Customer Satisfaction Loyalty

Walker recently set out to answer the question, "What drives partner preference?" Or, asked a different way, "Why do partners recommend one product or brand over others?" 

As we analyzed data from more than 20,000 partner surveys across multiple IT OEMs, one of the findings that emerged is partners have similar needs as customers.  

As we reviewed the drivers of partner preference and compared them to the drivers of customer satisfaction and loyalty, we noticed some similarities:

• Partners and customers prefer OEMs that offer reliable products. This area, more than any other, including the financial incentives that OEMs provide to their channel, has the greatest impact on partner preference and is a common top driver of customer satisfaction and loyalty.
• Partners and customers want to work with companies that are easy to do business with. While this is a nebulous concept, partners and customers generally consider the people and the processes they interact with when evaluating a company as being easy to do business with.

As we sifted through all of the data, I couldn't help but wonder what would happen if OEMs adapted their voice of customer (VoC) best practices to their partner relationships. Best practices such as soliciting partner input, creating partner-specific action plans for vulnerable relationships, and leveraging partner feedback to prioritize improvement initiatives. Would that help them grow market share? Would this help them solidify their customer retention strategies?

Based on the work that we've done, the answer is yes.

One common challenge customer-focused leadership faces is knowing the right question to answer or problem to solve. This isn't just a challenge reserved for customer strategists. It is a challenge faced by all leaders.

In the movie Moneyball, this challenge surfaces during a meeting where the Oakland A scouts discuss how they are going to replace their most valuable player. The discussion went something like this: 

Scout 1: "We're trying to solve a problem here Billy."

Billy Beane: "Not like this you're not. You're not even looking at the problem."

Scout 1: "Look Billy. We all understand what the problem is."

Billy Beane: "Good. What's the problem?"

Scout 1: "The problem is, we have to replace three key players."

Billy Beane: "No. What's the problem?"

Scout 2: "Same as it's ever been. We have to replace these guys with what we have existing."

Billy Beane: "No. What's the problem Barry?"

Scout 3: "We need 38 home runs 120 RBIs."

Billy Bean: Makes a buzzer sound indicating another wrong answer and goes on to explain the real problem.

Knowing the real problem that you are trying to address is the first step to developing a customer strategy that will ensure success. Before you get too far down any path, take a step back and challenge the problem you are trying to solve.

Once you've identified the real problem, you can design a customer satisfaction and loyalty program that is aligned with the true business need. 

Taking action is widely mentioned as the top challenge in a customer listening initiative or voice-of-the-customer strategy. One method to making customer loyalty more actionable is to begin with a good framework.

The Loyalty Matrix is a very practical framework that segments customers into four groups based on their responses to a small battery of questions. The two axes in the matrix represent the two key aspects of loyalty – behavior (what a customer plans to do) and attitude (how they feel about working with your company). This forms the following four quadrants:

TRULY LOYAL – These customers have every intention of continuing to do business with you and they have a positive attitude towards your company. They like working with you and are more likely to increase their spending and recommend your company to others.

ACCESSIBLE – These customers have a good attitude about working with you but do not plan to continue their relationship. Since this is a rather odd combination, it’s not surprising that it is often a very small percentage of customers. It typically means something has changed in their business and they do not need your product or services any longer.

TRAPPED – These customers show every indication of continuing business with you, but they’re not very happy about it. They feel trapped in the relationship. This is common among organizations that are locked into a long-term contract, lack a suitable substitute, or find it too hard to switch. Eventually, trapped customers will find a better option.

HIGH RISK – As the name implies, these customers do not intend to return and don’t really like working with you anyway. Typically, they’re halfway out the door and not only will they no longer be a customer, but will also talk poorly about your company in the marketplace.

Many organizations use this framework and find it to be more versatile, more practical, and much more actionable than satisfaction scores, NPS, or other approaches. Here is a link to a short paper on the Loyalty Matrix if you would like to learn more. 

Patrick Gibbons
Principal/SVP
Walker

Once again, Willow Creek Association put on a tremendous Global Leadership Summit last week. As soon as Len Schlesinger started his presentation, I knew I was in for a whirlwind of new ideas and different ways of thinking. As President of Babson College (ranked #1 business school for entrepreneurship by U.S. News & World Report); former Harvard Professor; and noted author, he is an entrepreneurial genius. 

