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The Customer Loyalty Illusion

There is no such thing as customer loyalty.  Loyalty…true loyalty… loyalty through thick and thin – requires an irrational customer, one who will stay with the bank regardless of the bank’s performance.

Every time a customer interacts with their bank, they may learn something as a result of the experience, and adjust their behavior as a result of what they learn. What we perceive as loyalty is an illusion, rather it is actually the product of an ongoing calculation each customer makes conscious or subconsciously to either initiate or maintain a relationship with a bank.  This is the customer value equation.

Customer Value = (Results + Process Quality + Intangible Benefits) - (Price + Other Acquisition Costs + Intangible Costs)

The customer value equation is simply the sum of the benefits of banking with a given institution minus the sum of the costs of choosing another provider.  If this sum is positive, the customer will act as if they are loyal.  If this sum is negative, the customer will behave as if they are disloyal.

The first term in this equation contains all the possible benefits associated with the bank.  These include the obvious, such as convenience of location or hours, rates and fees, breadth of delivery channels, and customer service.  However, they also include less obvious intangible benefits, such as doing business with a local community bank, or the prestige of one financial service provider over the other.

The second term contains the sum of all the costs associated with the banking relationship.  Again, the obvious are rates and fees.  However, there may be other acquisition costs, such as, the effort of switching providers, as well as intangible costs such as potential risk of switching financial providers. These intangible costs are significant, and play a significant role in what we perceive as customer loyalty, where customers remain with a financial institution more out of inertia, than other reasons.

A common objection to the customer value equation as a model of customer decision making is that it assumes that all customer decisions are completely rational, something that flies in the face of modern research using fMRI machines to probe the biological underpinning of decision makings.  This research strongly suggests that many decisions are neither conscious nor rational.  However, the customer value equation model allows for this equation to be subconscious and the intangible terms on both the cost and benefit side of the equation allow for irrational benefits and costs to be inserted into the customer’s decision making.

The proposition that customers are not loyal, and that behaviors we use to describe loyalty are really the result of an ongoing calculation of benefits and costs at first may seem daunting, but embracing the proposition that customers adjust their behavior based on what they perceive about a provider, gives managers a valuable model to think about customer loyalty in ways that mirror customer decision making. Understanding the customer value equation gives bank managers a rational framework to make investments in product, positioning, price and place to best match their offering with their customers’ value equations.

How might banks use the concept of the customer value equation to manage the customer experience?


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Measure and Motivate the Right Contact Center Agent Behaviors

Increasingly banks must operate in a multi-channel environment.  While the changing role of the branch, combined with automated channels such as online and mobile, are getting a lot of attention, there remains a key role for the contact center in delivering an effective customer experience.  Central to this key role is designing an effective customer experience, comprised of the right sales and service behaviors – those which influence customer attitudes and behaviors in a profitable way yielding the most return on investment.

To provide direction with respect to what sales and service behaviors will yield the most return on investment, Kinesis conducted a series of mystery shops to identify which sales and service behaviors have the most influence on purchase intent. In addition to observing specific sales and service behaviors, mystery shoppers were also asked to rate how the call would have influenced their purchase intent if they had been a real customer. This purchase intent rating was then used as means of calculating the strength of the relationship between each behavior and purchase intent.

To determine the relationship between these service attributes and purchase intent, the data for these different studies was cross-tabulated by the purchase intent rating and subjected to significance testing. [i]

When the percentage of calls in which purchase intent significantly increased is tested against the percentage of calls where purchase intent significantly decreased, nearly all the sales and service attributes are statistically significant at or above a 95% confidence level.

