SATISFACTION, LOYALTY, AND THE FUTURE OF PAST EXPERIENCE
LARS LASMUSSEN WAS standing onstage showing the new software that he and his team had been developing in Sydney, Australia, for the past two years. The Danish-born PhD was no stranger to the audience of software developers. This was the man who back in 2003 cofounded a company called Where 2 Technologies, which was acquired shortly after by Google to create Google Maps.1 With the success of Google Maps under his belt, Rasmussen was now showing his new program, and was occasionally interrupted by applause from the crowd. Rasmussen was now working for Google, which was going to launch the new software in a few months. And since Google enjoyed tremendous goodwill from millions around the world, hopes for the software ran high.
But today, the past doesn’t matter as much as it used to. Not Google’s past triumphs. Not Rasmussen’s past successes. The software he showed that day would be suspended a few months later. Actors have been saying for decades that “you’re only as good as your last gig.” These days, even your last gig doesn’t matter that much anymore. Fortunately or not, it’s the absolute value of your current product that drives its success.
In the past, when assessing quality was difficult, we heavily relied on our past experiences as consumers. When good information was hard to get, relying on our previous positive experience with a brand made sense. If we liked the Sony Walkman, we used this to infer that Sony also made good CD players. If we liked their CD player, that meant that Sony probably made good laptops. . . . But in a world with good, low-cost information, we can easily start from scratch each time. The fact that Sony made great products in the past is very nice, but we no longer need to use this information to judge whatever else Sony introduces. This has major implications for the significance of satisfaction and loyalty.
Let’s go back for a moment to Planet Absolute—that utopian world where the sidewalks are paved with accurate quality information. You press a button and know the absolute value of things, and how well those values fit your preferences. Suppose you drove a Brand X car on that planet and you had a wonderful experience driving and owning it. On a scale of 0 to 10, you’d give it a 9—you were highly satisfied. After a couple of years of driving this car, you decide to buy a new one. If all you had was this internal rating of 9, this information would have been extremely valuable to you. But on Planet Absolute you can press that magic button and know for sure what your experience quality will be with the current Brand X models and whether any other car you’re considering might provide a better experience. So you care less about your past experience. The answers for all cars (not just the one you drove) are simply out there.
This is starting to happen on Planet Earth, too. Think of the way we make decisions about rental movies these days. The fact that we can get good information about movies through services such as Rotten Tomatoes or IMDb means that our satisfaction with the past work of the movie creators is less relevant. Suppose you’re considering renting the movie Swept Away, directed by Guy Ritchie, who also directed one of your favorite films—Snatch. Without additional information, your past experience with Snatch would drive you to rent Swept Away. But when you check Rotten Tomatoes, you see that Swept Away got an average rating of 5 from film critics (not 5 stars . . . that is 5 out of 100!). The audience was a tad more generous with the movie, giving it an average rating of 27 percent, which is still very poor. After you read just a few short reviews (a typical one: “Don’t count on being swept away by this contrived, predictable shipwrecked romance”), you’re much less likely to rely on your experience with Snatch in making a decision regarding Swept Away. Studios will probably continue to push movies by highlighting the past achievements of their creators (“From the producers of . . .” or “from the director of . . .”), but these tactics will have a diminishing impact.
We both like the cars we drive. Itamar likes his sporty Audi (a lot) and Emanuel likes his good old Volvo. Yet how much weight will our prior experience play when we buy new cars? Not much. It’s just so easy to get a good idea about what it means to own other cars. Audi and Volvo will have to compete for our business while getting little credit for our prior good experience.
LOYALTY OR OPEN MARRIAGE?
Marketers love to talk about loyalty and long-term relationships with customers, but these days, more and more consumers see their relationships with companies as an open marriage. Here are just a couple of examples: A 2012 Deloitte study demonstrated a sharp decline in loyalty to hotel chains, with only 8 percent of survey respondents saying that they always stay at the same hotel brand. While there might be different factors that underlie this trend, at least part of it is driven by consumers’ ability to use tools like price comparison sites, review sites, and other sources to assess the absolute value of each hotel before deciding where to stay.2
Here’s another example: Executives at Research in Motion (RIM) (now “BlackBerry”), used to often talk about their millions of passionate and loyal customers. They weren’t making this up. Millions of people around the world loved their BlackBerry device at one point or another. Some loyal users were so addicted to their gadgets that they would refer to them as “crackberries.”3 And yet all this goodwill didn’t help much when RIM wasn’t keeping up with Apple and Android phones. In surveys conducted in the past couple of years, a significant percentage of BlackBerry users said that they were going to switch.4 Not long before this book went to print, RIM released the BlackBerry 10 and it remains to be seen if it can stop the decline. Yet it’s clear that many BlackBerry users did not stick around just because they were “loyal.”