In the 1990’s, he and his co-authors helped us better understand how to build profitability in a service business via The Service Profit Chain (1997). Per Harvard Business Review, the service-profit chain established relationships between profitability, customer loyalty, and employee satisfaction, loyalty, and productivity.

More recently, Len Schlesinger has been focused on using entrepreneurship in all kinds of settings to create economic and social value. His book Action Trumps Everything (2010) makes the case that conventional approaches to problem-solving don’t work as well in an uncertain world.

Instead, a very simple framework used by successful entrepreneurs can be more effective: Act. Learn. Repeat.

1)      Act: Take a small step forward.

2)      Learn: Pause to see what you have learned by doing so.

3)      Repeat: Incorporate that learning into what you do next.

At Walker, we know that taking action can be one of the biggest challenges faced by customer strategists. I suspect that is due in part to our tendency to set aggressive, stretch goals that may at times seem unachievable. This can lead to inaction. But, what if we didn’t try to solve world hunger from the onset? 

What if we make a decision to just do something that might have a small impact? 

1)      Act: Take a small step. 

2)      Learn: After taking that first step, see what customers think and say about it in your customer feedback program. 

3)      Repeat: Then, incorporate that learning into your action plan and take another step forward.

Do we make the idea of taking action more difficult than it needs to be? 

Kitty Radcliff
Vice President, Consulting Services 

Is customer loyalty on the decline or improving? We often find that clients want to evaluate their own performance relative to the “norm.” It is always good to look above and beyond your own data as a means to provide context for the trends you are seeing (I did a blog series on this topic a while back that you may find useful). One thing to remember when using benchmark data is that you should be able to evaluate the fit and appropriateness of the benchmark as well as the worth (and rigor) of the underlying data.

A well-respected benchmark of customer sentiment is the American Customer Satisfaction Index. This index has been existence since the mid-1990s and has a regular, regimented schedule of studying satisfaction trends across a wide variety of industries. The consistency in how the data are collected and reported provides some rigor in the process that can be absent in some benchmarks. In addition, despite some criticisms related to its concentration in the B2C space and the black-box nature of the calculations, it has been analyzed and vetted by a number of academicians. In the most recent update, the ACSI authors state that the ACSI has hit the lowest levels since 2008.

We, too, have seen some evidence of a shift in customer sentiment toward more of the High Risk category (you can learn more about the Walker Loyalty Matrix here). Interestingly, there is a similar trend starting to occur among employees – more and more employees are becoming less engaged, and are planning to look for new work when the recession ends. My colleague Chris Woolard (Walker’s employee expert) has blogged recently on this topic.

The convergence of the decline in both customer and employee sentiment suggests, to me, that a more macro-oriented dynamic is at play.

What is driving these shifts? Becca Lewis blogged about the impact that the economy has on customer behavior at the start of the economic downturn. The combination of the simultaneous shift in customer and employee sentiment is interesting; at the risk of analyzing without immense statistical rigor, here’s my assessment of what is driving this phenomenon among both customers and employees:

·         In a challenged economy, companies are delaying or deferring purchases as long as possible; this has the effect of hitting the P&L of service providers, who remain committed to maximizing shareholder returns. To achieve this, they cut any and all extraneous people costs as well as any discretionary expense items.

·         Customers who are purchasing run into roadblocks – they have to wait longer for salespeople to respond (because staffs have been cut), they wait longer in queues for customer support, and they are forced – either by their provisioning groups or by sheer survival instincts – to negotiate harder with vendors. This has the result of providing a negative customer experience. This situation not only exacerbates the P&L situation, but it creates a stressful environment for employees.

·         At the start of the recession, there was evidence that employees were simply grateful to maintain employment; however, over time, the stress created by more work among fewer associates, coupled with frustrated customers, creates a situation where employees are waiting for the tide to shift so they can seek greener pastures.

In short – an environment in which the customer experience suffers hurts everyone – customers, employees, and the company at large (including shareholders).

