How to Measure True Customer Loyalty
Dr Phil Klaus argues that NPS, Customer Satisfaction and loyalty transactions deliver only very little evidence of what is really going on.
We are all aware that loyalty programmes or cards do not guarantee customer loyalty. Point-of-sale systems and data analysis will always ‘reveal’ that your loyalty programme works, because every time you see a transaction, it is accompanied by the use of a loyalty card. Correct?
Subsequently, you believe that your programme is working – after all, you have the evidence to prove it. And not only that, you can combine these insights with other data to prove your point, using the usual suspects, such as NPS and Customer Satisfaction. So all seems to be fine, or isn’t it?
Customer engagement strategies
How Valuable are NPS and Customer Satisfaction Scores?
The reality, however, is that this often could not be further from the truth. NPS, Customer Satisfaction and loyalty transactions deliver only very little evidence of what is really going on.
Allow me to give you an example from one of our clients, who was convinced that their loyalty programme was working by applying the logic I mentioned above, i.e., customers are using our card, we can measure their purchases, and both customer satisfaction and NPS are high. Still, they lost customers to their competitors and sales growth came to a halt.
We created awareness that most customers these days hold more than one loyalty card (from them and their competitors). Today’s customers, unlike earlier generations, display multi-brand rather than single-brand loyalty. In addition, customers might also purchase from competitors not offering a loyalty programme. Therefore, we hypothesised based upon our experience with these challenges from our work with other clients that their data proves very little about what is really going on.
We went on to measure the share-of-category (or share-of-wallet), which is the only accurate measurement of ‘true’ loyalty. True loyalty refers to how much of their available budget customers are spending at your company versus your competitors. In layman terms: share-of-category measures if customers put ‘their money where their mouth is’, by measuring their purchasing behaviour in relation to all competitors.
The analysis was rather revealing; the client was surprised to see that even what they estimated would be ‘very loyal’ customers were not. Once the share-of-category measurement was applied, the client immediately realised the flaws of their existing data analysis.
But it didn’t end there, we also took a closer look at the indicators previously known as ‘reliable’ sources of customer insight: NPS and customer satisfaction.
Our analysis mirrored the findings of my colleagues researching share-of-category customer insight for quite some time. There is very little evidence that there is a significant correlation between NPS and share-of-category, the same is true for the relationship between Customer Satisfaction and share-of-category. To be more precise, according to longitudinal research conducted across a vast array of companies around the globe (ranging from the simple, mundane, all the way to complex and high impact offerings) the relationship between NPS/Customer Satisfaction and share-of-category (your customers purchasing behaviour) is weak, explaining an average of 1 per cent of customers’ share-of-category allocation.
I believe we can state that if what you are measuring explains only 1 per cent of the share-of-category variations, you might be missing some valuable information. This is just one example of what led managers, consultants and scholars challenge both, the relationship between customer satisfaction/NPS and purchasing behaviour, and the notion that NPS/customer satisfaction can actually be linked to performance.
Armed with this knowledge, managers have to ask themselves if NPS and customer satisfaction are worth the cost? Does it make sense to measure what has no impact on share-of-category, and therefore profitability? And even if you do want to go down this road, and try to add share-of-category as a measure, you are still lacking the insight on why the share-of-category increased or declined.
SEE ALSO: Building Brand Loyalty Through Rewards and Engagement
Utilising Customer Experience Quality
Without answering the why question, the answer to the question of what customers do makes very little sense. This is where measuring customer experience quality (EXQ) comes in, which explains what drives customer behaviour in detail and demonstrates its value for managers. EXQ, for example, outperforms both NPS and customer satisfaction significantly in terms of explaining and predicting share-of-category.
By combing the drivers (the why) of share-of-category with the outcomes (increase/decrease in share-of-category) managers convert insights into actionable results, increasing their company’s profitability.
A loyalty programme does not lead to loyal customers and you need to explore ‘true’ loyalty requires benchmarking yourself against your competitors by measuring share-of-category. NPS and Customer Satisfaction do not explain and predict share-of-category, which is instead driven by customer experience and so you need to measure this category by using EXQ.
Combining insights of what drives your customer’s purchasing behaviour (via EXQ) and how it influences their share-of-category, you can make certain that your insights drive ‘true’ loyalty, and profitability.
Dr. Phil Klaus is a Professor of Customer Experience and Marketing Strategy. His award-winning research has appeared in a wide range of journals and he is a frequent keynote speaker at public and in-company seminars and conferences around the world.
He advices blue-chip companies on CX strategy and has written the best-selling book ‘Measuring Customer Experience - How to Develop and Execute the Most Profitable Customer Experience Strategies’.