Something about the gap between managers and consumers in the way they view loyalty can be learned from the following study: In 2012, the CMO Council conducted a global study among marketing executives in the mobile industry. High on their list of goals, these executives listed building stronger affinity with existing customers and growing loyalty and advocacy. The same organization conducted a study among mobile subscribers and asked them to characterize themselves as customers. Only 29 percent saw themselves as loyalists. Most subscribers described themselves using phrases such as “Show me better service, better packages, or better phone upgrades and I am switching” or “I don’t care who I do business with, just as long as my phone works” or “I will go where the latest and greatest technology is.”5
We don’t blame marketers for valuing loyalty so much. It seems only fair that a company will be rewarded for its past good deeds. It instills a positive message for the entire organization, and the profit impact calculations are impressive; it also has other significant potential benefits, such as a predictable cash stream, customers who are less price sensitive, reduced marketing costs, and serving as a barrier from entry to competitors.6 Not surprisingly, textbooks, articles, loyalty gurus, and others have repeated the mantra that loyalty is the key to profitability; various statistics have been used, such as the impact of addressing a complaint on repeat purchase and the lower cost of retaining customers than acquiring new customers. Furthermore, books, executive education programs, and consultants have taught managers how to compute customers’ lifetime value, which is supposed to guide the amount of money and effort a company can afford to spend on new customer acquisition.
Despite the allure of such arguments, they are becoming less compelling and less relevant. Once the arrangement becomes more like an open marriage, whereby a customer looks for the best available option for each new purchase, theoretical lifetime value calculations are just that, mostly theoretical. Long-term relationships (especially when switching costs are low) become the exception. There is no point making marketing decisions based on lifetime value calculations if that potential is unlikely to be realized. Relying on customers’ lifetime value makes the most sense when customers tend to spend an extended period of time with the company.
The decline in loyalty is most pronounced in categories characterized by separable, discrete purchases, such as cars and cameras, particularly where switching costs are manageable. It is slower when continuous relationships are involved (working with a bank, accountant, and in many B2B services), and when it is expensive and/or time consuming to move to a different vendor. But these days loyalty for stand-alone products has already become less common and less robust, because the available information makes it much easier to rely on more accurate, product-specific quality assessments. When it was harder to obtain accurate information, relying on your previous positive experience with a brand made sense, but when the answer is out there, you don’t necessarily need to stick with your past choices. In fact, from a consumer’s perspective, loyalty can often be an inferior input, because quality and performance can vary greatly across products by the same company. This means that even if consumers had a good experience with other products by the same brand, each new purchase decision needs to be earned based on the product’s actual capabilities.
It also means that measuring consumers’ loyalty and its value to the company, especially where each product purchase (for example, a computer or a camera) is an infrequent event, is less meaningful and informative than it used to be. Consider, for example, the popular Net Promoter Score (NPS). A key ingredient in this method is measuring the percent of “promoters” who are defined as “loyal enthusiasts who keep buying from a company and urge their friends to do the same.”7 But the notion that people can be divided into chronic company promoters (or detractors) is misguided in a world where consumers increasingly evaluate specific products on their merit. A customer may be a promoter of one Samsung phone but be a detractor for the next model. Holistic brand or company measures are becoming less useful.
OPPORTUNITY KNOCKS
As with the decline of brand equity, the decline in the impact of consumer loyalty can present significant opportunities. If you feel a decline of loyalty among your customers, your competitors probably face the same problem (especially if, like most companies, quality and the relative competitive advantage or disadvantage of their products is uneven across their product lines). When consumers can easily assess the absolute value of products, more purchase decisions are in play. Targeting your competitors’ current customers can be more effective than it used to be. If you offer a better solution than your competitors, don’t hesitate to show it to their followers (not a new strategy, of course, but it may become more effective). If indeed your product is superior in ways consumers care about, its merit will become apparent to them faster than in the past.