The good news is that companies and employees alike can get ahead of the curve by focusing on a few good strategies. I will cover those in my next two blogs.

Mark A. Ratekin

Senior Vice President, Consulting Services

The 2010 Customer Champion awards from 1to1 Magazine were recently announced. We at Walker were particularly proud to see our client Gloria Berndl, from CDW, earn some well-deserved recognition for the work that she and her team have accomplished. In total, fifteen customer champions were identified across a variety of industries, including IT, retail, financial services, education, airlines, and automotive.

As I reviewed the stories of the fifteen award winners, five themes clearly emerged that the wise practitioner will take note of. Over the next five weeks, I will highlight a key trend and discuss the implications we should consider.

Trend #1: Executive Buy-In Is Key

As we typically see with our clients, the most successful customer loyalty programs are those that are led in a top-down fashion; the same is true with many of the 1to1 Customer Champions. Without a champion at the most senior level in the organization, loyalty is not as likely to take root and yield cultural change at a grassroots level.

Executive support is critical for a number of reasons, including:

1)      The executives are ultimately in control of whether the company will invest – and by how much – in the program (including resources to be allocated to the initiative, how much to invest in employee training, whether or not to tie compensation or other rewards to the program, etc.).

2)      Internally, it creates credibility – if the executive team is leading the initiative, then it is less likely to be seen as most recent “the flavor of the day” management fad.

3)      Externally, the executive sponsor puts a face on the program with customers. This person effectively sets the expectation that customers will have regarding the level of customer focus exhibited by the organization at all levels. This can serve as an effective signal to the market (which, according to the literature[1] and our own Walker Index, responds to such signals) as well as being an effective attractor for new customers.

4)      Being the chief customer advocate in an organization immediately provides a context by which the CEO can connect with customers.

It is easy to take executive sponsorship for granted when it exists; it can be challenging, though, to build. In fact, one of the questions we often hear from clients is how to engage executives. The main answer to that question is the second trend we see emerging, which will be the topic of my next blog.

Mark A. Ratekin
Sr. Vice President, Consulting Services

• We owe our customers a response when they participate in customer satisfaction surveys.
• Our response should include a summary of what we heard.
• It doesn't have to be too lengthy. Stick to the key points.
• Video is an effective communication tool.
• Our communications should have an impact on our business through building customer loyalty, creating customer value, and increasing our customer retention programs. 

In reading the most recent issue of the Harvard Business Review, I naturally gravitated toward two articles that on the surface seemed to contradict one another. The first, entitled “Stop Trying to Delight Your Customers,” essentially said that companies are trying too hard to provide a superlative customer service experience. Their advice – simply fix the customers’ problems. The second article, “Zappos’s CEO on Going to Extremes for Customers,” talked about how Zappos has succeeded by – you guessed it – providing a superlative customer service experience.

So, which is it – should we have customer delight as a strategic corporate objective? Over the next couple of blogs, I will review each article and will provide some recommendations on how to approach this concept. Let’s start, though, with a review of the article "Stop Trying to Delight Your Customers.”

In this article, Matthew Dixon, Karen Freeman and Nicholas Toman of the Corporate Executive Board argue that firms spent too much time trying to figure out how to go above and beyond expectation, when simply addressing the basic need will do. The result, they advise, is wasted time/effort (i.e., the mis-utilization of support resources) and lost revenue/profit (via refunds or free products/services offered to build “delight”).

The alternative? Dixon, Freeman and Toman’s research suggests that making the customer service interaction easy – and helping customers solve their problems – is the best path toward building customer loyalty. Removing the barriers/pain associated with customer support is key to making the process easy for customers. The authors propose a new metric – the Customer Effort Score – that is, according to their research, a stronger predictor of stated behavioral intentions (that is, likelihood to continue doing business with the company, increase spend, and spread positive word of mouth) than either the traditional customer satisfaction question or NPS.

What steps, though, should firms take to ensure an easy-to-navigate process that addresses the customer service needs? Dixon et al propose five tactics:

1)      Proactive analysis of the customer’s issue – This relates to understanding not only how to fix the current problem, but also how to predict what other issues may emerge as a result of the fix and addressing that before the customer hangs up (or logs off the website).
 

