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1 Customer satisfaction, loyalty and profit understanding the links between service and the bottom line Customers

s are becoming ever more demanding, and in most markets they have more options to choose from than ever before. At the same time perceived switching barriers, the inconveniences of changing supplier, are being reduced. A good illustration of the effect of these changes is in the financial market, where the growth of internet and telephone banking has presented consumers with a breadth of new alternatives at the same time as measures are being taken to ease traditional switching barriers such as the transfer of standing orders and direct debits. Different markets show very different customer loyalty profiles. The Leadership Factors experience has shown that, for example, in some manufacturing sectors customers may have very little choice over which supplier to use. This can lead to complacency, and the feeling that customer loyalty is irrelevant since they have no option but to come back. Such Reasoning is flawed on two counts. 1) Customer loyalty goes beyond mere retention to a Range of attitudes and behaviors, something which will be covered in more detail later. 2) Customers do come back when they have no other choice, but they will be vulnerable if any competitor arrives on the scene. Companies that are in a virtual monopoly situation can be vulnerable to this way of thinking. The difference between markets is due to a combination of factors the amount of competition, the sophistication of the customers and the perceived switching barriers. If all competitors were equally easy to use then we would expect an almost perfect correlation between customer satisfaction and loyalty. Fig.1 shows the relationship between satisfaction and loyalty for one Leadership Factor client. 0.0%

10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% Satisfaction Fig. 1 2 Why does customer loyalty matter? What is meant by customer loyalty? It is a phrase that can be used to embrace a range of customer attitudes and behaviours. On most of The Leadership Factors surveys customer loyalty is measured in two ways: loyalty behaviour is gauged by a measure of retention, or intention to buy again; loyalty attitudes are termed commitment. Why should you worry about customer retention? Customer lifetime value. This phrase relates to a very simple concept. Every interaction you have with a customer should be done on the basis that their value to you is the total of all the purchases they will ever make, not that one sale. For example your most valuable customers are probably not those who make the biggest purchases, theyre the ones who come back again and again. This way of thinking also allows you to consider marketing approaches that dont require you to make back

the cost of acquiring a customer in a single sale. The cost of acquisition. It has been demonstrated that it is up to 20 times more expensive to acquire a new customer than it is to keep an existing one. A traditional sales approach can be likened to pouring new customers into a bucket with a hole in the bottom the weaker your levels of customer retention the larger the hole. Why should you worry about customer commitment? Committed customers have been shown to demonstrate a number of beneficial behaviours, for example committed customers tend to: Come to you. One of the key benefits of establishing a good level of customer loyalty is that you dont have to sell to them, they will come to you when they need a product or service, and they may even come on spec to see if you have new products. Buy more often. Loyal customers come back more and more often, since they enjoy the service they receive from you. If customers find themselves forced to use you against their will they will come as little as possible. Try new products. If customers are happy with what theyve bought from you before, they will be more willing to try new products. Perhaps they will even trust you to suggest products suitable for them. Recommend you. Another key benefit loyal customers can become your most effective marketing tool (far more trustworthy than salesmen in the eyes of other customers) and theyre free. Buy only from you. A strong relationship of trust can mean that customers will prefer you even if it is more difficult or more costly to use you than a competitor.3 Look only at you. The holy grail of customer loyalty customers at this stage trust you to provide a good product/service at a reasonable cost, and will not go to the

trouble of shopping around before buying. The key to these is the establishment of trust based on good service, reputation and image. To illustrate how this works, imagine that you have just started dealing with a supplier. To begin with you probably check every invoice carefully, but after a while (if theyve all been correct) youll tend to assume that the invoice will be accurate. Eventually you may not even bother checking the invoice unless something catches your eye. Of course, the moment something goes wrong you go back to checking every item. Similarly if someone else tells you of a problem your trust in the supplier would be damaged. Why should you monitor customer satisfaction? Any breach of this trust can seriously damage the relationship youve built. Which is why it is so essential to monitor customer satisfaction, and correct any problem areas. Where a complaints system can allow you to see why some customers (those few who bother to complain) are unhappy, a customer satisfaction measurement (CSM) programme allows you to actively identify specific problem areas based on statistically sound information and correct them. It will also enable you to prioritise improvement based on an understanding of what the key drivers of satisfaction are, the areas that will have the greatest impact in improving customers overall perception of you. Once a CSM programme has been established it can be monitored and fed back to customers over time, informing them of actions you are taking and sending a strong message about your commitment to customer service. Building customer loyalty As an illustration of how the process of building loyalty can work, Fig. 2 shows for one consumer client the percentage of customers that requested quotes from other companies, split by whether they had used out client before or not. It shows that this companys strong performance means that past customers are less likely to shop around than others. The

company is building a very loyal customer base.