 

Significantly Increased Significantly Decreased Test Statistic
Product knowledge 98% 35% 9.6
Explanations easy to understand 99% 45% 9.0
When thanked, respond graciously 98% 42% 8.5
Friendly demeanor / pleasant voice 100% 60% 8.4
Express appreciation for interest / thank you for business 92% 20% 8.3
Listen attentively 99% 60% 7.3
Ask probing questions 79% 10% 6.4
Offer further assistance 85% 25% 6.2
Speak clearly and avoid bank jargon 98% 68% 5.8
Listen attentively to your needs 80% 25% 5.3
Mention other bank product 99% 75% 5.3
Clear Greeting 95% 60% 5.1
Invite you to visit branch 64% 10% 4.6
Explain the value of banking with bank 57% 5% 4.4
Offer to mail material / mention website 66% 20% 4.3
Ask your name 68% 25% 3.8
Ask for your business / close the sale 57% 21% 2.9
Avoid interrupting 100% 95% 2.9
If no one available to assist you, offered options 100% 0% 2.2
Professional greeting 98% 89% 1.9

 

The differences between the highest and lowest purchase intent for product knowledge and ease to understanding explanations are the most significant, while a professional greeting is the least significant.

Dividing these behaviors into rough quartiles and comparing them side-by-side, reveals some interesting observations:

 

 

Quartile I

Product knowledge

Explanations easy to understand

When thanked, respond graciously

Friendly demeanor / pleasant voice

Express appreciation for interest / thank you for business

 

Quartile II

Listen attentively

Ask probing questions

Offer further assistance

Speak clearly and avoid bank jargon

When thanked, employee respond graciously

 

Quartile III

Listen attentively to your needs

Mention other bank product

Clear greeting

Invite you to visit branch

Explain the value of banking with bank

Offer to mail material / mention website

 

Quartile IV

Ask your name

Ask for your business / close the sale

Avoid interrupting

If no one available to assist you, offered options

Professional greeting

 

The attributes with the most significant differences between high and low purchase intent ratings appear to be those associated with reliability and empathy.  It appears mystery shoppers valued such “core” attributes as product knowledge or interest/enthusiasm for the customer.  They seem to be less concerned with more peripheral service attributes, such as asking for names, etc.  Influencing purchase intent is not as simple as merely using the customer’s name or answering the phone within a short period of time.  Rather it is a much more challenging undertaking of being competent in your job and having the customer’s best interests at heart.

[i] Significance testing determines if any differences observed are the result of actual differences in the populations measured rather than the result of normal variation.  Without getting into too much detail, significance testing produces a test statistic to determine the probability that differences observed are statistically significant.  A test statistic above 1.96 equates to a 95% confidence level, which means there is a 95% chance any differences observed are the result of actual differences in the populations measured rather than normal variation.  For all practical purposes a test statistic over 3.1 means there is 100% chance the differences observed are statistically significant (although in reality the probability never reaches 100%).  Finally, in interpreting the following analysis, it is important note that test statistics are not lineal.  A test statistic of two is not twice as significant as a test statistic of one.  The influence on significance decreases as the test statistic increases.  However, the test statistic does give us an opportunity to rank the service attributes by their statistical significance.


Click Here For More Information About Kinesis'; Bank Mystery Shopping


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Clink Here for Mystery Shopping Best Practices

Changes in Word of Mouth Advertising Based on the Customer Experience – Part 2

Previously we observed changes in customer purchase behavior based on the customer experience. 

Every time a company and a customer interact, the customer learns something about the company, and adjusts their behavior based on what they learn.

To explore this proposition, Kinesis conducted a survey of 500 consumers asking them to recall an experience with any provider that they found to be particularly positive or negative, and determined how these customer experiences influenced customer behavior.

Here is how respondents told us they changed their behavior based on the experience:

Change in Cust Behavior

 

This post specifically addresses positive word of mouth as a result of the experience.

Respondents shared positive word of mouth a median 4.3 times as a result of their positive experience, compared to negative experiences, which were shared about 20% more often (median 5.2 times).  In fact, they were more likely to share negative word of mouth across all mediums:

Word of Mouth as Result of Experience

Positive Experiences

Negative Experiences

Friend or family (Excluding Online or Social Media)

69%

80%

Coworkers (Excluding Online or Social Media)

42%

54%

Online Social Media

28%

47%

Online Reviews

20%

33%

Customers are far more likely to share negative experience using online mediums.  While they are about 1.2 times more likely to share a negative experience with a relative, friend or coworker via an off line medium, they are 1.7 times more likely to share negative experiences over positive via online mediums.