2)      Understanding the customer’s personality type – By picking up on queues provided by the customer’s communication style, the rep can react in a way that will not only resonate better with the customer, but also will minimize the number of repeat calls by the customer.
 

3)      Ensure your self-service channel is working – The authors report that 57% of customers who call for customer support first visited the firm’s website. This “channel-jumping” behavior – which results in more effort on the part of the customer – is a result of the customer either not being able to determine the best method of support for their situation or getting overwhelmed and going back to the more familiar method of phone-based support.
 

4)      Follow-up with customers who are irritated with the level of effort they expended to learn where to improve – Customers, as we know, are a wealth of information, and following up to learn what did not go well can be quite illuminating. To be customer-centric, though, remember that the primary objective of a follow-up initiative should be to address the customer’s need first and to learn where to improve second.
 

5)      Empower associates – What gets rewarded gets done; if a support center is incentivized to minimize average handle time, then you can be sure that the calls will be short – even if that means the customer’s question is not answered. Making it “okay” to help the customer can result in longer average handle times, but fewer repeat calls – which should net out to less time spent on customer issues in total.

There is little to argue with in this article – the premise makes sense, and the tactics are straightforward. However, should we completely give up on the notion of customer delight? Before we answer that, I will review the second article that talks about Zappos, a firm that has become synonymous with being customer-focused. I will review that article in part two and will conclude in part three with my assessment of where companies should be focused based on our experiences with clients across a number of industries. In the meantime, I would love to hear your thoughts – are we working too hard (and giving up too much vis-à-vis revenue/profit) by attempting to build customer delight?

Mark A. Ratekin
Sr. Vice President, Consulting Services & Resource Management

 

Source: Dixon, Matthew; Freeman, Karen; and Toman, Nicholas. “Stop Trying to Delight Your Customers.” Harvard Business Review, Volume 88 (July-August 2010).116.

A month ago, my husband and I went to see “Iron Man 2”. Halfway through the movie, the projector in the theater began having some technical issues, and after about five minutes, the movie stopped playing completely. Frustrating, but at least it wasn’t during a particularly action-packed or climactic part of the movie, and the movie was playing perfectly again in less than three minutes. 

After the movie, as we exited the theater, we were greeted by a supervisor. He apologized for the interruption to our movie and handed us complimentary tickets that we could use for any movie we wanted at any time. That was so unexpected to me, but a gesture that I’ve told everyone about. 

As I got to thinking about it, this was a great customer service move by the management at the movie theater. Sure, it cost them money to give everyone in the theater a free ticket, but they successfully turned a negative transaction into a positive transaction for their customers (at least in my mind). This probably saved the theater money in the long-run! An article I read recently supports this; it found that negative critical incidents can lead to declining satisfaction and altered purchasing behavior over time, even for long-term customers. This is because negative incidents cause customers to reflect on and reconsider the relationship with the company in a way they may not if it is “business as usual”. Therefore, managers should be on the lookout for customers who have recently experienced a negative event and should strive to resolve it in a positive manner.

In the case of the movie theater, a minor irritation was turned into a gesture that let me know I was a valued customer and subsequently increased my satisfaction with my experience.   The manager definitely took the right steps to increase the loyalty of his customers. Would your company handle a negative incident in a similar way?

Jessica Gregory, Director, Marketing Sciences

Reference: van Doorn, Jenny and Peter C. Verhoef (2008). “Critical Incidents and the Impact of Satisfaction on Customer Share," Journal of Marketing, Vol. 72 (July 2008), pgs. 123-142.

A VP of Marketing who has launched a strategic account management initiative in his company in the past year made the comment to me this week that his account teams were skeptical of the impact executive sponsors could have in their accounts. 

Even though I know we strategic account managers like to be in control of everything going on in our accounts, this surprised me a bit. All evidence I’ve seen shows the positive impact gained by having top-to-top relationships between your company and your account.

