Why is this indicator important?

This is the first of two KPIs in this book that consider customer engagement. Within the ‘Marketing and sales perspective’ section we describe how to assess how customers engage with an organisation through online vehicles (such as websites/discussion forums) – a burgeoning area of interest for senior managers and marketers alike as they struggle to make sense of how the internet has changed customer–supplier dynamics.

This KPI, however, looks at ‘customer engagement’ measurement more traditionally: that is, the strength of a customer’s relationship with an organisation as assessed through the customer’s overall perception of/experience with the organisation (through whichever customer – supplier touchpoints – online or offline).

Companies that are measuring ‘customer engagement’ are ultimately interested in building a loyal customer base that delivers superior financial returns. That said, conventional wisdom has it that satisfied customers 5 loyal customers 5 profit. So why measure engagement? Although we would strongly argue that satisfaction is an important KPI (see the customer satisfaction index KPI on page 97), research has found that it is not uncommon for a significant percentage of customers to defect to competitors even if they are satisfied with a supplier’s products/services.

As early as the mid-1990s Xerox was finding that more than a quarter of ‘satisfied’ customers defected at the end of their contract. The company found that those that remained loyal were more likely to be ‘very satisfied’ and that this usually had something to do with how the customers perceived their relationship with Xerox – what today we would call ‘engagement’.

More recently, the US-based Enterprise Rent-A-Car has moved away from relying on conventional measures of satisfaction to deploying an enterprise service quality metric that counts only those customers that are ‘completely satisfied’. Internal research had shown that customers who are completely satisfied are three times more likely to return as a customer: analysis has found that these customers value the relationship with Enterprise Rent-A-Car and so can be described as ‘engaged’ (Marr, 2010).

And ‘engaging’ customers certainly delivers financial results to the supplier. The globally respected research firm Gallup has created a customer satisfaction metric that is based on just 11 questions. Based on the findings, Gallup categorises customer engagement according to four levels:

• Fully engaged customers: These are emotionally attached and rationally loyal and are an organisation’s most valuable customers.
• Engaged customers: These are beginning to feel the stirrings of emotional engagement.
• Disengaged customers: These are emotionally and rationally neutral.
• Actively disengaged customers: These are emotionally detached and actively antagonistic.

Gallup’s analysis across many industries serving both B2C and B2B customer sets (Gallup’s most recent database, which covers a four-year time period, includes data collected from almost three million customers representing 47,000 workgroups in 16 major industries and 53 countries worldwide) reveals that customers who are fully engaged represent an average 23% premium in terms of share of wallet, profitability, revenue and relationship growth compared to the average customer. Actively disengaged customers, on the contrary, represent a 13% discount in those same measures. Organisations that have optimised engagement have outperformed their competitors by 26% in gross margin and 85% in sales growth. Their customers buy more, spend more, return more often and stay longer.

How do I measure it?

Data collection method

Data are collected through quantitative surveying tools. Customers might be asked to rate their experience of the supplier’s service/product according to a Likert scale (for example from 1 – very dissatisfied to 5 – very satisfied) or by providing a simple yes/no answer. Room for more qualitative replies might also be provided to add further richness to the findings.

Formula

Although there are many ways to measure customer engagement, the Gallup approach is particularly noteworthy. Gallup’s customer engagement ratio is a macro-level indicator of an organisation’s health that allows executives to track the proportion of fully engaged to actively disengaged customers.

Gallup developed its metric over a number of years of talking with customers and analysing their behaviours and testing many metrics. A final list of eight emotional attachment questions and three rational loyalty questions consistently showed linkages to key business performance metrics. The final metric consists of 11 questions, which Gallup calls the CE¹¹.

The metric is the ratio of fully engaged customers for every actively disengaged customer. So a ratio of 5.4 to 1 means 5.4 actively engaged customers to 1 actively disengaged. Gallup can then place the organisation into the appropriate engagement category (see previous page) and describe likely financial consequences.

The CE¹¹ measurement survey is measuring a customer’s rational assessment of a brand (questions 1–3) as well as their emotional attachment (questions 4–11), covering confidence, integrity, pride and passion.

Frequency

Usually measured and reported annually.

Source of the data

The data are drawn from the customer engagement surveys.

Cost/effort in collecting the data

When using an external firm to administer a customer engagement survey the cost might be fairly high (in line with any consulting engagement). If administered in-house the costs will be lower but the effort higher and the organisation will not have access to useful benchmarks.

Target setting/benchmarks

A customer engagement survey as administered by a company such as Gallup will typically have extensive databases of benchmarks of best practice performance from which the client organisation can identify and work towards their own targets against both industry comparators and the Gallup database as a whole. According to Gallup, in average organisations the ratio of fully engaged customers to actively disengaged customers is 0.8:1, while in world-class organisations the engagement ratio is 8:1.

Tips/warnings

Although customer engagement is typically measured and reported annually, organisations might consider surveying customers more frequently (say 10% of customers 10 times per year) so as to get a picture of how engagement is progressing, especially in light of performance improvement interventions launched to drive up the engagement score. For many organisations a once-a-year metric might be insufficient for maintaining a competitive edge.

To gain a richer picture of relationships with customers, organisations should also ensure that they conduct qualitative assessments (through focus groups, etc.) to complement/validate the quantitative results.

Those organisations that deploy the Gallup customer engagement survey might consider using it alongside Gallup’s employee engagement survey (see employee engagement KPI on page 269). Employees ultimately drive customer engagement and Gallup research has found that business units that score above its database median on both customer and employee engagement significantly outperform units that rank in the bottom half on both measures. Gallup calls this performance optimisation.

References

www.gallup.com/consulting/49/customer-engagement.aspx

Bernard Marr, The Intelligent Company: Five Steps to Success with Evidence-based Management. John Wiley, Chichester, 2010. www.ap-institute.com