Managing customer loyalty
01/01/1998
Industry Insights
Managing customer loyalty
Cell teams show results
Mary Swedberg
Keeping customers is easier and more profitable than finding new ones. Not only a well-known adage, it is the primary driving force behind customer satisfaction programs. However, while companies try to instill product loyalty by keeping customers happy, the actual relationship between customer satisfaction and loyalty can be very difficult to determine.
Surveys often attempt to measure loyalty directly by asking "Would you buy this product again?" or "Would you recommend this product to a colleague?" However, such questions are not always an effective gauge because of "false loyalties."
False loyalty occurs when customers have a limited choice of products. Customers appear to be loyal because they continue to buy from a single vendor. However, their apparent "loyalty" is due to a lack of good substitutes - they are actually unhappy with the product. As soon as the competitive environment for the product changes and a better alternative appears, customers will abandon this vendor. These are customers who, forced to be loyal despite low satisfaction levels, become "hostages." *
It is dangerous to ignore hostages. When they "defect" to another supplier, they may become "terrorists": ex-customers who leave conceptual bombs with your satisfied customers. Terrorists will talk about their bad experiences with your product, while raving about your competitors` products. Once happy customers will suddenly wonder if your competitors` products are better than yours, and dissatisfaction and disloyalty will spread. It will not be long then before these customers follow the hostages` path. This scenario is common for the semiconductor capital equipment business, particularly due to the proliferation of consortia and users groups.
VLSI Research has developed a new method from its Customer Satisfaction Survey that determines loyalty levels by comparing customers` willingness to buy again (loyalty) to their overall happiness about buying again (satisfaction). This method makes customer satisfaction a tool for improving profits. It classifies customers as belonging to one of the four categories listed below, based on their satisfaction and loyalty levels:
Satisfied/loyal. Companies should strive for customers that belong to the "Satisfied/loyal" category, which contains clientele who are both highly satisfied and highly willing to buy again from the manufacturer. These customers not only feel the product is satisfactory, but also that it is the best for their needs.
Unsatisfied/disloyal. These are the traditional unhappy customers - they do not like the product, and are on their way to your competitor`s door. These customers are easily identified and are often the focus for improvement. However, special attention is also needed for customers in the more difficult to define final two categories.
Satisfied/disloyal. Customers using equipment that does not completely fit their needs. Although satisfaction ratings are high for the vendor, they would not buy the specific equipment again.
Unsatisfied/loyal. "Falsely loyal" customers are unsatisfied with the vendor or the product, and are potentially held hostage by a lack of alternatives.
In order to determine which category customers belong to, satisfaction ratings can be divided into quintiles and compared to the percent of customers that are willing to buy again from the manufacturer. VLSI Research studied the results for five companies. The first quintile contained the top 20% customer satisfaction ratings for a company, whereas the fifth quintile contained the lowest ratings. The majority of the top three quintiles contained customers that fell into the Satisfied/loyal category.
However, the lower quintiles contained customers that fell into the danger zones of the Satisfied/disloyal or Unsatisfied/(falsely) loyal categories. These quintiles serve as a warning to examine all customers closely. Even though customers in the middle and high quintiles appear loyal, they could be ready to defect to new competitors. Therefore, it is important for companies to manage customer loyalty in each of the quintiles.
The quintiles should be managed based on how profitable it is to sell to the different categories of customers. Start with an examination of the lower quintiles. If they contain highly unsatisfied, unprofitable customers, it may be best to simply let these customers go - especially if they seem impossible to satisfy. Abandoning discontented customers will improve satisfaction ratings, and your company can then focus on satisfying profitable customers.
If you find satisfied customers whose needs do not fit with your company`s products ("satisfied" with your company, but "disloyal" to the products), you may be able to open up an unexplored market niche. Once the lower quintiles have been dealt with, the middle and upper quintiles should be examined for satisfied customers that are not profitable. Your company may be expending too much effort to keep these customers, and should determine how to trim costs or develop new products to address this group profitably.
Finally, focus on the highly satisfied, loyal customers that represent solid vendor profits. Use them to drive technical advancements that will ultimately increase profits, and in turn, allow for further investments in technology. By developing new technology in coordination with your satisfied customers, you will improve product lines and help keep competitors away from your established customer base.
Mary Swedberg is plant manager at Eaton Corporation`s Semiconductor Equipment Division; ph 508/921-0750,fax 508/927-
Christine D. Burgeson is market research analyst at VLSI Research Inc., San Jose, CA, ph 408/453-8844, fax 408/437-0608.
Thomas O. Jones, W. Earl Sasser, Jr., "Why Satisfied Customers Defect," Harvard Business Review, Nov.-Dec. 1995, pp. 88-99.