Again, every time a company and a customer interact, the customer learns something about the company, and changes their behavior based on what they learn.  And, as this study shows, they certainly will share this experience with others.   But what about the recipients of this word of mouth advertizing?  How does one customer’s experience influence the behavior of others?

Approximately 90% of respondents said their purchase decisions were influenced positively (93%) or negatively (85%) by social media or word of mouth reviews.

With customer trust at an all time low,  and social media providing a much more far reaching medium of person to person communication, positive word of mouth is becoming far more important in terms of defining the brand.  Increasingly social media is becoming the media.  With 9 out of 10 potential customers saying their purchase decisions are influenced reviews of others, it is increasing important that managers manage their customer experience to support and reinforce the brand.


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Changes in Purchase Behavior Based on the Customer Experience – Part 1

Every time a company and a customer interact, the customer learns something about the company, and adjusts their behavior based on what they learn.

To explore this proposition, Kinesis conducted a survey of 500 consumers asking them to recall an experience with any provider that they found to be particularly positive or negative, and determined how these customer experiences influenced customer behavior.

When asked to characterize the cause of the positive or negative experience, these customers’ descriptions were grouped into four common themes that mirrored each other regardless of whether the experience was positive or negative.  The most common themes for both experiences were: speed of service, pleasantness of personnel, efficiency of service, and the success of the outcome.

Causes of Positive & Negative Experiences

Positive Experiences Negative Experiences
Speed of Service/ Problem Resolution 72% 69%
Pleasantness of Personnel 70% 63%
Efficiency of Service/ Not Passed Around to Multiple People 60% 71%
Outcome Successful/ Problem Resolved/ Expectations Met 55% 49%

The speed of service was cited with about the same frequency (7 out of 10 cases) as a cause of the experience being positive or negative.  Pleasantness of personnel was mentioned 70% of the time as a driver of positive experiences compared to 63% for negative.  Efficiency of service (or lack thereof) was more commonly cited as a reason for the experience being negative (71%) compared to positive (60%).  The fourth most common theme mentioned as a reason for the success or failure of the customer experience is the successful outcome of the experience itself (55% for positive experience, 49% for negative).

Again, every time a company and a customer interact, the customer learns something about the company, and adjusts their behavior based on what they learn.  So…how did these experiences (positive or negative) influence customer behavior?

Here is how respondents told us they changed their behavior based on the experience:

Changes in Customer Behavior Based on Experience

Positive Experiences Negative Experiences
Change in purchase behavior (Buy more or less) 54% 57%
Told others (Positive or negative) 36% 43%
Considered change in purchase behavior 32% 38%
No change 14% 5%

Over half of the respondents said they changed their purchase behavior as a result of the experience, 54% of the customers recalling a positive experience told us they purchased more from the provider as a result of the positive experience, while 57% told us they purchased less as a result of the negative experience.

Furthermore, about a third of the respondents told us they considered a change in purchase behavior as a result of the experience; 32% considered purchasing more as a result of the positive experience, and 38% considered purchasing less as a result of a negative experience.

Finally, roughly four out of ten told others of the experience.  Thirty-six percent of participants told us they gave positive word of mouth as a result of the positive experience, while 43% gave negative word of mouth as a result of the negative experience.

Again, every time a company and a customer interact, the customer learns something about the company, and changes their behavior based on what they learn.  The two primary ways customers change their behaviors based on the customer experience is both their own purchase behavior and sharing the experience with others.

The next post in this series explores how customers share the experience with others and the ultimate influence this word of mouth advertising has on others.


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Own the Call: A Key to Customer Loyalty

What service attributes from your agents drive customer loyalty?