2 = 26.62, 2df, p=0.00 Shopped around? Yes No Don't know Yes 60.6% 39.0% 0.4% No 70.9% 28.3% 0.8% Used before? Total 67.5% 31.8% 0.7% Fig. 2 4 Another question (Fig. 3) shows the value of a loyal customer base to this client their reputation influenced 44% of their customers to use them, 23% were repeat users and 14% chose this supplier based on a recommendation. What makes up customer loyalty? The Leadership Factors surveys have consistently shown very strong correlations between customer satisfaction and loyalty. Our work, and that of other agencies, suggests that customer loyalty is driven by a combination of customer perceptions such as satisfaction, image and perceived value, and is further subject to something called loyalty personality. Loyalty personality refers to innate differences in the way customers form their opinions. Commonly these differences can be predicted by a number of geo-demographic factors, such as age, gender, occupation and location. Fig. 4 shows how customer satisfaction and loyalty vary by age. It is important to note that the shape of the lines is different satisfaction personality is not the same as loyalty

personality, though they are usually similar. In both cases scores tend to get higher with age. Why did you chose this supplier? 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Reputation of the company Value for money Used them before Recommendation Respondents were allowed more than one answer Fig. 35 Common loyalty personality divisions might include: Innovators/risk averse. Some people will always be on the lookout for the latest product or trend, and will tend to try something just because its new. If youre not making the most up-to-date product you may have to resign yourself to losing these customers, however good your service is. Rest assured, though, that theyre no more likely to remain loyal to your competitors, and tend to be less profitable in the long term than customers who need a reason for switching. Customers who moved to telephone banking when it first came out fall into this category how many of them are still using telephone banking accounts, and how many have moved on to internet banking? How much money did they make for the telephone bank? Level of involvement. Some markets are more high involvement than others, reflecting the importance to customers of making the right purchasing decision. Beyond market-wide trends, however, the most significant difference is in how involved your customers feel with you. Perception of switching barriers. Switching barriers are the perceived obstacles to changing supplier. The key word here is perceived. For instance, how difficult is it

really to change bank? Probably not nearly as hard as most people think, but its in the interests of the big high-street banks to maintain this impression. One message that is often missed is that it can be okay to write off customers. There are some customers that cannot be kept loyal, just as there are some that cannot be kept happy. 70.0% 75.0% 80.0% 85.0% 90.0% 95.0% 100.0% 18-24 25-34 35-44 45-54 55+ Age category Satisfaction Loyalty Fig. 4 6 Increasingly the concept of firing customers is growing in currency, and it is a valuable idea. The important thing is to make sure you focus on keeping the right customers. The most damaging customer is one who takes up your resources but doesnt yield commensurate gains. Worst of all they may be damaging you by criticising your performance. These terrorists are customers that you are better off without since theyre losing you business and youre probably making a loss on them anyway. Concrete advantages At the end of the day, whats in it for you? Youve surveyed your customers levels of satisfaction and loyalty, youve focused improvement on the drivers of satisfaction and