We also have some good news to marketers whose last product was less than perfect: You may be getting a better second chance. The decline of past experience signifies a somewhat more forgiving era. Not that we recommend that you screw up. In fact, if you do, the market has no mercy, as is evident from numerous failures of products that didn’t deliver, and the verdict these days is faster (as we explained in Chapter 3). Also, people are likely to remember your mistakes longer than your achievements since the impact of a negative experience is much greater than that of a positive one. Having said all that, consumers’ diminishing reliance on past experience can help marketers. Here’s an example: Suppose that you ate at a new French restaurant in your town, and you had a so-so experience. A few months later you search Zagat for a place to eat and you come across that restaurant again. Based on your past experience, your decision would be not to go to that place again. But then you notice that the average rating of that restaurant has gone up. You take a peek at some reviews and notice that people rave about the coq au vin and crème brûlée (neither of which you tried when you were there). Some other people say that the chef’s tasting menu is amazing and really the best way to go. Your past (“so-so”) experience is facing some competition and you may actually decide to give this place a second chance.
This can happen on a much larger scale, as illustrated in the case of Hyundai. The first car from Hyundai to be imported into the United States was the Hyundai Excel. David Letterman had a joke that illustrates the public’s reaction to the car: As part of the Top Ten Hilarious “Mischief Night” Pranks to Play in Space, No. 8 read: “Paste a ‘Hyundai’ logo on the main control panel.” There were numerous similar jokes. It was a pretty bad car. The company kept struggling with quality for several years, but over time quality became the focus and Hyundai’s reputation for product quality increased. A ten-year/100,000-mile warranty on engines and transmissions helped as well, and their U.S. sales rose an average of 14 percent a year.8
The most dramatic leap came in 2004, when in a study by J. D. Power, new-car buyers ranked Hyundai higher in initial quality than any domestic or European manufacturer.9 It was Hyundai’s good fortune that by then close to 70 percent of the U.S. population was already on the Internet and had access to this news (among new-car buyers the Internet penetration was probably even higher). Today Hyundai is one of the leading brands in the United States and its plant in Alabama can’t build cars fast enough. Despite a rough start, Hyundai got a second chance from the North American consumer. When customers can quickly get a good idea of how good (or bad) a new product is, a company has a better chance to reverse its course.
Bottom line: The decline of past experience goes both ways. The bad news is that you can never rest on your laurels. The good news is that more decisions are in play and you have better second chances.
ON SATISFACTION
Let’s shift gears for a moment for a fun exercise. Think of it as a field trip that will help us clarify some concepts related to satisfaction. Start by going to Yelp or Zagat (or any other restaurant review site) and find a restaurant in your area where you’ve never eaten before. Find one that you think you’d like. Read five or more reviews. If you feel that this isn’t the right restaurant for you, read a few reviews about a different restaurant, until you find one that looks really good. Now comes the hard part of the exercise—go to that restaurant and have a good meal. If anyone tells you that you can’t go (your boss, your significant other), tell them that you’re on a scientific mission, and if you feel generous, invite them along.
You’re back? Good. We hope you enjoyed it.
Actually, there is a high likelihood (no certainty) that you did. Because we suspect that after reading some reviews about the restaurant you picked, you had a pretty good idea of what to expect. You most likely had more accurate expectations than if you relied solely on the restaurant’s website. You were also not very likely to make major mistakes, because if you came across reviews that raised some serious red flags, you switched to a different restaurant as we instructed you (and as most people would do). Since you knew what to expect in terms of the service, the food, and the general atmosphere at the restaurant, your expectations and your actual experience were likely to be pretty close. When people assess their satisfaction, what they consider and feel is just the vague comparison between expectations and experience. Since better information sources lead to more accurate expectations, the gaps between expectations and actual experiences should generally be smaller. Of course, some of our less fortunate readers will experience disappointing service or dishes, and you may have detected some inaccurate information in the reviews you read—reviews are not perfect quality predictors—but on average, better information should lead to fewer unpleasant surprises. An important outcome of the new information environment is that consumers are likely, on average, to have better (objective) experiences and fewer big disappointments.
Should we then expect satisfaction ratings to steadily go up? Not necessarily.
