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Customer Satisfaction and Customer Loyalty Overview Table of Contents What does the term "Customer Satisfaction" refer to?What is "Customer Loyalty"? More about Loyalty Behavior More about Loyalty Attitudes What is the Value of Greater Customer Loyalty? If Loyalty is the Goal, why is it Necessary to Work on Customer Satisfaction? What are some of the Major Considerations in Improving Satisfaction? Measuring Customer Satisfaction Which Analyses and Reports are Important in a Customer Satisfaction Survey? What are Some Good Ways to Set Satisfaction Improvement Priorities? What else is Important in a Customer Satisfaction Program? Customer Satisfaction and Customer Loyalty Overview This summary of customer satisfaction and customer loyalty is for people who want to make their existing customer satisfaction or loyalty program more effective or who are considering starting a customer satisfaction program in their organization. Also see our: CLICK THE COLORED WORDS for related books, websites or links to further information on this website. What does the term "Customer Satisfaction" refer to? Customer satisfaction is a measurement of customer attitudes about products, services and brands. While it's always been smart to keep customers happy, the term "customer satisfaction" became popularized in the 1980's with the total quality movement. Customer Driven Excellence and Customer Focused Results remain important aspects of the Baldrige National Quality Program. Loyalty has two definitions. Loyalty BEHAVIOR means the act of customers making repeat purchases of their current brand, rather than choosing a competitor brand instead. Loyalty behavior is also called "customer retention." Loyalty ATTITUDES are those judgments and feelings about your product, service, brand or company that are associated with repeat purchases. Sometimes customers exhibit loyalty behavior without having loyalty attitudes, as in markets dominated by a monopolist. And sometimes customers exhibit loyalty attitudes without demonstrating much loyalty behavior, as in the case of true blue customers who buy very infrequently. Still, it is worthwhile to examine loyalty BEHAVIOR and ATTITUDES in more detail, because each definition has value. The value of the BEHAVIOR definition is that it directly relates to sales and market share. Loyalty behavior is measured by analyzing customers' sales transactions, revealing customer retention rates and customer defection rates over various time periods. As transactions of individual customers are tracked over time, this shows their repeat purchases and "lifetime value." Then lifetime value is linked to demographics, and used in developing marketing strategies that target high value customers. Loyalty ATTITUDES are a softer measure than BEHAVIOR because people can feel one way and behave quite differently. Sometimes customers are classified into loyalty attitude groups such as "new arrivals", "repeat buyers," "advocates," "loyalists" and so on as they slowly bond with your company over time. Loyalty attitudes are measured by means of customer surveys. There is no widely accepted standard for what questions to ask or what is a "good" score. Instead you need a good process that produces useful information. For example, you can track your customers' loyalty attitudes over time and use this trend information to see where your company may be improving or slipping, and learn which of your improvement efforts are having an impact on customer attitudes. Also consider administering the same questionnaire to your customers and competitors' customers blind (sponsor undisclosed), then benchmark your scores against resulting competitor scores. Loyalty is a big topic. Our favorite introductory book on loyalty is Loyalty Rules! by Fred Reichheld. This book has examples of successful loyalty practices in leading companies, useful checklists and even a loyalty questionnaire for surveying customers. Reichheld, from Bain & Co. is probably the most well known loyalty expert. What is the Value of Greater Customer Loyalty? Loyalty behavior is worth almost any effort unless it is achieved by deep price cutting or major promotional giveaways that destroy profits. Loyalty is so valuable because it has a huge impact on market share. It is undeniable that each customer who switches from Brand A to Brand B raises Brand B's market share and lowers Brand A's market share. In most markets there is a fairly high degree of this brand switching or "churn". Churn is a pool of potential customers that smart competitors pursue. Established repeat customers may often generate superior profit margins. They require less customer care, have less price sensitivity, need fewer advertising and promotional inducements, they refer their family and friends to your brand and so on. If Loyalty is the Goal, why is it Necessary to Work on Customer Satisfaction? Loyalty behavior is the RESULT or OUTCOME of very high satisfaction. What has to be worked on and improved is SATISFACTION. As customers become more satisfied they start to take on some loyalty attitudes. In managing a loyalty program it makes most sense to consider loyalty attitudes to be part of customer satisfaction. All your efforts in this field need to be directed at winning more favorable customer attitudes so you can get more loyalty behavior. Don't spend your time