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.
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?