Measure and Evaluate Customer Loyalty

Goodwin and Ball, presenters at the 1999 Quality Measurement Conference in Anaheim, stated that a customer loyalty survey seeks to measure what customers' value and thereby to gain strategic insights that can be used for increasing customer loyalty.

Unfortunately many companies receive incomplete data from their customer surveys, and consequently end up with flawed "customer pictures." It is crucial for companies to sample their entire customer market including those of its competitors. Survey questions should be designed around the key attributes of customer requirements concerning what they value.

Each respondent should rate the company and, at minimum, the best other vendor for all attributes. Questions should measure the respondent's direct, experience-based beliefs and indirect, non-experienced ones. For example, measuring customer satisfaction alone for products or services will not reveal how customers perceive the value of these products or services relative to the competition. By measuring both types of beliefs, companies can greatly increase their competitive insight concerning the critical value delivery and value communication areas to focus on improving.

Goodwin and Ball state that by including questions pertaining to an organisation's strategic priorities, the survey results can help drive the strategic planning process. It's also best to get the management team to agree on the organisation's strategic priorities before designing the survey or seeing the results. For example, many management teams believe their primary goal is to attract new customers and facilitate sales. By agreeing on the priorities beforehand, the survey results are less likely to be misdirected toward supporting "hidden agendas" or maintaining the status quo.

Given that research shows that, generally, more than 80% of profits typically comes from less than 20% of customers and that it costs five times as much to replace a customer as it does to keep one, companies in mature markets will give a higher priority to customer retention than customer acquisition. Exceptions may include high-technology companies in discontinuous markets requiring rapid development of innovative products.

In the new mathematics of value management, former business success strategies such as cost reductions, core competencies, reengineering core processes, empowered learning organisations, and fast cycle time are shifted into the business fundamentals of meeting basic requirements. Getting to market quickly with a minimum viable product and services, aligned with the promise of the brand, is required just to be in the running. This should ensure access to the playing field, but doesn't guarantee a win. To win, superior value must be added to retain current customers and acquire new ones.

The survey results can also help align the management team around what customers' value. Unfortunately, the management team's perception of the value drivers is often not closely aligned with the customer's reality. By having the management team take the survey first their attention and commitment can be gained. They can then also compare their perception of the customers' perspective with the actual survey results.

Along with directly measuring customer loyalty drivers the verbatim responses of customers and non-customers are also of great value according to Goodwin and Ball. Qualitative listening posts can complement quantitative data and provide an important "word on the street" view of what customers think. Listening posts may include:

Customer loyalty measurements are helpful for unearthing the key attributes associated with loyalty drivers. Customer anecdotal information may be used to identify detailed tactical actions. This information can provide the customer "face" to results and assist in making what needs changing real. This approach can assist in selling the need for change within an organisation by supplementing quantitative survey results with quotes from customers and non-customers. The results can also be used to establish goals with detailed action-ability and accountability.

It is possible to measure, directly, relationships with key customer stakeholders once the definition of a relationship is agreed upon, says Gordon. This must be done before planning any measurement he says. Gordon's own definition is shown below:

"A relationship between businesses and customers is the interplay of values, attitudes, behaviours and results that brings customers and the company together collaboratively, preferentially and continually in the pursuit of new and mutual value."

Relationships between customers and organisations revolve primarily around mutuality and how each party sees the other in their respective future. Following on from this therefore, measurements should be developed from both the customer's and the company's points of view. A company is unlikely to have a profitable and durable relationship with a customer who does not see the value in having a relationship. On the other hand, a customer who looks to a company for more than what a company is capable of delivering is bound to be disappointed.

Gordon further comments that companies may use research methodologies and software to arrive at the key attributes driving each customer relationship; explore relationships using focus groups with consumers grouped according to their behaviours; conduct personal interviews with the purchase decision-makers and influencers. Whichever approach is adopted, attributes can typically be aggregated into three main categories that yield a comprehensive description of the customer relationship. Gordon's categories are:

Assessment can then be made about the customers' outlook regarding these attributes and how the organisation compares against key competitors (as indicated by the customers). The results are often presented according to whether the customer is positive, neutral or negative toward the firm in comparison to its competitors.

Profitability is often used to rank customers and can include individual customer costs relating to financing costs (relating to the customer's invoice payment history), selling costs (relating to associated account management activities), investment of sales time (the activity of selling) and product returns (all related costs associated with the customer), and various other costs such as customer contacts with a call centre as well as margins. Following profitability analysis the customer's lifecycle can be studied and value can be assigned according to strategic potential.

Apart from these analyses and survey methods, the following provide some simple ideas on measuring loyalty:

• Customer - Retention e.g.: No. of regular  customers over the past year \ number of customers in total, or % of customers current in one period retained over next period, or
  Value of repeat sales \ total sales, or
  % of contracts renewed

• Customer - Projected retention e.g.: No. of customers over the past year who intend to repurchase as a % of total no. of customers 

• Customer - Repeat purchasers e.g.: No. of repeat purchase customers over the past year as a % of total no. of customers, or
  Value of repeat sales as a % of total sales or
  % of purchases by current customers 

• Customer's first choice supplier (competitiveness) e.g.: % customers for whom the organisation is the first choice supplier or
  % market sectors in which the organisation is the first choice supplier 

• Customer/supplier relationship - Stability of e.g.: Length of contract, relationship, partnership or
  Average size of customer's investment in the suppliers business or
  % of suppliers in whom a financial stake is held or
  Frequency of bidding contests or requests for tender

• Customer loyalty e.g.: Quantify from aggregation of loyalty measures such as repeat purchases, no. of different products purchased, relationship duration, and loyal customers.

• Customer loyalty - Products/services purchased e.g.: % of customers that have purchased multiple products or services.