Question 1

What is “customer loyalty”?

Accepted Answer

“Customer loyalty” exists when people in your market consistently and knowingly prefer to engage with you rather than with your competitors and like doing so. It is a feeling, not a measured behavior, and “loyalty” is a term that customers are not likely to self-apply as it suggests that they are not using their mentality. Quite the contrary. It is fashionable to argue that technology has given customers the tools and knowledge to make more informed decisions than ever before. They “prefer” to engage with you because they believe the experience you offer is better than whatever else is available; they are not prisoners of inertia, contractual obligation, or some other external circumstance. It is important that this preference is formed “knowingly” because if they prefer you simply because they are ignorant of better alternatives that currently exist, you are vulnerable to increased awareness of those alternatives, which could be driven by competitor marketing or a dissatisfactory experience with you. It is important that this preference is acted upon consistently because the whole concept of “loyalty” falls apart without that. The choice of the phrase “engage with you” rather than “buy from you” is deliberate and important. Two customers might have identical spending patterns with you, but one buys exclusively from you while the other splits purchases with a competitor. You could argue that the customer who splits purchases is just as loyal as the other because they spend with you consistently over time, but would you be willing to bet that they recommend you as strongly as the customer with whom you enjoy 100% share of wallet (SOW)? Despite identical spend, the customer who splits purchases may not be as valuable as the one who does not. The term “engage” is also important because it references the entire customer experience, not just the transactional part. Generally, you invest in marketing and advertising because you want people to purchase, but you invest in CX and CRM because you want people like (or love) you. If they like or love you more than competitors, they will expend more energy to promote you, less energy to shop for alternatives (even after a poor experience), and spend more in general. It is easy to misunderstand customer loyalty or take it for granted because it is easy to assume that repeat purchases mean “they love us” and it is hard to understand and master all the drivers of loyalty. A customer may buy from you again and again yet be oblivious to the fact that you consider them “loyal” because they don’t feel that way. People tend to “satisfice” rather than look for the absolute best alternative, and they may buy from you simply because that is what they are used to doing and have not encountered enough pain from you or inspiration from others to look into buying something else. One negative experience with you or improved products or marketing from competitors could change that behavior if they don’t feel strongly enough about you to resist the urge to switch, and off they go, taking their value with them.

Question 2

How does customer loyalty relate to customer value?

Accepted Answer

A loyal customer, or one who chooses to engage with you consistently over time instead of with a competitor, tends to shop with you more frequently, buy from more of your product line, make larger purchases, and spend more with you. They are also more likely to recommend or promote you to others. They may require less investment from marketing and advertising because it will require more to convince someone to purchase from you the first few times compared to someone who is already engaged. Because of these factors, a customer who is categorized as “loyal” has greater value to you than one who is not categorized as such. If you peruse different articles on customer loyalty and customer value, you will see that some authors attach dollar values to these activities. You’ll likely see something such as “it costs five times as much to sell to a new customer as to sell to an existing one” or that “the probability of selling to an existing customer is 60% to 70% while the probability of selling to a new one is 5%-20%.” Such statements make intuitive sense, but you might question whether the numbers apply to your specific situation. For example, the “five times the cost” number has been around since the 1980s, and it defies credulity that it would remain unchanged despite revolutionary changes in shopping dynamics and that a single metric applies to every unique business. You should definitely not ignore these insights into how customer loyalty relates to customer value, but you may want to establish your own metrics regarding the impact. Compared to the 1980s, companies have more data, technology, and expertise to quantify these relationships for themselves, and customer loyalty experts can help with research, consulting, and tools and platforms to establish and track these metrics.

Question 3

What is the relationship between customer loyalty, customer experience (CX), and customer relationship management (CRM)?