To answer this question, Kinesis conducted surveys of people who had recently called a contact center. Impressions of the customer experience with particular attention to the performance of the agent were collected across a variety of attributes. In order to determine the relationship of these attributes to customer loyalty, we identified each customer as a promoter or detractor as a result of the call, according to the Net Promoter methodology. Net Promoter is generally accepted as a strong proxy measurement for loyalty, and serves as the basis for evaluating the relationship of these attributes to customer loyalty.

It’s the People

Not surprisingly, the performance of the individual agent weighs heavily on customer loyalty. The average overall impression rating (on a 5-point scale) of the agent is 1.4 times higher in calls where the customer was identified as a promoter (4.9) compared to those identified as detractors (3.5).

Further evidence of the importance of the agent can be found in a comparison of the specific attributes ratings for promoters compared to detractors.

Promoter

As Result of Call

Detractor

As Result of Call

Took Ownership of Call 4.9 3.2
Confidence in Agent 4.9 3.3
Value as a Customer 4.8 3.6
Interest in Helping 4.9 3.8
Use of Understandable Terms 5.0 3.7
Job Knowledge 5.0 3.8
Professionalism 5.0 4.0
Friendliness/Courtesy 5.0 4.3

The agent taking ownership of the call and the confidence the customer had in the agent are both 1.5 times stronger in calls where the customer is a promoter as a result of the call, compared to calls where they are a detractor.

Own the Call

What does ownership of the call mean?

Ownership of the call was defined in this survey as the extent to which the agent appeared to be the voice of the company, took responsibility for the customer’s concerns, showed a desire to be of assistance, and advised of possible solutions and assured resolution.

Every time a company and a customer interact, the customer learns something about the company, and adjusts their behavior based on what they learn. When customers encounter a contact center agent who owns the call, they learn that the company, through the agent, cares about their needs, wants to help resolve the need, and will stay engaged until the need is met. Customers respond to this information with an increased desire to positively spread word of mouth, a behavior strongly correlated to customer loyalty.

What are some of the ways you take ownership of the call?


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The 5 Service Dimensions All Customers Care About

Reprinted with permission from Chris Arlen, of Service Performance.

by CHRIS ARLEN

Not All Dimensions Are Equal

All dimensions are important to customers, but some more than others.

Service providers need to know which are which to avoid majoring in minors. At the same time they can’t focus on only one dimension and let the others suffer.

SERVQUAL research showed dimensions’ importance to each other by asking customers to assign 100 points across all five dimensions.*

Here’s their importance to customers.

The 5 Service Dimensions Customers Care About

SERVQUAL

What’s this mean for service providers?

#1 Just Do It

RELIABILITY: Do what you say you’re going to do when you said you were going to do it.

Customers want to count on their providers. They value that reliability. Don’t providers yearn to find out what customers value? This is it.It’s three times more important to be reliable than have shiny new equipment or flashy uniforms.

Doesn’t mean you can have ragged uniforms and only be reliable. Service providers have to do both. But providers first and best efforts are better spent making service reliable.

Whether it’s periodics on schedule, on-site response within Service Level Agreements (SLAs), or Work Orders completed on time.

#2 Do It Now

RESPONSIVENESS: Respond quickly, promptly, rapidly, immediately, instantly.

Waiting a day to return a call or email doesn’t make it. Even if customers are chronically slow in getting back to providers, responsiveness is more than 1/5th of their service quality assessment.

Service providers benefit by establishing internal SLAs for things like returning phone calls, emails and responding on-site. Whether it’s 30 minutes, 4 hours, or 24 hours, it’s important customers feel providers are responsive to their requests. Not just emergencies, but everyday responses too.

REPORTING RESPONSIVENESS

Call centers typically track caller wait times. Service providers can track response times. And their attainment of SLAs or other Key Performance Indicators (KPIs) of responsiveness. This is great performance data to present to customers in Departmental Performance Reviews.

#3 Know What Your Doing

ASSURANCE: Service providers are expected to be the experts of the service they’re delivering. It’s a given.

