Create Customer Loyalty
Recent studies provide empirical evidence of something we already know intuitively: customer loyalty is a key driver of profitability. Creating customer loyalty must be an integral part of your organization's strategy - particularly in a time of industry consolidation. Understanding customers' requirements is fundamental to business success. The most important basis for strategy development, however, is a comprehensive understanding of what drives customer loyalty and how strong those drivers are.
The key to understanding what drives your customers' loyalty lies in finding answers to the following questions:
The first step in answering these questions is to measure both customer satisfaction and customer loyalty. These data can then be analyzed to determine key linkages to and drivers of customer loyalty. A brief commentary about each of these topics follows.
Measuring customer satisfaction:
Customer satisfaction is measured because it contributes to customer loyalty. The trick is determining how specific elements of customer satisfaction lead to customer loyalty. Once you have established the most important components of a company's delivery package, for example, you might then ask customers to rate the company in each of the following categories: (1) scheduling acceptable delivery dates; (2) meeting promised delivery dates; (3) providing advanced notification of delivery delays; and (4) rescheduling delivery dates as requested by the customer.
Measuring customer loyalty:
Customer loyalty relates to probable behaviors. To measure customer loyalty, you must develop specific dimensions of customer loyalty to determine the description and intensity of customer loyalty in aggregate and within each core segment of key customer served. It is essential to have a solid grasp of which factors in your business relationship with your customers are most important to them. This means developing a comprehensive understanding of your customer's business and doing some very objective listening.
Determining the key drivers of customer loyalty:
After you measure customer loyalty and customer satisfaction, you can then identify key drivers of customer loyalty through multiple linear regression analyses.
These analyses reveal the following:
These analyses provide the knowledge and understanding that serve as the foundation for developing objectives, strategies, and tactics that will result in increased customer loyalty. Note that these strategies and tactics are predictive: they address future behaviors (i.e., what is required to obtain an increased share of a customer's business). Continuous improvement in those aspects of the business relationship most important to your customers is essential to creating customer loyalty.
Analysis in Action
The following case study illustrates how one company, working in conjunction with a consultant, applied these concepts to improve business results. Truck-Lite, a Penske company, provides vehicle safety lighting systems to the truck aftermarket. Sales are through independent distributors and through dealers owned by truck and trailer manufacturers. Both the distributors and dealers sell to fleet operators.
Truck-Lite sells into a classic "mature" market. There is an excess of used trucks and trailers, fleet operators are operating on very slim margins, and consolidations are occurring across the board among OEMs, distributors, and fleets.
Truck-Lite's managers asked themselves: "How do we compete beyond price?" To find answers, they conducted research to determine the degree of their customers' satisfaction and - more importantly - the degree of their customers' loyalty.
The first step was to determine customer satisfaction "factor" importance, i.e., what aspects of customer satisfaction were most important to their customers. This determination was made for each segment of the business.
The next step was to identify ways in which customer loyalty might be manifested in each segment of their business. They then developed survey questions for each of these potential manifestations.
Truck-Lite surveyed a broad cross-section of customers, analyzed the results, and then established driver/behavior sets. To illustrate a driver/behavior set, Truck-Lite's research determined that "accurate delivery information" was a driver for the behavior "increase purchases from Truck-Lite."
The company then developed action plans to improve the level of satisfaction with those factors determined to be key drivers of customer loyalty. Progress was monitored carefully, and in some cases, progress could be determined internally. Delivery accuracy, for example, can be readily tracked. Truck-Lite also initiated a random follow-up process to obtain relevant information directly from customers.
The results were positive. In a mature market - and in a weak economy - revenues increased and profit margins improved.
Implications for Other Companies
Many companies today are operating in mature markets where there is too little demand and too much capacity - and all indications are that these markets will become ever more challenging. In such an environment, you cannot afford to waste time and energy on customers with whom you have no legitimate opportunity to become the supplier of choice.
In the quest for improved business results, there are no easy answers or quick fixes. Successful companies will focus on the basics of the business: cost, quality, and timeliness. They will also act to increase profitability by creating loyal customers.
Bob Krok and Jim Teegarden are founding members of Valpers Performance Partners, Inc. (VPP), a consulting firm specializing in results-driven intervention management. For more information about VPP, visit www.valperpar.com or contact the authors at (281) 313-5116 .
Many more articles in Customer Service in The CEO Refresher Archives