Four Steps Up Profits Using Customer Equity

These four basic steps provide a comprehensive approach to customer management that achieves the end goal of retaining and growing profitable customers.

A large portion of business value is customer equity—the expected profit flow from customers. Research shows that these four basic steps are required to retain and grow profitable customers: measure loyalty and satisfaction, profile customer loyalty segments, identify key drivers of satisfaction and loyalty, and take action on the key drivers.

1. Measure Loyalty and Satisfaction

Customer satisfaction and loyalty measurements are leading indicators and essential inputs to effective management of customer equity. However, it is important to recognize that loyalty and satisfaction are different. Customers are satisfied when their needs, requirements, and expectations are met. Customers are loyal when their trust and faithfulness are earned and they buy again. Often, satisfied customers are lured away by competitive offers, while dissatisfied customers continue to buy. Therefore, satisfaction is necessary, but not sufficient, for true loyalty.

The appeal of a simple, "one number" loyalty metric such as the much discussed Net Promoter Score (NPS) based on a single survey question (likelihood to recommend) is obvious. If life were only that simple. While intent to recommend is an important question, used in customer satisfaction and loyalty measurement for many years, strengthening customer relationships is a complex business that requires comprehensive understanding of what you need to do to meet or exceed ever expanding customer expectations. Even NPS guru, Fred Reichheld, acknowledges that you need to understand the "why" behind an NPS. However, NPS on its own fails to account for critical behavioral and attitudinal elements of true customer loyalty.

A much more comprehensive loyalty metric includes the following:

• Intended Behavior—likelihood to recommend, which is the basis for the NPS. NPS is determined by subtracting the Detractors (0-6 on a 0-10 point scale) from the Promoters (9-10).
• Actual Behavior—often a good predictor of future purchase. Typically, this is share of requirements and reported word of mouth. Has a customer actually told others good (or bad) things about a company's products and services?
• Rational Ties—the logical elements of a relationship; i.e., value for the money.
• Emotional Ties—deep-seated feelings about the relationship that are often very stable and predictive of the future; i.e., trust, respect, and personal identification.

Profile Customer Loyalty Segments

By combining the comprehensive loyalty metric (above) with customer satisfaction measure, four distinct customer segments emerge—each with different opportunities, risks, and action priorities.

• Loyal Advocates—satisfied customers with excellent loyalty scores that indicate a strong advocacy-based relationship.
• Hostages—customers with average or good loyalty scores, but at risk because they are not totally satisfied.
• Ambivalent—satisfied customers who are not truly loyal. These customers can be easily lured away by competitive offers.
• Exit Bound—dissatisfied customers with poor loyalty scores. These customers have little emotional or rational attachment and often spread negative word of mouth.

Case Example: Financial profiles of these segments typically show that Loyal Advocates have above average revenue and profit.In fact, an analysis of actual future sales data for survey respondents from a GfK financial services client (Exhibit 1) shows that, on average, a Loyal Advocate bought twice as much as an Exit Bound customer. Also, Exit Bound often have negative value because of bad word of mouth.

Impact on Attrition: The effect on account attrition was even more dramatic, with Exit Bound customers nine times more likely to cancel their account than Loyal Advocates. Because a likelihood to recommend is a part of this loyalty score, NPS segments, Promoters, Passive, and Detractors, can be compared to the loyalty segments.

Exhibit 2 shows that with both approaches, attrition is much higher among those groups with weakest NPS/Loyalty scores. However, the multi-dimensional loyalty segments explained above provide better predictive power than segments based on NPS alone. Loyal Advocates are less likely to cancel than Promoters, and Exit Bound are more likely to leave than Detractors.

3. Identify Key Drivers of Satisfaction and Loyalty

Clearly, the goal is to create more Loyal Advocates who buy more and are less likely to leave. This is done by eliminating specific causes of dissatisfaction for Exit Bound and Hostages and delighting Ambivalent customers by exceeding their expectations for relationship-building factors that matter. A two-pronged key driver model separates and prioritizes the drivers of dissatisfaction (Key Dissatisfiers) and the drivers of delight (Key Enhancers).

Key Dissatifiers are those core requirements that most affect customer dissatisfaction when customer expectations are not met. For a survey that measures customer satisfaction for 20 or more requirements, typically four or five Key Dissatisfiers will be identified that explain 80% or more of overall dissatisfaction. When customer expectations are not met on one or more of these Key Dissatisfiers, a reason for defection is created and the customer will be at risk.

On the other hand, Key Enhancers are those things that most impact customer delight and exceeding customer expectations on these will prevent customers from being lured away by competition. As with Key Dissatisfiers, typically four or five Key Enhancers will explain over 80% of strong loyalty scores.

4. Take Action on Key Drivers

The best loyalty and satisfaction metrics and analyses are severely underutilized if they are not a catalyst for change. Change requires customer-centric commitment across all functional areas, not just sales and marketing. Action-planning workshops with cross-functional teams are the best way to deploy findings and assure that they are acted on. These workshops focus on product features and service processes that are linked to top priority dissatisfiers and enhancers. Often, by focusing on specific customer requirements, multi-functional teams can make small process changes that have a huge effect on satisfaction and loyalty.

Case Example: This was the case for a financial services client cited in the above example. Key Dissatisfier analysis identified credit line increases as a key dissatisfier. Customer Service Reps (CSRs) were not authorized to approve credit limit extensions on the spot. However, once this was identified as a dissatisfier, customer service and risk management worked together to identify and fix process bottlenecks. CSRs received risk evaluation training and tools and were empowered to make instant credit decisions. This streamlined process resulted in cost savings and increased customer satisfaction by eliminating the need for repeat calls. Just as importantly, all this occurred with no increase in account delinquency.

The four basic steps outlined above provide a comprehensive approach to customer management that achieves the end goal of retaining and growing profitable customers.

-September 2009

This content was provided by GfK Custom Research North America and originally published in Marketing News. Visit the company website at www.gfkamerica.com or read their blog.