SERVQUAL research showed it’s important to communicate that expertise to customers. If a service provider is highly skilled, but customers don’t see that, their confidence in that provider will be lower. And their assessment of that provider’s service quality will be lower.

RAISE CUSTOMER AWARENESS OF YOUR COMPETENCIES

Service providers must communicate their expertise and competencies – before they do the work. This can be done in many ways that are repeatedly seen by customers, such as:

  • Display industry certifications on patches, badges or buttons worn by employees
  • Include certification logos on emails, letters & reports
  • Put certifications into posters, newsletters & handouts

By communicating competencies, providers can help manage customer expectations. And influence their service quality assessment in advance.

#4 Care about Customers as much as the Service

EMPATHY: Services can be performed completely to specifications. Yet customers may not feel provider employees care about them during delivery. And this hurts customers’ assessments of providers’ service quality.

For example, a day porter efficiently cleans up a spill in a lobby. However, during the clean up doesn’t smile, make eye contact, or ask the customer if there is anything else they could do for them. In this hypothetical the provider’s service was performed fully. But the customer didn’t feel the provider employee cared. And it’s not necessarily the employees fault. They may not know how they’re being judged. They may be overwhelmed, inadequately trained, or disinterested.

SERVICE DELIVERY MATTERS

Providers’ service delivery can be as important as how it was done. Provider employees should be trained how to interact with customers and their end-users. Even a brief session during initial orientation helps.  Anything to help them understand their impact on customers’ assessment of service quality.

#5 Look Sharp

TANGIBLES: Even though this is the least important dimension, appearance matters. Just not as much as the other dimensions.

Service providers will still want to make certain their employees appearance, uniforms, equipment, and work areas on-site (closets, service offices, etc.) look good. The danger is for providers to make everything look sharp, and then fall short on RELIABILITY or RESPONSIVENESS.

At the End of the Day

Customers’ assessments include expectations and perceptions across all five SERVQUAL dimensions. Service providers need to work on all five, but emphasize them in order of importance. If sacrifices must be made, use these dimensions as a guide for which ones to rework.

Also, providers can use SERVQUAL dimensions in determining specific customer and site needs. By asking questions around these dimensions, providers can learn how they play out at a particular location/bid opportunity. What dimensions are you in?

* For a description of the SERVQUAL methodology, see the following post: SERVQUAL Model: A Multi-Item Tool for Comparing Customer Perceptions vs. Expectations


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SERVQUAL Model: A Multi-Item Tool for Comparing Customer Perceptions vs. Expectations

5 Dimensions

Looking for a tried and true model to understand your service quality?

The SERVQUAL model is an empiric model that has been around for nearly 30 years. While not new, it is a foundation of many of the service quality and customer experience concepts in use today. It is a gap model designed to measure gaps between customer perceptions relative to customer expectations.

SERQUAL describes the customer experience in terms of five dimensions:

1. TANGIBLES – Appearance of physical facilities, equipment, personnel, and communication materials
2. RELIABILITY – Ability to perform the promised service dependably and accurately
3. RESPONSIVENESS – Willingness to help customers and provide prompt service
4. ASSURANCE – Knowledge and courtesy of employees and their ability to convey trust and confidence
5. EMPATHY – Caring, individualized attention the firm provides its customers

Each of these five dimensions is measured using a survey instrument consisting of individual attributes which role up into each dimension.

