Customer Loyalty | Systematic Approach

Customer loyalty is fundamental behavioural feedback. Which stems from positive consumer experiences of a company’s products and services. As result leads to increase the financial performance, and market share.

In recent articles about the relationship with the consumer make us recall the old parable of three blind men who try to make a sense of an elephant by touch. Some authors argue that in this area it is important to ensure customer satisfaction and only. Others – that caring for it is a waste of time, and you should worry only about consumer loyalty, others are concerned only with increasing consumer value. All of them do not take into account the fact that the problems lists above are three inextricably link components of an integrated approach. Which is commonly called consumer orientation.

It is believed that consumer-oriented organizations are characterized by a special corporate culture built on the desire to ensure quality. The activities of such enterprises are centered around quality management, and everything on them is done with an eye to the client, buyer, or customer. From the point of view of this concept, the level of customer satisfaction or loyalty, the consumer value of products are only indicators of how much the company is actually focused on the consumer.

The initial impulse to form a loyal or disloyal attitude towards the company is the idea of how effective its work is. On the basis of this idea, the general opinion of the consumer about the enterprise is formed. If it is favorable, the consumer begins to behave loyally towards the company. This has a positive effect on its financial performance. This is the four-phase model of consumer loyalty.

Phase 1. Business efficiency of the company

Consumers evaluate the effectiveness of the company’s work on the following characteristics:

• Product quality: the main characteristic of both the company’s material products and the services it provides.
• Quality of service: all aspects of the services accompany the main product offered by the company (organization of sales, delivery and payment for goods and services, customer service).
• Quality of relations between customers and suppliers: quality of communication, diligence and responsiveness to the requirements and wishes of the partner. This aspect of quality is very important in the relationship between enterprises (B2B scheme).
• Image: innovation, market leadership, corporate citizenship. Buyers can focus on the image of the manufacturing company when it is difficult to choose a product or service according to their characteristics.
• Opinion on prices: The idea of the fairness of prices depends on the price of the product, the cost of its maintenance and application, the cost of modernization. The relative importance of the price of a product varies greatly across industries but tends to increase during periods of economic downturn.

All five of these categories should be cover in questionnaires designubg to assess customer satisfaction. Every organization should be able to assess which ones are most important to its customers. It is these areas of activity that need to be improved in the first place.

Phase 2: General opinion of the consumer

Based on the assessments of the effectiveness of the company, consumers form a general idea of it. It consists of many components, but from them it is easy to identify six mains, closely related to the main financial indicators of any enterprise.

This is a general satisfaction, a willingness to recommend the company to friends, the intention to purchase its products or services again, a commitment to it, a feeling that what you purchased from it meets expectations and is worth its price. The presence of these components is a sign that the consumer is loyal to this company. Therefore, they are included in the model of consumer loyalty under consideration.

Consumer loyalty to the company is a behavioural reaction to his favourable opinion of it. This reaction is always beneficial to the organization. For example, if a company’s customers have the intention to re-acquire its products, this leads to an increase in the volume of future acquisitions, the number of renewed contracts and an increase in the company’s income.

Surveys of customer satisfaction levels are usually carried out retroactively, after the purchase of goods or the signing of a contract, and they focus on the current performance indicators of enterprises. Therefore, in most cases, it is not possible to assess all the factors that initially affect the decision of consumers to purchase a particular product. For example, to make such a decision, the consumer’s opinion about the price of the goods may be very important, but, as a rule, this factor can be difficult to take into account after making a purchase.

It should also be noted that the most loyal to the company are consumers who are highly satisfied with its work (Fig. 1).

Table. 1. Percentage of retained consumers

Phase 3: Loyal consumer

Customer Loyalty is a behavioural category, so when researching its level, it is necessary to evaluate consumer behavior. One of the main measurable characteristics is the “defection rate“, that is, the percentage of customers who refuse to purchase the company’s goods and services in a year. If the relationship between the supplier and the consumer is built on an ongoing basis. Then in the event of an unexpected departure of the regular consumer to another supplier the fact of his “apostasy” is obvious. If such a relationship is sporadic, the supplier may not be aware of the fact of apostasy.

Consumer apostasy is not the only characteristic of their loyalty. The dynamics of changes in the company’s revenues, their growth and fall are also important. The consumer may not refuse the services of the enterprise, but at the same time significantly reduce the volume of purchases. If a regular customer transfers 80% of his orders to another organization, shouldn’t his behavior also be considered apostasy? It is strange that in most consumer databases such phenomena are not noted as facts of apostasy.

When assessing consumer behavior (whether it is loyal), a number of situational factors should also be taken into account. One of the most obvious among them is the procurement schedule. If purchases occur continuously, the loyalty of the buyer to the company is obvious. But if they are produced every few years, then it becomes much more difficult to answer the question posed – as in the case of concluding contracts on a competitive basis or especially large purchases. When deciding on an expensive transaction, the consumer usually proceeds from different considerations than when making small purchases. In industries subject to frequent and rapid technological change, these changes can also affect the consumer’s decision.

