15. Love Your Loyal Customers
Many companies are focused on finding and selling to new customers, but the smartest companies concentrate on keeping their existing customers and growing their relationships with them. Here’s why:
• It is five times more effective to sell to an existing customer than it is to find a new customer.
• Customer loyalty drives profitability. It is estimated that keeping a customer can increase profits between 25 and 80 percent.1
• Loyal customers make repeat purchases.
• Loyal customers tend to buy across your portfolio of products and services.
• Loyal customers give referrals.
• Loyal customers tell their friends and spread good will.
• Loyal customers are immune to the pull of competition.
• Loyal customers require less marketing.
• Loyal customers help you co-design new products and services.
Do you know what drives customer loyalty in your company? In addition to an analysis of your customer base, it is important to understand WHY customers choose to do business with your company. What drives them to do business with you instead of your competitors? What do your customers value the most? It’s easy to form assumptions about why customers do business with your company instead of competitors, but the only real way to know is to ask them. Surveys, focus groups, and behavior research can help you understand what customers want and gauge how well your company actually meets their needs.
How Do You Measure Loyalty?
You now know that great customer service and experience creates customer loyalty, which in turn creates more profitability, but how much profitability? Research shows that a one percent increase in customer retention is equal to a five percent increase in business value, which is significant. Research also has proven that companies with the highest level of customer loyalty grew revenues at twice the rate of their competitors.2
There are several metrics you can use to track customer loyalty. Two of the most effective are customer lifetime value (CLV) and customer delight using the Net Promoter Score (NPS). These concepts are explained below.
Measure Customer Profitability and CLV
A basic measure of customer profitability is the revenue a customer generates over a period of time, minus the cost of attracting, selling, and servicing the customer. Activity-based cost is another way some businesses calculate customer profitability. This method is more complicated and involves subtracting all costs and resources to make and distribute the product or service, including all expenses to service the customer (travel, entertainment, phone calls, and so on). This is a much more granular method of estimating customer profitability, and if you don’t have the luxury of time or an accounting department to crunch all these numbers for you, I suggest you stick with the simple calculation previously described. This basic measure will give you a good estimate of customer profitability and you can also use the same method to evaluate profitability of channels and market segments.
CLV is based on the concept that a customer profit rate increases the longer they do business with a company. Depending upon the industry, this number can be substantial. According to James Putten of American Express, a company’s best customers outspend others by:3
• 16 to 1 in retailing
• 13 to 1 in restaurants
• 12 to 1 in the airline business
• 5 to 1 in lodging
CLV can be calculated in several ways. Many companies use the same calculations described above (annual customer revenue minus costs to arrive at profitability rate and the number of loyalty years) plus estimating the net present value. But again, if you have not estimated CLV before, I recommend a basic approach (customer revenue - costs = profitability × years) so you have a good estimate of present and future CLV and how loyalty transfers to profitability in your business.
Building Customer Loyalty
It’s a fact that loyal customers create sustained, profitable growth. You now know why you should focus on creating loyal customers and how to measure it, but how do you do it? Here are a few methods you can learn and apply to your business:
• Measure customer delight, not customer satisfaction.
• Measure customer loyalty using the Net Promoter Score.
• Create customer relationship management strategies for profitable customer segments.
• Build a customer and employee centric culture.
• Engage customers in unique customer experiences.
• Know why customers buy your products/services and why they choose to do business with your company.
Measure Customer Delight, Not Satisfaction
Measuring customer satisfaction will not be an indicator of customer loyalty. Yes, you read that correctly. In fact, customers who are merely satisfied are at risk of defecting to a competitor. Why? Like a business attribute like “quality,” customer satisfaction is becoming a given, a baseline assumption that customers expect. Consumer needs have become more fickle as products and services have evolved to become more sophisticated and a vast array of choices has been made available for consumers to choose from. This means businesses need to ask different questions to understand whether they are meeting customer needs.
