn/loss/turnover (more commonly called customer retention), and (2) increasing customer purchasing behavior. When it comes to measuring customer loyalty in this case, the customer retention loyalty dimension is most relevant to strategy #1 while the customer purchasing loyalty dimension is most relevant to the second strategy. With this in mind then, companies that are focused predominantly on a business growth objective of growing through existing customers, should focus on measuring customer loyalty using the survey questions associated with retention and purchasing.
Now, suppose that your company’s business growth objective is to grow through new customers. When this is the case, your primary growth strategy is to increase referrals of new customers by your existing customers. In other words, you are most interested in customer advocacy loyalty and, as a result, you should focus on including the questions associated with advocacy on your customer loyalty survey.
My point here is that your approach to customer loyalty assessment can and SHOULD mirror your customer value proposition and your primary business growth objective. That is, you shouldn’t just apply a standardized, "best practice" approach to customer loyalty measurement or adopt a measure like Net Promotor® Score (NPS)* without thinking through its relevance to your company’s business growth objectives.
Now, many of you are probably thinking that most companies are likely to adopt both business growth objectives to get ahead. This may be true but, in my experience, most companies, whether they realize it or not, will place a higher focus on one growth objective than the other. When this is the case, organizations may choose to include survey questions associated with all three of the customer loyalty dimensions on a customer survey, however, by weighting the customer loyalty responses they collect in alignment with the focus of their primary business growth objective, they will be able to get a more relevant perspective on the current state of the loyalty factors that have the greatest impact on moving their primary business growth objective forward.
Customer loyalty plays a critical role in profitable business growth so all successful businesses measure it, and learn from the results and insights that they discover. The key is to ensure that you are measuring the dimensions of customer loyalty that are most aligned with your company’s business growth objectives and strategies, and are the best predictors of the customer behaviors that will produce the business growth outcomes you want. This is easily done but requires you to go through a well thought out process that begins with your customer value proposition and identifying your primary business growth objective and strategies, and ends with designing the right customer loyalty survey for your company’s needs.
Start today in your organization by using this 5-step worksheet to guide you through this process.
* NPS provides a single overall score based on your customers’ response to the question “How willing are you to recommend our company to a colleague or friend on a scale from 0 to 10 (with 0 being not at all likely and 10 being extremely likely)?” Obviously NPS is focused on customer advocacy loyalty so NPS may only be a relevant indicator of customer loyalty if your primary business growth objective is growing through the referral of new customers by existing customers. However, understanding customer advocacy loyalty doesn’t have much informational value if you are planning to grow your business by retaining customers and/or increasing their purchasing behavior.