Accepted Answer

Customer loyalty is the goal you want to pursue: to have customers who love you so much that they engage with you as much as possible and advocate for you, too. Customer experience (CX) is the nutrient that enables customer loyalty to take root and grow. Customer relationship management (CRM) is the process that enables you to deliver a superior individualized customer experience consistently throughout the customer journey. Experiences that influence a customer’s feeling for your brand can occur at any time and in any context, and you need to make sure that each customer has the best experience you can deliver in every step the customer journey. Whether that step is at a retail or ecommerce point of purchase, on your website or in your app, during the customer’s engagement with your product, or in the news they read or hear about you, you need that experience to be positive or risk losing them. Brands are using “Voice of the Customer” (VoC) methodologies to understand which experiences are influential and how to participate in them to create positive outcomes. VoC research provides insight into how to engage via social media, best practices for customer service, product updates and new product development, and more. Because different customers want different experiences, you also need to understand how to personalize engagement appropriately for each individual. Because CX can happen anywhere, all the time, for every customer, the volume of data to leverage is immense. Because there are so many kinds of experiences and so many ways individuals want them to be delivered, technology is needed to accomplish what can’t possibly be done manually. CRM collects, processes, and analyzes the data, providing reports and taking actions designed to maximize customer satisfaction or delight with every engagement. CRM enables delivery of the optimal CX for each customer, driving customer loyalty and value.

Question 4

What is a customer loyalty program?

Accepted Answer

Typically, a “customer loyalty program” rewards customers for making purchases and for referring or recommending the brand. Rewards are “earned” when the customer achieves certain levels of purchases or referrals. Generally, customers keep track of what they need to do to earn the next reward so they can work toward it. In addition to incentivizing future purchases and referrals, this structure also increases engagement due to its similarities to a game. Similarly, if you want to teach your dog to roll over, you give a reward whenever this behavior is performed correctly, the dog internalizes the behavior, and may even come back to you to wanting to perform the treat to “buy” more treats. Perhaps this shared experience even fosters loyalty toward you within the dog. Customers, however, are not dogs. Giving customers a reward for the behavior you want does not make them more “loyal;” it makes them more transactional. Such programs are more properly termed “customer rewards programs” because they reward customers for certain behaviors, and the customers perform the behaviors because the purchases meet some minimum requirement and they want the rewards. Unless the rewards are products from the brand or the repeated purchases provide meaningful experiences, it is hard to argue that the program has made them love the brand more. Back when it was fashionable to pay wireless customers to switch carriers, a study showed that those who had been paid to switch valued the brand of their current carrier less than those who chose the same carrier without the bribe. Mercenaries are not known for their loyalty. Rewards programs have a role to play in loyalty, and for many customers, a rewards program is table stakes for them to consider you. The rewards program is an aspect of the total customer experience and has the same opportunity to influence loyalty as any other aspect of the experience. A rewards program can keep customers engaged with the brand, but more is required to keep them in love with it. Participation in the rewards program is a gateway to experiences that might make them love your brand, but, on its own, is only one part of the solution. Experts in customer loyalty or rewards programs can help you design the best programs to accomplish your loyalty objectives. They can apply advanced analytics to your current program and recommend modifications to how you define your tiers and the incentive levels associated with each.

Question 5

Does net promoter score (NPS) measure customer loyalty?

