How to measure Customer Loyalty
Customer Loyalty is something more than Customer Satisfaction. It entitles the emotional connections and customer experience about company and company’s culture and image, about people working for this company and products and processes employed in this particular company. Customer Loyalty in general is behavior which customer exhibit by making repeat purchase from the certain company or brand. Among the customers, who are satisfied we have different levels of satisfactions: somewhat satisfied, satisfied and very satisfied. As different studies shows that only very satisfied customer aim to recommend you to the others and only among these very satisfied you will find those who are the loyal customers.
Basic Customer Loyalty model
In overall this is a business model in which all company recourses allocated and employed that way to increase the customer loyalty.
This model is described in the book “Improving Customer Satisfaction Loyalty and Profit” the authors Johnson M.D. and Gustafson A. They claim that contemporary trends in the company’s strategies moves from quality to the customer. In particular authors claims that trends goes from / beyond the quality or even satisfaction of the product/ service quality towards the building customer loyalty. In their book they pay a lot of attention to the link Quality – Satisfaction (from the product/ service) – Customer Loyalty – Profit of the company (what reflects the efficiency of the company business activities).
In the article “Loyalty – based Management. Harvard Business Review 1993” the author F. F. Reichheld. talks about importance for the customer oriented company to build Customer Loyalty and claims that: “Customer loyalty has tree second-order effects: (1) revenue grows as the result of repeat purchases and referrals, (2) costs decline as result of lower acquisition expenses and from the effectiveness of servicing experienced customers, (3) employee retention increases because of job pride and satisfaction increase.”
Measurement of Customer Loyalty
In his book R. Best looks deep inside of the problem of investigation and studying of the relationship between the company and its customers and offers different models and indexes linked to this point. One of the key success factors, which R. Best see for the company now days is the Customer focus strategy resulting in the customer satisfaction and customer loyalty to the company. Author shows the links between Customer satisfaction and company profitability using activity based accounting methods. Also he offers the model how to make the parameter of Customer Loyalty measurable:
In this model Customer Recommendation considered as one of the most important elements. In case Customer recommendation index will be measure as zero, overall loyalty index of the company will be zero as well.
This approach is which follows R. Best, is in frame of Customer Relationship management approach (CRM) or strategy.
Another proposed measurement method to assess the Customer Loyalty is Net Promoter Score (NPC) is recently developed and introduced by Fred Reichheld, Bain & Company, and Satmetrix.36Author of this method claims that this is the easiest way to identify how loyal are your customers to you. Due to the fact that Loyalty is purely behavioral, the only important for the company to know are our customer willing to recommend us to the others. All customers are grouped into three groups: Promoters, Passive, and Detractors. NPC is measured by asking customers with only one question:”How likely will you recommend our company to the friend or the colleague?” Answers should be given based on the scale from 0 to 10. Based on their responses, customers are categorized into one of three groups: Promoters (9-10 rating), Passives (7-8 rating), and Detractors (0-6 rating). The percentage of Detractors is then subtracted from the percentage of Promoters to obtain a Net Promoter score. A score of 75% or above is considered quite high. Authors of the model claim that it is very easy and universal tool, which can be implemented in different industries and reflect precisely customer loyalty.
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