Some examples of the evidence:

-The Strategic Account Management Association (SAMA, a great resource in this topic area) says right on their web site: “Executive sponsorship is considered a critical success factor for any organized strategic accounts effort.” (http://www.strategicaccounts.org/public/knowledge/glossary.asp)

-Grover Smith of Cisco presented his company’s executive sponsorship program at the recent SAMA annual conference. He shared that they expanded their program from 15 executives covering 30 customers in 2006, to 125 executives covering 194 customers today – and they did so because they see a positive impact on revenue, customer satisfaction (which we all know leads to growth), and keeping Cisco focused on the customer’s top priorities.

-In some best practice gathering interviews recently completed with the highest performing strategic account managers at a Fortune 500 company, each one of the 6 high performers interviewed cited (without prompting) the influence of their executive sponsor on their overall success (high customer loyalty and high revenue growth) with the customer.  

So, it seems like a good idea, right? If you’re starting to think so, try these tips to ensure your executive sponsor is a growth contributor:

-Be sure to find the right executive that fits with your customer. Grover Smith of Cisco shared that their sponsors are selected via a six-step process with the last step being an expectation setting/match analysis meeting between the account team and the proposed sponsor.

-Keep your executive (and you and your entire team) focused on your customer’s priorities rather than your own.  

Remember, you all want the same thing – success for your customer (okay, so that will lead to your success too…nothing wrong with that). 



Sonya McAllister,
SVP/Principal

A recent Harvard Business Review article suggests a new management paradigm is developing. In “The Age of Customer Capitalism,” Roger Martin provides a brief history of management theory; simply put, Martin calls out two periods of managerial capitalism to date:

1)      Management Capitalism This period, which started in the early 1930’s, created the notion of professional management, prompted by the work of Adolf A. Berle and Gardiner C. Means, whose book The Modern Corporation and Private Property made the case for management that was separate from ownership of the firm. This work ushered in a period in which management became a valued discipline by creating processes and roles that help to fuel the economic growth of firms. It could be said that by creating the division of labor between owners (who are, ostensibly, more entrepreneurially-oriented and therefore more focused on the vision of the firm) and management (who are more oriented toward building systems and infrastructure that facilitates the realization of the vision), firms leveraged the unique skills of individuals in a way that was not only scalable, but also increased the probability of firm success.

2)      Shareholder Value Capitalism The second period emerged in the mid-1970’s, when Michael C. Jensen and William H. Meckling  suggested in their article “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” that managers focused on their own financial well-being at the expense of the firm (and, therefore, shareholders). This work (along with other management-critical treatises such as The Peter Principle: Why Things Always Go Wrong, which posited that managers in a firm advance to their level of incompetence) created a skeptical view of management; Jensen and Meckling suggested that a better focus for the firm would be shareholder value maximization.

Professor Martin suggests that shareholder value capitalism is also a flawed theory, and provides some compelling evidence that the shareholder value paradigm did not pay off for shareholders (in short – between 1933 and 1976, when management capitalism was king, the S&P earned compounded annual returns of 7.6%; between 1977 and 2008, during which shareholder value capitalism has been in vogue, the S&P created compounded annual returns of 5.9%). Further, Martin argues that shareholder return cannot increase in perpetuity.

So, what is a firm to do? Martin suggests that the answer is Customer Value Capitalism – that is, the path to shareholder value creation comes by maximizing what we at Walker call customer loyalty. In Professor Martin’s words:

“…companies should seek to maximize customer satisfaction while ensuring that shareholders earn an acceptable risk-adjusted return on their equity.”[1]

Why can’t the firm focus on both customer value as well as shareholder value? Professor Martin provides two arguments. First, from the perspective of optimization theory, you can only maximize one variable while controlling for all other variables. While this is technically correct, the second reason cited is more compelling – shareholder value reflects the value stockholders place on the company’s future earnings, and it is impossible to any firm to continuously raise –and deliver on – expectations. If we assume that customers are the source of all future earnings, then logic would suggest that maximizing customer value would be the best way in which to maximize shareholder return in the long run.

Do the data bear this out? Professor Martin provides some anecdotal examples in support of customer capitalism; we can add several more from our work with clients (many of which we have previously discussed in this blog - see this entry and this entry for more information):

1)      We continue to see a statistical connection between what customers say they will do and what they actually do;

2)      We have witnessed the correlation between a customer’s loyalty and his/her revenue growth rate, profitability, willingness to buy across a firm’s multiple categories, etc.