trying to "improve" loyalty behavior, it's just the result. It's a metric. Spend you time improving the root causes of customer satisfaction and that will create loyalty behavior outcomes. You can't improve loyalty by being "results oriented." Again, that is because loyalty behavior is a result, an outcome, a metric. A high jumper can contemplate clearing the bar at seven feet (the result or outcome) but this focus on a desired result doesn't help ACCOMPLISH the result. Only by training and practicing can the high jumper improve performance and start raising the bar. See The Achievement Zone by Shane Murphy. So, improve loyalty by improving your product's root causes of customer satisfaction. And be wary of loyalty literature or programs that don't connect to the things that make customers more satisfied and delighted. What are some of the Major Considerations in Improving Satisfaction? When a company becomes customer focused, everything starts to look different. That is because everything in a business can be viewed from a customer perspective. For this reason good customer satisfaction and loyalty programs span the entire organization. Here are the essential elements of satisfaction and loyalty programs:
Measuring Customer Satisfaction MEASURING satisfaction is necessary because it reveals the voice of your customer. Properly done, this tells you which aspects of your product, service or brand will return the greatest impact on the OUTCOME called loyalty behavior. First customers must be surveyed to identify what they consider important or significant about your product and product category. This qualitative information then drives design of your satisfaction survey, so you can be sure you are tracking things that matter to customers. This process reveals "customer requirements." Watch out for too much company input (rather than customer input) in your questionnaire design. Being customer-centric means you understand quality is defined by customers. If you use too much management judgment in questionnaire design your results may be accurate but still misleading. Use the questionnaire for diagnosis rather than confirmation. You can't get the right answers if you don't ask the right questions. Surveying your entire customer population (a census) may be cost prohibitive. In that case you need a SAMPLE survey that produces statistically useful generalizations about your overall customer population and any relevant sub-sets. Random samples must be drawn and the sample size must be large enough so that it holds down the degree of sampling error. Market research companies can help with this. Which Analyses and Reports are Important in a Customer Satisfaction Survey? The survey must identify how satisfied customers are overall, how satisfied they are with each key attribute and how important they consider that attribute to be. Sample surveys must indicate the degree of sampling error, and which comparisons are statistically different from one another. Usually this requires involvement of a market research company. Here are some typical customer satisfaction reports:
What are Some Good Ways to Set Satisfaction Improvement Priorities? The heart of a satisfaction program is the improvement projects that result. Consider using these criteria in deciding where to allocate project investments (these may overlap):
Some additional insight into priority setting can be gained by examining the relationship between satisfaction and loyalty. Unlike many behaviors, satisfaction doesn't follow a bell curve, but is instead skewed.  The chart illustrates the typical finding that most customers are 4's and 5's on a five point satisfaction scale. Customers on the left of this curve are more likely to defect, but there aren't as many of them. Customers in the middle are less likely to defect, but there are quite a few of them. One way of setting priorities is "fixing problems". This addresses customers on the left. Pick attributes that are both high in importance and low in satisfaction (the first bullet above). Another way of setting priorities is "differentiation" of the product by creating competitive advantages. This involves giving customers some good reasons for being loyal. The second bullet above relates to differentiation. Analyze your lost customers (switching analysis) to see where the greatest opportunity lies. For our services in these areas see the services page on our website. What else is Important in a Customer Satisfaction Program? Taking action is important. The benefit of customer satisfaction programs comes only from resulting actions that improve your product, service or brand and result in greater sales, profits and market share. It is crucial that your program provide useful customer information. Our criteria for "useful" are: clear, accurate, current, relevant and complete. When customer information meets these criteria managers will be more willing to rely on it for making decisions. Becoming customer driven means making your customer information at least as credible and useful as your financial information. Managers will use the information that best helps them solve important business challenges. When financial information is the only reliable information, the company has a hard time becoming customer driven.
This Overview was written by Gary Kopacek, President, Survey Value Inc.
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