Phase 4: Financial results

The financial results of an enterprise that cares about customer loyalty are affected by the expansion of its market share, the reduction of costs for attracting new customers, the attitude of its employees to customers, the growth of its revenues and the value of its shares.

Company market share Organizations with higher levels of customer loyalty tend to own a larger share of the market. This increases the efficiency of their costs for marketing and promoting their products. For example, for the average company, a 15% consumer apostasy rate is common.

To maintain the level of income at a constant level, any enterprise must attract an equivalent number of new consumers annually. Organizations with a affinity ratio of only 5% can secure a 10% increase in revenue for the same marketing costs, since to maintain them at the same level, they need to attract only 5% of new consumers to compensate for the departure of the old ones. The above example shows that an increase in the level of consumer loyalty entails an increase in the company’s share in the market.

This can also be due to the fact that consumers who are very satisfied with the company and loyal to it, as a rule, recommend it to their acquaintances.

Reducing costs. 

Attracting new customers is usually much more expensive than retaining existing ones. According to IBM-Rochester, on the prior the company needs to spend five times more than retaining an existing one, and 12 times more on returning a customer who previously refused its services. The cost of attracting a new consumer includes the costs of advertising, sales negotiations, and the preparation and processing of loan applications.

According to IBM-Rochester, a company needs to spend five times more on acquiring a new consumer than on retaining an existing one, and 12 times more – to return a client who previously abandoned its services, high costs are usually required for his technical support, since he is still learning to use a new product or service.

For example, more than a million users contact Hewlett-Packard’s consumer support center every year. About 70% of requests come from users who own printers for less than 2 months.

An increase in market share entails a reduction in the company’s unit of production costs, since, for example, its marketing costs are distributed among a large number of products sold. Marketing costs are usually categorized as overheads, and there is an economic effect associated with an increase in production scale. The same applies to costs such as R&D and administrative costs.

Employee-to-consumer attitudes There is a direct correlation between the attitudes of employees toward consumers and the behavior of the latter. The more attentive the company’s employees are to customers, the more loyalty they show. This is proved, in particular, by studies conducted by Nortel Networks and IBM.

Profit: 

The effect of a company’s size in the market on its profits has been proven in many studies. As a company gains market leadership, the profitability of its operation tends to increase. The same effect has an improvement in the company’s cost structure due to an increase in its market share.

In addition, the company’s leading position in the market often allows it to make price premiums. Buyers are willing to pay more for well-known products that bear the imprint of a positive image of the manufacturer. By reducing their own costs and obtaining price premiums, leading companies receive gross profits that significantly exceed the industry average.

Stock Price:

A company’s actual or expected earnings are the primary determinant of the value of its stock. The amount of profit is influenced by many things, and not least – the level of customer satisfaction. This is confirmed by numerous studies. One example of such a relationship is shown in the graph, which shows the relationship between the values of the American Customer Satisfaction Index (ASCI) and the Stock Value Index (Dow Jones Index).

Experimental confirmation of the model. Many organizations have empirical evidence of a link between elements of a customer loyalty model, but few have been able to examine this relationship thoroughly. Most of them focus only on individual, most interesting dependencies. Each organization applies its own methodology in research, uses different sample sizes and methods of statistical analysis of data.

Therefore, their results are not always comparable. However, they come to similar conclusions. The level of customer satisfaction and their general ideas about the consumer value of products strongly affect their loyalty to the companies whose services they use, and, as a result, the financial performance of these companies.

Many businesses choose not to make public the results of this kind of research. In this sense, firms such as AT&T, IBM-Rochester, and Johnson Controls, which published this information, compare favourably with the rest. Their findings are summarized in this article.

How to convince a company’s top management: 

So, there’s a direct logical relationship between customer satisfaction, customer loyalty, customer value, and the financial performance of an enterprise. The experience of the three sample organizations shows. That different ways of measuring these parameters can be used to study this relationship. Sometimes it’s not necessary to explore them all.

It is necessary to experimentally find out which of them are most indicative in each specific situation. Most importantly, are most suitable for presentation to the top management of the organization. Some executives are persuaded by generalized characteristics of the level of customer satisfaction. Others – information about the customer’s perception of the consumer value of products or the market share owned by their company. All this must be taken into account when developing a plan for studying the attitude of consumers to the company.

As already noted, all the considered concepts are separate components of a more general characteristic of the enterprise, namely, its focus on the consumer. Any research on customer satisfaction, their “apostasy”, the study of the structure of consumer value or market preferences contribute to the study of different aspects of the relationship between the company and consumers. All of them are equally important and bring useful information.

These studies require comprehensive and accurate consumer databases. Subjective data collected in the course of customer surveys should be correlated with different types of consumer behavior. It is important to remember that consumers, like elephants, have an extremely good memory. They never forget about the positive or negative experience with a particular company. Therefore, a careless attitude to ensuring customer loyalty and satisfaction can cost a company very much.