loyalty and seen these soar as a result, and youve fired your terrorists. What difference will it have made? The honest answer is that we cant be sure. We believe that for almost every organisation improving customer satisfaction will improve customer loyalty, which will in turn improve profit. But we cant prove this is the case for every organisation, and we cant predict by how much. To predict what an improvement in satisfaction will mean to you in terms of loyalty and profit you have to model the relationships between these items. Only a small number of companies at the cutting edge of customer research have managed to model the links between satisfaction, loyalty and profit. The perception seems to be that the process is very complex and requires enormous amounts of data, which is far from the case. Of course the more data is available the more reliable and precise a model will be, but the chances are you could make a start with existing financial data. In simple terms the modelling of a relationship is no more complex than drawing a line of best fit on a scatter diagram. Looking back to Fig. 1 it is obvious that as satisfaction goes up so does loyalty. Getting at the specifics of this relationship and understanding how reliable the equation is requires some statistical knowledge, however, and unless you have a statistical background it is probably best to let an outside agency do the work for you. Such an agency should also be able to employ more advanced techniques such as Structural Equation Modelling and Latent Class Regression, which are only available through specialist software. As a final thought for those that are still unconvinced about the concrete benefits of making your customers satisfied and loyal consider this: markets are becoming more and more competitive, and consumers are getting more demanding. If youre experiencing high customer turnover, but your competitors are locking in customers by targeting loyalty, youre soon going to run out of prospects to pour in at the top of the bucket. Further information Author of the article Stephen Hampshire is Business Development Manager for The

Leadership Factor. The Leadership Factor is an international agency specialising in customer satisfaction and loyalty measurement. The Leadership Factor conduct in excess of 200 satisfaction and loyalty studies per annum. As well as helping many companies manage their CSM projects, The Leadership Factor run the worlds leading one day seminar on the subject and have presented their training day to over 3500 delegates across the globe. To speak to Stephen further about any aspect of satisfaction and loyalty measurement you can contact him direct on 01484 467014 or email him at

Whats the reason why many customers now are dissatisfied? And why countless businesses these days dont know how to handle and treat their customers well customers who are their reasons for existence?

image source: These businesses, which sell anything from needles to battleships seem to have lost focus of their reason for existence: to generate satisfied customers who believe they are getting their moneys worth and will come back to buy a second time, a third, or the ninth time and thus, make profit. Indeed, customers demand good, if not excellent, service from the companies that they buy a product or a servicebe it from a grocery store, a bookstore, a clothing store, a tailoring shop, a sauna and spa, or whatever. Sometime ago, Ive read an excellent article written by Jeffrey Margolies, an American author and management consultant, about excellent companies. I cant forget the lessons that I have learned from that article, because I had notes about it which still exist to this day.

Here are the important tips to follow to achieve service excellence in the market, thus also achieving business growth and profitability. 1. Next to the quality of the product itself, service is your greatest key to profitability. Good service is your next sale in the making. It is a rare business indeed that owns such a lock on its market that a dissatisfied customer cannot shop elsewhere. Frequently, it is only the quality of the service that separates one product from its competitors. Service is the key to profit, not a cost of doing business. 2. No matter what your company does, yours is a service business. Service is part of every contact between your company and a prospect or customer. Ultimately, it affects not only how purchasers feel about your company but also their perception of the value and quality of the product you deliver. 3. Good service is value added for your customer. Customers make buying decisions based on their perceptions of the product or service extra value. Especially when products or services offer similar features as is true with cars, packaged goods, bank loans, computers, grocery items good service is the margin of extra value that exerts a positive influence on customer behavior. 4. Service creates sales opportunities. Your customers bought from you in the first place, and not from your competitors, because they believed your product offered real, tangible advantages. Its your job to help the customers see the value of the products or services that you offer, to make the sale. 5. When it comes to service, later isnt soon enough. Service is a real time activity and real time means real money. Whatever the customers need, they need it right away and they want it now. Therefore, whatever the service your company provides, doing the job right is just half the battle. It is equally important to set up systems that help you and your employees respond to a customers needs as soon as they arise. In the final analysis, service excellence is a key success factor in business, in any business. It is only by providing good service to the customers that companies can become excellent companies, attending to the needs of the customers first while meeting growth and profit objectives as a result of that service.

