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Is It Really Possible To Measure Customer Loyalty?

Is it really possible to measure customer loyalty?

Let’s start with the dictionary’s definition of the word ‘loyal’; “Giving or showing firm and constant support or allegiance to a person or institution.

The inference here is that loyalty is the natural tendency to show constant support which, in the context of business, translates into customers coming back for more – more services, more products, more entertainment, more time, and all of their own volition. In reality, loyalty isn’t quite that simple.

Loyalty schemes are designed simply to bring-in more business, but they can be expensive to devise, implement, market, and maintain. If the uplift in revenue doesn’t cover the running costs, possibly because it turns-out there just isn’t a big-enough customer base to justify the rewards on offer, there has to be a point at which the scheme is ditched. The point at which that happens is precisely when the concept of customer loyalty is tested.

It wasn’t really until Sainsbury’s introduced its Homebase Spend & Save scheme back in 1982, at the peak of the DIY frenzy, that the loyalty scheme concept began to capture the public’s imagination and satisfy their desire for ‘something for nothing’. Homebase was possibly the first company to use a plastic card the size of a credit card for this purpose too, which would have had enormous novelty factor back then, adding to its widespread adoption. You take your shopping to the till. Swipe your loyalty card, pay and leave. Job done.

But there was way more to the loyalty card scheme than we were led to believe.

Despite the warm and cuddly impression these companies give; “we really love you being our customer and we want to reward you for being so lovely“, with their glossy, celebrity-endorsed advertising and brochures, smily, happy people and in-store promos, make no mistake, it’s all a tad sinister and takes full advantage of technological trickery and data mining in true big-brother style.

For the massive high street/national chain retail and superstores in particular, loyalty schemes are the main way they obtain people’s personal data. They know who you are, where you live, who else is in your household, where you shop and precisely what you buy, when you buy it and every detail about the combination of foods, the relationship between times and days you shop, and so-on. The data is used to predict demand and shape the very products the shops sell because they know what a particular store’s customers are likely to want to buy.

Aside from the massive amount of personal data they hold on millions of customers (which came under fire with the implementation of the GDPR in May 2018) the benefit to the customer is genuine and the company’s sales increase as a direct result so clearly, they have created a band of truly loyal customers.

Or have they?

In the right environment, where demand is high, a loyalty scheme can be highly effective at driving sales even for small businesses. For example, a long established and highly successful fish & chip restaurant near Croydon, Surrey began running its own loyalty card scheme and the results were incredible. To this day they literally give away more than 200 free meals every week, yet turnover and profits continue to rise because one free meal equates to 5 paid-for meals. Do the maths.

However, is that really loyalty or is that just playing to our natural weakness for wanting something for nothing?

If the scheme were to be stopped would the customers continue to go to that particular establishment, regardless? Especially if they have to go out of their way to get to it.

For more than 30 years every type of business from credit card companies to coffee shops to supermarket giants has been running some form of card-based loyalty scheme. This is fine for those businesses with high street footfall, but what about the massive faceless companies like insurance or finance, or the independent online businesses? How can they measure loyalty without the exchange of a physical card to be stamped or scanned?

In 2003 Fred Reichheld, Bain & Company, and Satmetrix gave birth to the Net Promoter System as a new and simple way to measure customer loyalty (primarily consumers).

This mainly online system is said to “…measure the loyalty that exists between a provider and a consumer” by asking one simple, key question of the consumer; “How likely is it that you would recommend our company/product/service to a friend or colleague?

The consumer has to simply select their answer by clicking on a number on a scale of 1-10. That’s it.

Customers like it because it’s quick, simple and requires no justification or explanation and it’s 100% anonymous.

Business owners like it because, according to Reichheld et al, a lot can be deduced from the number (or score) selected between 1 and 10.

  • Those who score in the range 1-6 are known as Detractors. These are described as “unhappy customers who can damage your brand and impede growth through negative word-of-mouth.” In plain language; you’d better be scared of these people because they will actively bad-mouth your business and actively recommend not to use you.

  • Those who score 7 or 8 are known as Passives. These are described as “satisfied, but unenthusiastic customers who are vulnerable to competitive offerings.” In plain language; these people are neutral and don’t care about your business one way or another. You made no noticeable impact on them negatively or positively.

  • Those who score 9 or 10 are Promoters. These are described as “loyal enthusiasts who will keep buying and refer others, fuelling growth.” In plain language; these people are the Holy Grail. They will actively tell other people about their positive experience and recommend using you too.

What’s really interesting is the assumption that there is a direct correlation between those who would recommend (or promote) the company/product/service (the 9s and 10s), and ‘loyalty’; those who would come back and buy again. The question is, is there really a direct correlation or is this just hyperbole developed by Reichheld and his cronies to sell the concept?

The Net Promoter System remains massively successful and is widely accepted as the de facto, global standard in measuring customer loyalty (as an interpretation of expressed customer satisfaction). Yet, despite this success, there are many critics of NPS based, primarily, around there being no scientific evidence to support the claims that it is a clear and true representation of customer loyalty.

The response from NPS proponents is quite amusing. They say: “…the practical benefits of the approach (short survey, simple concept to communicate) outweigh any statistical inferiority of the approach”. Clearly, they agree that the so-called ‘facts’ are, potentially, nonsense and open to speculation and interpretation.

Statistical inferiority“? Well we all know what they say about statistics. Ok, for those who don’t know; statistics should be used the way a drunk uses a lamp-post; for support, not illumination.

The reality is that widely adopting the mythical belief that NPS is a true representation of customer loyalty is no less ridiculous than accepting that small piece of paper with a currency symbol and value printed on it as what we accept to be ‘money’, and will gladly take it in return for products, services or time that we provide for others. Neither actually exists; we just choose to believe they do, so it’s all fine and dandy.

An interesting development in creating an offline version of the Net Promoter Score system devices that are seen more and more in such as Boots Pharmacy stores, at big public events/exhibitions and huge transport hubs, such as airports. These are counter-top tablet-style screens or floor-standing podiums with a set of four or five physical buttons from sad (red) to happy (green) that invite visitors to rate their experience with a single push.

The NPS system is simple and cost-effective to implement. It’s also way more likely to be used by your customers than any other system or survey and, as long as you buy-in to the concept of interpreting the results in the same way every other NPS adopter has; that customers selecting a score from 1-10 are actively demonstrating their level of loyalty to your business, product, service then yes, it is an effective feedback mechanism that could transform your business should you choose to act on the results.

Smiley face customer feedback button - courtesy of Viewpoint

So, back to the original question; “Is it really possible to measure customer loyalty?

In the same way that a company’s turnover is vanity (e.g. lots of stamped loyalty cards), and profit is sanity (identifiable, confirmed returning customers), the short answer is no.

Of course, with eCommerce the ‘identifiable, confirmed returning customers’ is easy to quantify because the majority of online sales require the consumer to create, or log-in to an account. Returning customers are therefore really easy to identify and consider to be loyal.

Think about your own business, the way you or your business transact with customers and the expreience they have in doing so.

How important it is for you to know how satisfied they were with their last experience and whether or not they would recommend you to someone else?

It should be vitally important to you and you should want to know. Most don’t.

NPS, or your own version of it, wouldn’t be a bad place to start with measuring the reactions of your customers but it may be prudent to take a somewhat philosophical view as to what the results are actually telling you.

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