Fredrick Reichheld, author of The Ultimate Question and The Loyalty Effect, has studied customer loyalty and how to measure it for more than a decade. He discovered there is really only one question that a business can ask its customers to know if they are loyal:
“How likely is it that you would recommend this company to a friend or colleague?”
Net Promoter Score
Reichheld’s question results in a metric called the Net Promoter Score (NPS). The NPS is derived from measuring customer satisfaction by the criteria in three groups:
• Promoters are loyal enthusiasts who continually buy from a business and encourage their friends and family to do business with the company.
• Passives are satisfied but unenthusiastic customers who would easily move to the competition.
• Detractors are unhappy customers who no longer wish to buy from a company.
Reichheld advises companies to measure customer loyalty by asking the “Ultimate Question” and using a ten-point scale. Promoters score a 9 or 10, Passives a 7 or 8, and Detractors score 6 or below. Therefore, the best way to gauge customer loyalty (profitable growth) is to subtract the number of detractors from the number of promoters to calculate the NPS (P - D = NPS).
The best companies average an NPS between 50 and 82 percent. Sadly, the average U.S. company has an NPS of less than ten percent. Some firms even have a negative NPS. It’s no wonder so many businesses fail. They don’t know how to keep their existing customers; therefore, how could they ever be successful in growing their business with new customers? The NPS is a remarkably simple methodology to track customer loyalty and understand customers’ constantly evolving wants and needs.
Both small and large companies are integrating the NPS score into their business processes and using it as a key metric. Take a look at how Intuit uses the NPS to measure and improve customer relationships and develop new products.
Intuit: How the Best Get Better
Scott Cook, former CEO of Intuit, was passionate about creating customer loyalty. When Intuit adopted the NPS to measure customer loyalty, they implemented a two-question phone survey to determine how many promoters, passives, and detractors there were. They asked:
1. What is the likelihood that you would recommend TurboTax to a friend or colleague?
2. What is the most important reason for the score you gave?
The result of asking these two questions resulted in an NPS of 27 to 52 percent across Intuit’s product lines.4 While this is above the national average, Intuit’s goal was to achieve a much higher ranking. Intuit launched a 6,000 member “Inner Circle” of customers to get ongoing feedback about how the company could improve. As customers joined the virtual community, they were asked to answer the “Ultimate Question” and make recommendations for improvements to TurboTax. They could also vote on the suggestions other people made. Intuit’s software team then ranked and prioritized the suggestions so the most popular and valuable suggestions were implemented first.
But Intuit didn’t stop there. They discovered that priorities were different across the Promoters, Passives, and Detractor segments. Curious, executives called customers to learn more. (Note: The task was not delegated to a research manager.) This resulted in several discoveries and subsequent improvements in the products. The final outcome was an increase in new user NPS from 48 to 58 percent, and scores for the desktop version of TurboTax jumped from 46 to 61 percent.
If your company has several metrics, you might find it refreshing—and immensely more valuable—to focus on one measurement. Cook said, “We have every customer metric under the sun and yet we couldn’t make those numbers focus the organization on our core value of doing right by the customer. The more metrics you track, the less relevant each one becomes. Each manager will choose to focus on the number that makes his decision look good. The concept of one single metric has produced a huge benefit for us—customers, employees, and investors alike.”5
Current CEO of Intuit Brad Smith has continued to foster Intuit’s maniacal focus on understanding customer needs and using non-traditional market research to do so. Follow Me Home is an observational research project started several years ago. Intuit representatives go to a customer’s home or office and observes them as they load the software and use it. Intuit knows they can only learn so much by talking with customers and asking questions. Often it’s far more effective to watch what customers do when they use a product. This sheds light on how the product is used, the features customers use and appreciate the most, and those that are not used at all. Over time, this helps Intuit modify products to meet customer needs based upon what they value the most. It’s so important that Intuit invests more than 10,000 hours a year with customers on this project alone.