Many people today are complaining about shoddy products being sold and of poor services being offered by businesses which do not seem to care, except to make the sale and generate income at customers expense.

image source: Is your business one of these companies? Are you selling your products or services in a manner that give the customers a reason to complain and stop their patronage? Or is it the other way around, in a fashion that ensures their satisfaction, making them your loyal clients? A company or business that does not know how to take care of its customers will soon find itself on the verge of collapse, as what happened to many other companies in the past. The key is to sell customer satisfaction, not products or services, and make your business prosper. Below are the three proven ways to do it. 1. Do not only sell a product or a service; instead, sell the benefits that the product or service provides. Customers buy the product or service not because you sell it to them. On the contrary, they buy because they believe that the product or service can meet and satisfy their needs and wants. 2. Sell more than a product or a service. You sell to your customers solutions to their problems. For example, they buy a product or a service (tangibles) because it gives them peace of mind, freedom from want, or the answer to their longings and wishes (intangibles). Always think of what your customers needs, and not your own profit. Once your customers are satisfied of your products or services, profit will come to you naturally, as a result. Profit is a reward for doing good to the customers, to the extent that you provide them value for their money, in short, satisfaction.

3. Differentiate your business, your products and services from the competition. This is very important. You can differentiate your business, products, and services by developing your own brand and image that set you apart from the competitors. Differentiation can be achieved by providing service excellence, being customer-focused, and by developing long-term relationships with the customers. Working hard to satisfy the customers, their needs and wants, takes time, money and effort. But this is the only way to make your business prosper. In the final analysis, without the customers there is no business, the customers being your reason for existence.

What is Quality?
The primary dimensions of product quality include:
y y y y y y y y

Performance Features Reliability Conformance Durability Serviceability Aesthetics Perceived Quality

Increasingly, however, service quality is attracting equal or more attention.

y y y y y y y

Responsiveness Reliability Accuracy Knowledge of Employees Courtesy Consistency Speed

These listed dimensions of product and service quality are, in a broad sense, generic to most situations. However, every business is unique, and if customer satisfaction measurements are to be meaningful, expectations should be phrased in the language of customers for each distinct market segment.

Also, some needs are more critical than others and it is wise to determine the relative importance of each need. After measuring satisfaction levels, emphasis can then be placed on improving performance in areas important to the customer but where the organization may be lacking in comparison to the quality delivered by competitors. View an illustrative bar chart Return to Begining of this Folder

Acheiving Continuous Quality Improvement

Continuous quality improvement begins by identifying customer expectations for all key "moments of truth" - the critical interactions customers have with the organization. This can include contact with, for example, internal support groups, collection individuals, sales representatives, management, or direct service providers. The best way to understand customer expectations is to listen to customers using qualitative research techniques. This usually requires skillful probing by someone practiced in customer satisfaction measurement. After identifying expectations, customer satisfaction can readily be measured. However, this requires the customer to answer specific questions about how he or she feels about the company's performance. This is why it is so important to capture their interest and build the credibility needed to gain their cooperation. The task is made considerably easier by speaking the customer's language and presenting only issues that are truly significant. Return to Begining of this Folder

Why Quality Must be Measured

More and more, quality is being measured. Companies are coming to the conclusion that if they can measure it, they can manage it and, consequently, can improve it. The best performing organizations are allowing customer expectations to drive their quality initiative. They recognize customers define quality by judging them in relation to competitors. Organizations that constantly measure themselves in relation to competitors (Benchmarking) are able to quickly capitalize on their emerging strengths and address weaknesses before they become problems. Return to Begining of this Folder

Why Include Customers of Competitors

The rationale for including non-customer (customers of competitors) benchmarking is that without the non-customer data customer satisfaction levels are arbitrary. Both sets of data allow an organization to exploit its strengths, and put initiatives in place to narrow and eliminate any gaps between expectations and performance. In fact, the best performing organizations benchmark themselves against:
y y y

their best competitor the industry average a world class supplier in a similar industry

Future measurements permit the organization to objectively assess how well the initiatives are working. Return to Begining of this Folder

How Exit Interviews Can Translate into Huge Profit Increases

By measuring only customer satisfaction levels, organizations miss former customers who have left ... because they no longer had the need for, or were unhappy with the products or services being offered. Measuring customer retention, on the other hand, relates directly to the bottom line. Long term customers spend more, refer new clients and are less costly to do business with. Ironically, past customers present every company with an opportunity. They can tell the organization exactly what parts of the business to fix in order to reduce the number of customers at risk. This improves customer retention and, subsequently, profitability. An average organization loses about 15% of its customers every year. But if this can be reduced to 10%, bottom line profits improve 35% to 85%.