Expert Opinion

The following is a quotation by Frederick F. Reichheld (The Loyalty Effect, 1996). "The new theory sees the fundamental mission of a business not as profit, but as value creation. The new theory also makes loyalty a truer litmus test of corporate performance than profits. Since the only way a business can retain customer and employee loyalty is by delivering superior value, high loyalty is a certain sign of solid value creation."

Goodwin and Ball (1999) presenters at the Quality Measurement Conference in Anaheim felt that customer satisfaction measurements may not necessarily predict customer loyalty. Customer loyalty is related directly to repeat purchase behaviour and is characterised by a willingness to continue relationships. Customer satisfaction on the other hand is an attitude. Many advanced companies use customer loyalty measures to gain competitive advantage. Research has revealed that loyal customers:

• Stay with companies longer.

• Cost less to service.

• Provide higher margins.

• Purchase across product lines.

• Buy more.

• Demonstrate immunity to the competition.

• Demonstrate less price sensitivity.

Industry research shows that the perception of value by customers represents the prime factor that affects buying decisions. Value perception is the best leading indicator of market share, sales revenues, profitability, and sustained competitiveness. Value is the perceived worth of a product or service relative to what was paid for it including lost opportunity costs. A customer's perception of value is formed throughout all the experiences associated with a product gained during its life cycle. Customer experiences start with presales literature, continue through ordering, receiving, and installing, to learning, using, supporting, and finally the disposal of the product.

Goodwin and Ball considered that through a strong understanding of what customers' value, companies will know how to offer:

Vikki Bland of NZ Business (2004) says:
"There are many reasons for making an effort to retain customers, even those who seem determined to defect." , and offers two of the most obvious;

Bland suggests that to operate solely through winning new customers and bearing the associated costs is not a viable proposition and that research has shown that a five percent increase in customer loyalty can produce profit increases from 25 to 85 percent. Bland puts forward eight ideas for creating customer loyalty:

Ian Gordon the president of Convergence Management Consultants (2003) writes: "Is a satisfied customer a loyal customer? Not necessarily - satisfied customers can defect but customers who have a strong relationship rarely do." Gordon maintains that along with investment in building close relationships with key customers, companies must develop the following to increase chances of success:

Forming, measuring, and even understanding the requisite qualities of good customer relationships also represent major challenges to many organisations leading to poor ROI from CRM initiatives for many. Gordon goes on to highlight the incomplete approach of many organisations that focus on satisfaction only and attempt to use it as a leading indicator of customer loyalty. To effectively predict or even measure loyalty that is better related more to behaviour and profitability data, the whole relationship must be understood and managed. Customer satisfaction measures usually do a poor job of the following:

John Calhoun (2001), a partner in an international high-tech consulting firm considers that many companies use CRM technologies mainly for targeting customers and to maximise the opportunities for cross selling and fail to meet the more strategic goals of improving customer loyalty and generating Customer Advocacy (defined by Bill Doyle, vice president, research director at Forrester Research as "the perception by customers that a firm is doing what's best for them and not just for the firm's bottom line"). To drive loyalty, an integrated, strategic approach to CRM is required i.e., one that focuses on improving the customer's overall experience with an organisation. This should include all customer contact points (physical and electronic), and all experiential elements (from activity prior to sales to product/service experience and post-sales support).

Calhoun states that, in recent research, businesses indicated their four primary goals for CRM projects i.e. to:

The research indicated that the vast majority of CRM projects were really focused on targeting customers better, cross-selling more effectively, or handling customer requests more cost-efficiently. There was a low level of focus on how to alter or improve customers' experience with the organisations. This is partially related to the fact that CRM technologies are directed towards customer data and workflows and not about relationship building. Relationship building requires the creative thinking necessary to leverage the data and workflows into a better customer experience. Creative, or strategic, thinking was conspicuously absent from most of the CRM projects examined.

Managing customer interactions better, or targeting them better is not all that is necessary to make an effective approach to improving customer relationships and increasing loyalty. There must also be a keen focus on serving customers in a fundamentally improved way. This generally requires changes outside the sales and marketing area, in order to redefine the customers' experience with the organisation in some meaningful way.

Calhoun also states that serving the customer better does not necessarily mean serving him/her in a more expensive manner. Customers' need must become the goal ensuring that service elements are aligned accordingly. Identifying and eliminating areas of over-serving can often compensate for areas where enhancements are required in services to become more competitive. Where a more expensive form of serving the customer is required, it is critical to ensure that this is done for the key customer segments that the organisation can afford to serve better.

According to Calhoun customers define their loyalty to an organisation according to their total experience with it. For example, their loyalty (or lack thereof) is typically with company x, not with division a, or department b. Customers define loyalty through the sum of their experiences with an organisation, across all contact points and across all experiential elements. Hence CRM initiatives whose goal is to improve loyalty must view the Total Customer Experience from a holistic perspective. Interacting with customers over the Web or a call centre in a customised manner, while doing nothing to improve their product or service experience, will have a limited impact on loyalty.

Chris Dawson (2003) vice-president of the Toronto office of Bain & Company, in which he leads the firm's loyalty practices asks , "why is winning customer loyalty so crucial?" Several years ago, in The Loyalty Effect, Bain & Company documented the outstanding financial results you can achieve by cultivating customer loyalty: A 5 % increase in customer retention increases profits by 25 to 95 %. The reason? It costs so much to acquire customers that many of these relationships are unprofitable in the early years. Only later, when the cost of serving loyal customers falls and the volume of their purchases rises, do relationships generate big returns. That finding prompted a lot of executives to search for ways to keep their customers loyal.

This enthusiasm is not surprising, especially now. With use of the internet so entrenched in everyday business, it's harder than ever to keep a customer. They have far more choices, and a couple of clicks allow them to check out the competition for a better deal. Churn rate has gone up. In fact, a company with a seemingly impressive 90% retention rate will lose more than half of its customers in five years. When times are tough, who wouldn't want to increase profits and reduce costs just by keeping more of the customers you already have?

Dawson further states that CRM software can help increase customer loyalty in many ways. It can track customer defection and retention levels, tell you how satisfied your customers are, but in the end, technology is not the answer.

In fact, Bain & Company research shows that the prime driver of customer loyalty is the loyalty of the company's employees. When Bain analysed the auto service business, for example, it found that the highest rates of customer loyalty were in local garages, because they had the highest rate of employee retention. Although most customers felt that mechanics at the chain outlets possessed better training and equipment, they liked dealing with the local guy, the guy they knew. Customer loyalty hinges, as it always has, on committed teams of high-calibre employees - the kind who exceed the customers' expectations, rather than just grudgingly meeting them.

CEOs expect their employees to do what's needed to cultivate strong bonds with profitable customers, and to do this they must understand what loyalty is. Loyalty demands that profits be earned through the success of the company's partners, not at their expense. Furthermore, loyalty can be earned only when leaders put the welfare of their customers and their partners ahead of their own self-interest. This doesn't mean sacrificing financial gain. In fact, the loyalty leaders surveyed by Bain in the 1990s enjoyed solid share price increases; their stock price grew at twice the rate of their competitors'. Leaders must encourage employees to give their partners and customers reasons to stay and involve them in the relationship that delivers them.