For example, each of the five dimensions may consist of the following individual attributes:

Tangibles
• Appearance/cleanliness of physical facilities
• Appearance/cleanliness of personnel
• Appearance/cleanliness of communication/marketing materials
• Appearance/cleanliness of equipment

Reliability
• Perform services as promised/right the first time
• Perform services on time
• Follow customer’s instructions
• Show interest in solving problems

Responsiveness
• Telephone calls/other inquiries answered promptly
• Willingness to help/answer questions
• Problems resolved quickly

Assurance
• Knowledgeable employees/job knowledge
• Employees instill confidence in customer
• Employee efficiency
• Employee recommendations
• Questioning to understand needs

Empathy
• Interest in helping
• Individualized/personal attention
• Ease of understanding/use understandable terms
• Understand my needs/recommending products to best fit my needs
• The employees have my best interests at heart

Call to Action

Research without a call to action may be informative, but not very useful. By measuring both customer perceptions and expectations, SERVQUAL gives managers the ability to prioritize investments in the customer experience based not only on their performance, but performance relative to customer expectations.

The first step in taking action on SERVQUAL results is to calculate a Gap Score by simply subtracting the expectation rating from the perception rating for each attribute (Gap Score = Perception – Expectation). This step alone will give you a basis for ranking each attribute based on its gap between customer perceptions and expectations.

Service Quality Score

In addition to ranking service attributes, the Gap Score can be used to calculate both a Service Quality Score based on the relative importance assigned by customers to each of the five service quality dimensions.

The first step in calculating a Service Quality Score is to average the Gap Score of each attribute within each dimension. This will give you the Gap Score for each dimension (GSD). Averaging the dimension Gap Scores will yield an Unweighted Service Quality Score.

From this unweighted score it is a three step process to calculate a Weighted Service Quality Score.

First, determine importance weights by asking customers to allocate a fixed number of points (typically 100) across each of the five dimensions based on how important the dimension is to them. This point allocation will yield a weight for each dimension based on its importance.

The second step is to multiply the Gap Score for each dimension (GSD) by its importance weight. The final step is to simply sum this product across all five dimensions; this will yield a Weighted Service Quality Score.

Click here for a more detailed step by step description of score calculation.

What does all this mean?  See the following post for discussion of the implications of SERVQUAL for customer experience managers: The 5 Service Dimensions All Customers Care About.

5 Steps to Make Frontline Employees Authentic Representatives of the Brand

Actions speak louder than words.  Brands spend millions of dollars on external messaging to define an emotional connection with the customer.  However, when a customer perceives a disconnect between an employee representing the brand and external messaging, they almost certainly will experience brand ambiguity.  The result severely undermines these investments; not only for the customer in question, but their entire social network.  In today’s increasing connected world, one bad experience could be shared hundreds if not thousands of times over.

Bottom line, frontline employees must be authentic representatives of the brand.

Simple enough, right?  Nearly all rational managers will agree with the above statement.  But how does management ensure that employees animate the brand? – It is a process of alignment.

Here are five steps to align the customer experience with external messaging:

  1. Align external messaging with customer expectations:   Repeatedly test the effect of external messages on customer expectations.  Ask yourself, what expectations are we instilling based on our messaging?  Additionally, the next four steps will help ensure that operational staff fully understand and are equipped to handle these promises made to customers.
  1. Align customer expectations with company service standards:  Even in the most sophisticated and progressive companies, standards of service delivery can be out of sync with customer needs and expectations. One reason is that customers are seldom involved in the writing of these standards. Rather, service standards tend to be the product of mid-management committees, resulting in a hodge-podge of ideas and opinions that are more a reflection of operational expediency than of customer expectations.  A better practice is to calibrate service standards against customer needs, expectations and experiences.
  1. Align service standards with training content:  Training should arise from standards, not vice versa.  Bring training managers into the process from the beginning, ensuring that as standards are adjusted, training content will follow.
  1. Align training content with frontline execution:  The success of most training programs is measured in terms of the participant’s ability to recall the content, rather than to apply the information on the job.  A more proactive practice is to identify specific deficiencies in service delivery and adjust training content to address those deficiencies.
  1. Align frontline execution with rewards and incentives:  At the managerial level, incentives tend to be in the form of quarterly bonuses linked to metrics such as customer satisfaction and service execution scores.  However, you can go farther.  Depending on the data available, consider rewards on a much more immediate and shorter cycle.  For example, on a daily basis, call centers agents can receive bonus points that are immediately redeemable at on-line redemption sites.  Or a bank teller may receive an immediate reward if they display the appropriate behavior to a mystery shopper. Thus, employees receive quick, meaningful rewards that reinforce the specific skills that are needed to improve customer experiences.