Accepted Answer

In theory, a net promoter score (NPS) indicates the degree to which your customers are willing to recommend you to others (positive score) versus not recommend you (negative score), and some believe that it measures customer loyalty. It is calculated by asking people a question to the effect of “How likely are you to recommend XYZ Company to a friend or colleague?” on a 0 to 10 scale, then subtracting the percentage who answered 0 to 6 (“detractors”) from the percentage who answered 9 or 10 (“promoters”). Presumably, “willing to recommend” is a surrogate for “loyal,” and who would feel strongly about recommending a company except for someone who is very loyal? NPS is ubiquitous in the customer loyalty discussion, and a plethora of supplier offerings underscores its acceptance and use. There might also be actual data that proves that it measures loyalty, and maybe this proof applies to your business. There is no doubt that “willing to recommend” is a better predictor of future purchases than measures such as “overall satisfaction,” and no doubt that NPS is intuitive and many companies are using it to an advantage. However, there are some caveats to think through before you take it at face value and apply it to your business. First, there is the NPS question itself, which is almost unvaryingly asked as: “How likely are you to recommend....” Many people would automatically answer “not at all likely” for the simple reason that they don’t know anyone who would ask them for a recommendation. They might in fact love the brand, but the brand would consider them to be “detractors” because they don’t happen to be in situations in which friends or colleagues ask for recommendations or they lack the “I recommend everything I like” gene. Or perhaps NPS only wants to count true evangelists as “promoters,” which is fine, but why does that mean that those whose likelihood to recommend is only “6” are “detractors”? Further, consider the ubiquity of the NPS process, then consider whether it has trained respondents on which parts of the rating scale will not trigger annoying follow up questions! Next, there is the focus on “promoters” (9 or 10) versus “detractors” (0 to 6) and the lack of attention paid to so-called “passives” (7 or 8). You could raise your NPS just by making sure that “detractors” never buy from you again, just as you can increase customer satisfaction by losing customers who are not satisfied. It seems like attention should be focused on making “passives” more enthusiastic, as that seems like the lower bar to clear. Perhaps NPS researchers do examine this segment, and perhaps they assume that “detractors” are lost causes who won’t buy from you again. In any case, when some executive cuts your primary research budget in order to fund NPS, try to influence that funding to explore these issues and quantify the reality. There is also a question of population: who does NPS represent? If you conduct a representative survey of your market, you can be sure it represents your customers and prospects. If you ask the NPS question only at customer touchpoints (and it’s only answered by those who volunteer), how do you interpret the aggregate score? It’s not clear that NPS proselytizers are paying much attention to what their score actually represents, at least not when they write about it publicly. As you look into NPS, you’ll also note that pretty much everyone introduces it as “one question,” but when you read further, they discuss all the great follow up questions you should ask. It’s a bit like the folk tale “Nail Soup,” where the hungry traveler who has only a nail asks the inhospitable villager for some boiling water to make soup from it. As the traveler charms the local and explains how much better nail soup would taste with potatoes, carrots, etc., the fascinated local provides more and more vegetables for the soup until – voila! In other words, if you want to get value out of your NPS question, you might have to embed it in a real survey, but you can still call it NPS in front of your executives. No doubt, the NPS community can provide vigorous rebuttals to these caveats, but, beyond the rebuttals, you should ask them for documented proof. There’s nothing really wrong with NPS, but before you accept that it measures customer loyalty, you should prove it to yourself. Don’t mistake its simplicity for parsimony: ask for proof and treat it like any other research. Examine how the question is asked, know what population it represents, and analyze it in light of other data. Experts in customer loyalty and customer value have opinions and insights on NPS and can answer your questions as well as provide documentation and advice.

Question 6

Does winning over a dissatisfied customer make them more valuable?

Accepted Answer

It’s argued that winning over a dissatisfied customer makes them more valuable because they learn more about you through the experience, and the euphoric feeling of having their problem solved will make them love you even more and tell it to everyone they know. It’s also argued that these situations put them in touch with your customer service reps, giving the CSRs an opportunity to put a human personality on the brand. There is truth to these arguments, but you shouldn’t start creating or abetting unhappy experiences just so you can rehabilitate your customers into even better customers. Research has also shown cases where customers who had a dissatisfying experience which the brand resolved are more satisfied, but not as satisfied as those who never had a bad experience. Also, whereas as going from zero to hero with some customers might make them more loyal, what about the dissatisfied customers who moved on without giving you a chance to fix the problem? If you have more of the former than the latter, consider yourself lucky. Although the quasi-apocryphal story of the “Enhanced Value of the Resurrected Customer” may have real-life precedents, the story itself is only a distraction. Are you going to start upsetting customers simply to create opportunities to engage them? No. Are you going to slack off on resolving customer problems? Let’s hope this answer is also “no.” It’s better to focus on keeping customers from wanting to leave rather than romanticizing situations to win them back, and experts in customer loyalty and customer value can help keep you grounded in reality.

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