|
LOYALTY MANAGEMENT CREATING VALUE IN BUSINESS
Anil Antony
Loyalty Specialist (Eastern Europe, Middle East, Africa)
ACNielsen, Egypt
www.acnielsen.com
Is loyalty dead? It definitely looks that way, be it friendships,
communities or even marriage. Businesses too seem to have entered
the age of one-night stands. In today’s ultra-competitive
business space, loyalty is passé; ROI, bottom line and EBIDA
are in. But look beyond the obvious and you will see what really
drives success: 360 degree loyalty – be it customers, employees,
suppliers or shareholders.
Customer churn rates are higher than ever. People
assume this is just the natural outcome of a competitive market
where the customer is king and choices are abundant. But is it really
so difficult to keep customers? Or is it that the rules have changed
and the tools need to be upgraded?
Today’s successful organizations spend little time setting
profit goals or focusing on market share – the mantra of the
last millennium. Instead, they recognize that in the new economy,
the focus of management is on frontline workers and customers. They
pay attention to the factors that drive profitability in this new
paradigm: investment in people, technology, recruitment practices
and performance-related incentives at every level in the organization.
This is where the “Service Profit Chain” model [Figure
1] fits in. Espoused by Heskett, Sasser and Schlesinger in the Harvard
Business Review in the 1990s, it provides the framework for business
success.
On the face of it, the model looks extremely simple, bordering on
mundane: satisfied employees beget satisfied customers, which results
in revenue growth and profits. But that is the easy part. The tricky
aspect of this model is to systematically measure and track these
variables so as to understand their mutual interactions and hence
gain insights on how to tweak them to increase revenue and profitability.
Many companies become obsessed with measuring satisfaction and that
is where the problem starts. What exactly is satisfaction? Simply
put, it is a mental state that compares expectation with perceived
performance. Many businesses believe it can be used to predict and
tailor future behavior to achieve growth and profit. But is satisfaction
a reliable indicator of intended behavior? The answer, unfortunately,
is not always.
Examples abound. Some companies with 90 percent satisfied customers
experience a 30-percent defection rate. And according to one study
published in the Harvard Business Review, among defectors, 65-85
percent were “satisfied or very satisfied” with their
previous suppliers.
Satisfaction, it seems, has very little correlation with future
behavior. Thus, instead of measuring satisfaction, smart companies
seeking to identify future behavior measure loyalty, the Holy Grail
of profits and growth.
Competing on the basis of loyalty involves rethinking three important
aspects of the business – stakeholders (customers, employees,
suppliers and shareholders), product-service offerings, and systems
that manage, measure and monitor the linkages. The “Value
Profit Chain” [Figure 2] put forth by Heskett, Sasser and
Schlesinger in 2003 embodies all this.
Let us examine this model to see how it can be applied to help a
business prosper. It requires, first of all, understanding the relationship
between customer retention and the rest of the business, and being
able to quantify the linkages between loyalty and profits. Only
then can daily decisions reflect systematic cost benefit tradeoffs.
We will look at each of the three processes: managing value, measuring
satisfaction and loyalty, and monitoring profit using a stakeholder
(in this case, customer) as an example.
Managing value
Value is the incremental benefit that a customer perceives as being
provided by a product or service compared to the competing offers
in the market. Once an organization determines how to maximize the
value it provides its customers, it begins the journey to a successful
long-term relationship with its customers.
The “Value Equation” [Figure 3] is used to determine
value and is the basic building block of the “Value Profit
Chain.”
Results produced for the customer: Customers buy results and not
products or services. People go the petrol station to fill up the
gas tank in their car. They would avoid it if there were a way,
but the result, convenient transportation, is worth the effort.
Delivery process quality: Important for products but more so for
product-service offerings. Defined as the relationship between what
was actually delivered vis-à-vis the expectation on behalf
of the customer.
Price to the customer + acquisition costs: Many customers and service
providers measure costs only in terms of price, but acquisition
or convenience involves costs (place, time, etc.) and has important
implications for product/service providers.
Measuring satisfaction and loyalty
Satisfaction is based on past experience while loyalty is the crystal
ball to the future. There is an inherent disconnect between the
two as the past cannot always be the predictor of future behavior.
New competitors enter the market, new processes change the way the
industry works and technology disruptions can make entire business
models obsolete.
The secret to understanding the relationship between satisfaction
and loyalty lies in demystifying the real predictor of loyalty and
relating it to satisfaction. ACNielsen, for instance, uses an ‘eQ’
stakeholder loyalty model that identifies the behavior that results
from a customer being satisfied and hence willing to show loyalty.
Customers are asked a simple question to determine this, such as
“How will you show loyalty to the company whose products or
services you are satisfied with?”
The responses? In the mobile telephony industry, for instance, customers
indicate that they show loyalty by buying extra lines from their
trusted service provider for their loved ones. While in the airline
industry, customers say they show loyalty to their favorite airline
by recommending it to their friends and colleagues.
Based on responses to questions on satisfaction and the loyalty
predictor, customers can be segmented into three distinct sets –
“Detractors,” “Unattached” and “Promoters”
– according to their level of satisfaction and loyalty [Figure
4]. Action plans can be tailored to precisely target these three
classes.
Monitor profit
Profits are the lifeline to sustaining and growing any business,
so monitoring profits is of paramount importance. Profit measurement
in loyalty-based systems is based on the “Lifetime Value”
equation [Figure 5]:
Base revenue: Number of orders per year multiplied by the price
of the average order.
Cross sell amount: Products or services that the customer in question
will purchase (x percent of base revenue).
Informational revenue: Something you know about a customer that
gives you an advantage over your competitors. For instance, if the
client is about to open a new store that will result in extra purchases
(y percent of base revenue).
Total costs: Direct costs incurred in winning the customer, plus
the retention costs.
The principles of loyalty
It would be appropriate to conclude this article by mentioning the
pillars of loyalty as put forward by Frederick Reichheld, considered
the father of modern loyalty management:
• Preach what you practice: Ensure that senior leaders’
statements and actions consistently reflect your firm’s values.
• Play to win-win: Stakeholder loyalty derives from leadership.
Put employee interests first – you will build a dedicated
workforce that puts customer interests ahead of their own to produce
a sustainable competitive advantage in the market.
• Be picky: Choose the right customers and keep them happy
– choose the ones you can completely satisfy.
• Keep it simple: Simplify decision-making rules to achieve
flexibility and speed in an increasingly complex world.
• Reward the right results: Reinforce customer loyalty through
employee incentives that build a motivated, stable workforce.
• Listen hard, talk straight: To promote trust and loyalty,
cultivate honest, two-way communication and learning among all stakeholders.
Submit
your comment
Top
|