3)      The Walker Index, a composite of Walker’s publicly-traded customers, continues to outpace the broader market indices in total (see this entry for more discussion on the Walker Index);

In addition, the academic literature provides analysis consistent with what we see in our client work.

However, the notion of Customer Capitalism is another example of easy strategy that is extremely hard to execute. In my next blog, I’ll look at some of things firms should be mindful of – and prepared to do – if they aspire to adopt the strategy of Customer Capitalism. In the meantime, what do you think – what has worked in your firm (or what have you witnessed as a best practice among firms, brands, or products that you use)?

Mark A. Ratekin
Sr. Vice President, Consulting Services & Resource Management

As Christmas approaches many people begin to reminisce on what has happened over the past year as well as past holiday seasons. I am no different and recently have gotten into multiple conversations about what Christmas Day was like growing up and how that is different for the routines for this year. As kids, one of the most important things about Christmas was the gifts – we just couldn’t wait to see what new toy was under the tree. But as you grow up, the focus shifts away from the toys – even though there is still an element of excitement for what new gadget might be under the tree – and onto other things, such as time with family, a few days off of work, or just a little relaxation.

After dinner with a friend where we talked about our Christmas routines as kids and then for next Friday, I went home and was doing some analysis on customer loyalty. So that got me thinking about how in any relationship that lasts over time, there are going to be shifts in what is most important, even business relationships. So what does that mean for companies that collect feedback from customers?

A lot of companies solicit feedback in order to understand how to make their customers more loyal. After they have looked at the results they come up with a way to implement the drivers of loyalty in the customer experience, but they don’t factor in the fact that there are shifts in what is important to a customer. In fact, a lot of companies treat customers the same regardless of how long they have been working with the company.

Not surprisingly, research supports the idea that the drivers of customer loyalty differ when you segment the data by customer tenure. In the beginning of a relationship, customers tend to focus on satisfaction and price; however, as time goes on, trust as well as the relationship aspects (such as account teams, etc) become more important and have a greater impact on customer loyalty. This implies that depending on how new a customer is to your organization there may be different things that the account managers/contacts should be focusing on.

While this does not mean that you should never look at customer data in total, it does suggest that organizations should have a way to identify customer tenure and should use some time analyzing if there are differences between various customer tenures. The results may shed light on ways to improve relationships for different tenure classifications or help explain why changes impact customers differently.

Becca Lewis

Statistical Analyst

So far, we have explored how customer loyalty data can be connected statistically to financial performance at both an internal/micro level as well as an external/macro perspective. To summarize the key findings:

From an internal/micro perspective (i.e., at the customer/account level), we can use the linkage of loyalty and financial performance to:

·         Identify where revenue is at risk (and, conversely, more secure);

·         Evaluate to what extent customers act on their intentions;

·         Articulate the value of improving customer loyalty;

·         Build tailored customer-level strategies to build on existing loyalty or address the impediments to customer loyalty;

These tools are used in conjunction with strategic account planning to facilitate the growth and profit objectives of the firm.

At the external/macro perspective (i.e., at the market performance level), the literature to date suggests that customer satisfaction/loyalty metrics…

·         can be used as a leading indicator of future stock price trends,

·         can be used as a leading indicator of stock returns risk, and

·         have utility in financial markets and should be disclosed in the ongoing filings public companies are required to file with the SEC.

In other words, we have tangible evidence that intangibles such as customer loyalty can add to (or detract from) the value of a firm, and therefore have a place on the balance sheet.[1]

It is interesting to note that each approach, while different in its focus (external vs. internal), complements each other and creates a virtuous cycle of value creation. In other words, it makes sense that a firm that focuses on tailored customer-level strategies would have a more customer base, which means a more stable revenue base. A more stable revenue base means that there is likely less volatility in the firm's earnings, which attracts investors. When a firm attracts more investors (and the current investors are more interested in holding the stock vs. selling it), the laws of supply and demand tell us that the stock price will appreciate. Strong stock returns attract attention (generally positive), which serves to create awareness and demand for the firm’s products and services. And so the cycle continues.