These are five steps to align the customer experience with external messaging.  How do you ensure your frontline employees are authentic representatives of the brand?


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Shareholder Return and the Customer Experience: A Case for Investment in the Customer Experience

I recently came across a very intriguing bit of research that suggests the benefits of investments in the customer experience in terms of shareholder return.

Great customer service processes and people are not built overnight. They take years of investment to cultivate. Unfortunately, for some publically traded companies, the short-term demands of Wall Street make such investment difficult. The demands of investors to meet earnings estimates for the next quarter can make it difficult for managers to invest in the customer experience – the payback is too slow and uncertain.

Stockholders have little patience nowadays with investments that do not show a clear and quick return. To ensure that managers are acting in the owners’ interests, management incentives are more frequently tied to quarterly financial performance than to difficult-to-measure variables like customer loyalty.

Given great customer experiences are not built overnight, they are constantly at risk of budget cuts by managers who would boost short term earning at their expense. Service initiatives have a tendency to come and go in large companies before they have a chance to prove their worth, resulting in customer frustration, employee cynicism and widespread service mediocrity.

Service gurus talk about the need for “investor loyalty” as a counterbalance to customer loyalty, but that requires a visionary, motivated and stable management team who can convince investors to look farther ahead.

Easier said than done, right? How does one make the case for investments in the customer experience in an environment that demands making the next quarters numbers?

Jim Picoult, founder of Watermark Consulting, has an answer. Jim has created a stock index based on Forester’s annual Customer Experience Index (CXI). Jim calculated the returns of two hypothetical portfolios consisting of the top and bottom 10 publicly traded companies in Forester’s CXI for a six year period ending in 2012. Each year he rebalanced the two portfolios based on Forester’s new rankings. The portfolio comprised of companies ranked in Forester’s top 10 yielded a cumulative return of 43%, compared to 14.5% for the S&P 500. The portfolio containing the bottom 10, yielded a cumulative return of negative 33.9% – it lost a third of its value.

Customer Experience Leaders Outperform the Market

Now, correlation is not causation, and there are a lot of factors at play here. But clearly the managers of firms in the portfolio of Forester’s top 10 were able to both deliver shareholder value and invest in the customer experience.

It all comes down to thinking of the customer as an asset in which to invest and realize a return.


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Customer Loyalty Is an Illusion

A colleague of mine is fond of saying there is no such thing as customer loyalty. He argues loyalty…true loyalty…loyalty through thick and thin – requires an irrational customer, one who will stay with you regardless of the outcome.

The fact of the matter is customers are rational. What we perceive as loyalty is an illusion, rather it is actually the product of an ongoing calculation each customer makes to either initiate or maintain a relationship with a provider. This is the customer value equation.

Customer Value Equation

The customer value equation is simply the ratio of the benefits of a product or service over the costs of the product or service. If this ratio is greater than 1, the customer will act as if they are loyal. If this ratio is less than 1, the customer will behave as if they are disloyal.

The numerator in this equation contains all the possible benefits associated with the product or service. These include the obvious, such as the quality of the results and the process quality. However, they also include less obvious intangible benefits. The owner of a luxury car, for example, may perceive an intangible benefit of status associated with this luxury vehicle.

The denominator contains the sum of all the costs associated with the product or service. Again, the obvious costs are price. However, there may be other acquisition costs, such as installation or maintenance. Additionally, this should include intangible costs such as potential risk of switching.

As customer experience researchers, we are constantly considering the customer value equation to provide context from which to interpret our research.

Furthermore, understanding the customer value equation gives managers a rational framework to make investments in product, positioning, price and place to best match their offering with their customers’ value equation.

How might a manager use the concept of the customer value equation to manage the customer experience?


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