To illustrate why, let’s look at another example: Suppose you buy a camera to take some pictures at a big family event. Once you set your expectations based on all the user and expert reviews, the fact that the camera delivers on its promise means that you are satisfied. Satisfied, but not delighted—you knew it was a good camera all along, so it’s not a big surprise. You now have a better product and can do a better job thanks to the information you had before buying, but you don’t necessarily show it in your camera satisfaction ratings.
Similar in some ways to happiness ratings, which tend not to change when there are general changes (such as rise in income) that apply to most others, having the tools to make better decisions is unlikely to produce a general increase in satisfaction ratings.10 But as we indicated, the gaps should be getting smaller and satisfaction ratings should correspondingly become less variable and less extreme (though without a mean shift).
What narrows the expectation-experience gap further is a stronger confirmation bias. This bias refers to people’s general tendency to confirm their prior hypotheses and expectations. For example, when you’re told that a movie is great, this usually affects your experience (unless the gap between the actual experience and your expectations is very large, in which case you get a contrast effect). So what you felt about that filet mignon you ate at the restaurant was affected by the expectations formed by the reviews you read. Confirmation bias exists also when your expectations are formed by advertising, but it is reasonable to expect that this bias should be more potent when your expectations were formed by the opinions of more trusted sources. As more information today is gathered from reviews and other sources that are perceived as trusted (as opposed to advertising, which is usually perceived as less reliable), this confirmation bias is likely to be stronger.
Of course, we are not proposing that loyalty and satisfaction are no longer relevant. First, it’s a slow, gradual process. Quality is still associated with uncertainty, and emotional attachment to brands will not go away though its impact on purchase decisions is declining. Second, everything we’re talking about applies to categories where many people do take advantage of the available information regarding quality. In categories where this is not the case, past satisfaction and loyalty can still play an important role in certain decisions. For example, for low-involvement purchases, where consumers look for shortcuts and don’t wish to thoroughly evaluate options from scratch, loyalty can still be valuable for a company. But in categories that are affected by the shift in decision making, it’s becoming harder to ensure customers’ loyalty. The same goes for satisfaction. Having satisfied customers is obviously still the objective of every company. It’s just that having these happy customers today doesn’t guarantee your success tomorrow.
Third, at the present time and in the foreseeable future, there will be some customer segments that don’t take advantage of the available information. In these cases, loyalty and past experience will continue to play their traditional roles as quality proxies. Yet these segments are likely to shrink over time since information is so easily obtained. For example, brand loyalty used to be more significant for cell phones just five years ago. Today, more and more consumers—and not only the savviest ones—look around before buying a new phone, even if they liked their last handset. It’s just so easy to watch a video review on PhoneDog.com or to ask your friends what they’re using. Finally, a note to avoid confusion: When we talk about loyalty, we’re not talking about loyalty programs. The mere fact that loyalty is less used as a cue for quality does not mean that loyalty programs (for example, of airlines) are less relevant—many loyalty programs offer real value.
We opened this chapter with Lars Rasmussen, who was introducing a new piece of software to a cheering audience. The software he was showing was Google Wave. It was supposed to replace email, and serve as a one-stop shop for all electronic communications—from instant messaging to group collaboration. We actually had some hopes to make use of it in writing this book. We started using Google Wave in late 2009, but we didn’t get far. It was too confusing and complicated for us. And we weren’t alone. This was the experience of many early users, which they quickly shared with the rest of the world. We have great respect for Lars Rasmussen and for Google for their past achievements, but those past achievements didn’t make us stay with Wave. We went back to email. In 2010 Google suspended the project. Our point here is not to analyze why Wave was discontinued, but to point out that the past achievements of its creators were irrelevant to the way it was evaluated in the marketplace.11
The main takeaway from this chapter: Success is driven by the merit of your current product and much less by your customers’ past experience. This can go both ways. It means that you can never rest on your laurels. But it also means that more decisions are in play and that you might get a better second chance. It also suggests that loyalty is overrated. Businesspeople tend to believe in loyalty and long-term relationships with customers (and some of this certainly exists), but more and more consumers see their relationships with companies as an open marriage: If something better comes along, they will go with the better option.
There’s something almost cruel and seemingly unfair about this disregard for the past—for better or for worse, your past record doesn’t matter as much as it used to. But there’s also something fair about it. Should we expect you to like this book—Absolute Value—because of our past work? Of course not. Emanuel’s previous books and Itamar’s past articles may play a role in the way you assess our present work, but in the end, our past writings are irrelevant. This is the age of now.