Collectively, these findings reinforce the strategic value of being a customer-focused organization, and the implications are broad-reaching; consider the following scenarios:

1)      A mutual fund manager is interested in investing in a given sector and has narrowed his focus to three firms – each has a strong balance sheet, a solid growth record, and reputable management. With all the basic criteria so evenly aligned, the “tie-breaker” is the customer loyalty metrics each firm publishes.
 

2)      A firm is interested in acquiring one of its competitors; in the due diligence phase, the acquiring firm decides to conduct an assessment of the customers of the target firm. The results suggest that the customer base is tenuous at best. The acquiring firm may determine to back out of the deal altogether (or, at a minimum, substantially reduce its offer price).
 

3)      A management team decides that it wants to “walk the talk” by making certain its managers and leaders are personally invested in the strategy of being a customer-focused organization. To do this, performance targets on customer loyalty levels are set; to further reinforce the level of “skin in the game” that managers and team leaders have, the incentive is stock-based.
 

4)      An account manager wants to ensure that she is allocating her time focusing on the customers with the greatest value to her organization. Rather than focus solely on total spend/revenue, she employs the Value Mapping discipline to evaluate which clients hold the greatest strategic value to the firm. Using the output from the Value Mapping process, she is able to construct tailored, specific action plans for each customer.

These are just a few ways in which customer loyalty can be leveraged to increase the value of the firm. What they all have in common is that they are focused on strategic business questions – in other words, tracking loyalty for the sake of scorekeeping holds absolutely no value to the firm. To create strategic value, the data have to be leveraged to address substantive, strategic business questions.

Mark Ratekin
Sr. Vice President, Consulting Services & Resource Management

 

In my last entry, I discussed ways that we conduct analysis that links customer loyalty to firm financial performance at a customer/account level. In this entry, I will discuss the linkage between customer loyalty and market performance.

A growing base of research has quantified the linkage between stock price, stock returns and customer loyalty (see, for example, Aksoy, Cooil, Groening, Keiningham & Yalcin (2008) and Fornell, Johnson, Mithas, & Krishnan (2006)). Much of the literature has focused on the connection between customer loyalty and stock price – that is, is there a link between customer sentiment (as measured by traditional customer satisfaction/loyalty metrics) and how much value a share of the company’s stock carries? As it turns out, there is a connection, and it follows intuitive reasoning – the more satisfied a company’s customer base, the more favorable the stock price.

But stock price is only one factor to consider – the other factor to consider is volatility. Volatility refers to the ups and downs a stock price experiences, and it is a measure of risk – the more risk in a stock, the greater the volatility. When we refer to volatility in a stock, we are generally referring to the composite of two broad types of risk – first, there is systematic risk – this is the risk that is associated with the market at large, best characterized by the John F. Kennedy quote that “a rising tide lifts all boats.” The other type of risk is idiosyncratic risk – this is the risk associated with actions of the firm. For example, management decisions regarding products, pricing, customer segments, etc. have an impact on idiosyncratic risk.[1]

To date, the literature on the connection between stock risk and customer loyalty has been pretty sparse. Moreover, the available literature has focused exclusively on the topic of systematic risk – in other words, they have focused on how stock prices move relative to the total market, not the company-based idiosyncratic risk.

In the November, 2009 Journal of Marketing, Kapil Tuli and Sundar Bharadwaj add significantly to the literature in their paper “Customer Satisfaction and Stock Returns Risk” by focusing on both sources of risk – systematic as well as idiosyncratic. They find that customer satisfaction scores “insulate a firm’s stock returns from market movements (overall and downside systematic risk) and lower the volatility of its stock returns (overall and downside idiosyncratic risk).”[2] That is, the greater the satisfaction/loyalty of a customer base, the less volatility that is exhibited by the stock.

So, the bottom line is this - companies with strong customer loyalty enjoy not only better stock returns, but they are also less susceptible to volatility in their stock price. We have independently corroborated these findings with our Walker Index - a composite stock index  of Walker clients that has outperformed the broader market indices by a factor of 5 to 6 times since its inception. The Walker Index also has less volatility than the broader market indices, as measured by beta as well as upside and downside capture ratios.

