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The Tangible Benefit of Customer Loyalty – Pt. 1

Walker clients have heard us talk about the various techniques my colleagues and I have developed to demonstrate the tangible value of customer loyalty. When working with clients, we tend to look at the linkage between customer loyalty and financial performance relative to either individual customer relationships, by product segments, or some other variable of choice. These techniques allow us to discover a number of valuable insights that poise the client to take meaningful action on the customer results:

1)      We can see how much revenue and/or profitability risk exists within the customer base;

2)      We can determine the reality of the linkage between what customers say they will do and their subsequent behavior (and the time lag between the two);

3)      We can calculate the return on customer loyalty – in other words, when we take action on the customer feedback and create change that generates gains in customer loyalty, how much gain do we see in revenue and/or profitability?

4)      Finally, we can use Value Mapping to use Loyalty and the Three P’s – Profitability, Potential and Partnership – as a segmentation method to build differential strategies for taking action.

To accomplish these analyses, we must have not only the customer perspective (gathered, generally, through a quantitative research study), but we also must have financial data at a granular (account, product, geography, etc.) level. This, of course, requires that the client firm tracks customer data at this level. Moreover, it requires a collaborative effort between the Walker team and the client’s finance professionals. For the analysis to be credible, the data have to be capable of “talking to each other” – and this can often be a challenge.

Marrying these data enables us to tell a compelling reason for change – in dollars and cents. Beyond this, though, the process serves an extremely strategic purpose by taking “soft” metrics like customer loyalty and creating a valuation of the customer asset – a concept that has been espoused by Baruch Lev and others who have called for fundamental changes in our accounting methods to adequately reflect the shift of firm wealth metrics from hard assets (factories, inventories, etc.) to more intangible assets (customers, intellectual property, etc.).

What if we don’t have financial data at a granular level? Fortunately, we can still conduct linkage analysis; however, the utility from an actionability perspective within the company is highly constrained. From an external perspective, however, this information can be quite valuable. I will cover that in my next entry.

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

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