In these first two entries, we have discussed how loyalty metrics and financial performance are linked from an internal/micro perspective (i.e., at the customer/account level) as well as at an external/macro perspective (i.e., at the market performance level). What are the implications of these findings? I’ll address that in the third (and final) entry of this series.

In the meantime, what do you think? How can we leverage this information to more effectively run our businesses?

Mark Ratekin
Sr. Vice President, Consulting Services & Resource Management

The October issue of Quirk's published the last of a three-part series on how satisfaction measurement has gone awry and ways to fix it. I thoroughly enjoyed this series and would encourage anyone who administers or uses data from a survey-based customer feedback program to read it.

Of all the problems with traditional customer listening programs, there is only one thing the authors claim will thoroughly corrupt a program - tying feedback scores to corporate incentive plans or compensation. This may seem counter-intuitive. Including customer scores in an incentive program helps focus the organization on customers, right? Ideally, yes. Practically, not so much. It focuses the organization on the score, but not usually on the customer.

The authors provide three key reasons why tying incentives to customer feedback scores is dangerous:

1. The goal of the survey shifts from pleasing the customer to pleasing the organization. If you currently use survey scores in your incentive plan, consider how much time you spend setting, explaining and defending the goals. And this time increases exponentially if you miss a target, which is exactly when you should be talking to customers to see why scores are down instead of defending the numbers internally.
2. Those responsible for the survey become the "police" instead of the "partners." The time you spend with internal stakeholders is more often focused on defending the metrics and methodology than on helping the organization internalize and act upon the customer feedback.
3. You actually give executives an incentive to question the research and results. Making it part of the compensation plan brings high-level attention to the customer survey, but actually encourages executives to question and nit-pick the details instead of focusing on the big picture.

• We will understand where we have financial security (and risk) in our customer base.
• We will understand who our most valuable customers are.
• We will understand what potential revenue gains exist among our current customers.

• Changing economic conditions;
• Regulatory changes in your market;
• Competitive forces – new entrants, exiting competitors, supplier influences, resource constraints, etc.
• Changing consumer tastes; We recommend taking a fresh look at your program every couple of years to see how things are changing in your environment (and we need to revamp in the program to keep it fresh, relevant, and impactful).

• How do we define an account – one person or many people? One customer organization or entities within that organization?
• Should our sample mirror our revenue composition? If so, do we weight results, control the sample, or both?
• Do we have access to (and can identify) all relevant customer contacts? Should we differentiate by decision role, for example?

Toyota is “grasping for salvation,” according to Akio Toyoda, the grandson of the founder of Toyota and the current leader of automotive titan. He also is quick to say that the way they turn the business around is by making better cars, cars that people want.

An article in Business Week details Toyoda’s comments from a recent press conference. It also discusses that he has reams of customer satisfaction data at his disposal. Reading this, I instantly recalled my most recent car-buying experiences and the customer satisfaction surveys that came with them.

First, the discussion of satisfaction vs. loyalty. With the exception of financial services and automotive industries, most companies are way past that. Satisfaction is simply a low standard that has no correlation to the outcomes we are trying to achieve. I’m sure Toyota scores very high on customer satisfaction surveys. Maybe this is the latest proof that satisfaction is not an adequate management tool.

Second, how are Toyota and other carmakers using their customer satisfaction surveys? I see automakers advertise satisfaction levels everywhere—magazines, television, billboards, etc. Yet, after completing several of these surveys, I have yet to be contacted in an effort to resolve or further understand any of my complaints.

Third, every survey I have taken after buying a car has been accompanied by “strong-arm” tactics from the salesperson regarding the scores that I intend to give them. Let’s face it…they don’t want to know how we feel! They simply want high scores.

General Motors is now controlled by the U.S. government. Toyota is teetering and forecasting an $8.4 billion loss for this year. Maybe it’s time the car companies get serious about listening to us (their customers) and really get customer-focused. Maybe we are the salvation that Toyota is grasping for.