Chapter 12

The Customer is Always Right: Measuring Your Customer Success

In This Chapter

Establishing if your customers would recommend you

Understanding customer satisfaction and loyalty

Working out how valuable your customers are to you

Quite simply, business success depends on your ability to attract customers and keep them happy over the long term. Of course, not all customers are the same. Chances are they don’t all buy the same product or service and they almost certainly experience different levels of service depending on who they happen to deal with on the day, or whether your online purchase system crashed just as they were about to complete their order.

Some customers may love your customer service and attention to detail, some may think it needs work. Some customers may love your prices where others don’t really care about the cost because they are fully focused on the quality. This variability means that measuring how your customers feel about your business can often seem an overwhelmingly messy and daunting process.

But it doesn’t need to be. The KPIs detailed in this chapter will help you to measure your customer success which will in turn predict your business success.

Asking if Your Customers Would Recommend You (NPS)

Clearly, understanding how satisfied your customers are will have a direct bearing on how loyal they are to your business. If they are satisfied they are more likely to stay and buy from you again. If they are not satisfied they are more likely to buy what they need from your competitors.

Unfortunately most customer surveys that seek to measure satisfaction are complex, time consuming and expensive. Plus they can be notoriously difficult to interpret. So what to do?

Developed and trademarked by Fred Reichheld, Bain & Company and Satmetrix, the Net Promoter Score (NPS) is one option. Introduced by Reichheld in his 2003 Harvard Business Review article as the ‘one number you need to grow’ the metric is based on just one simple question: ‘How likely is it that you would recommend [insert company or product name] to a friend or colleague?’

Faced with complex and unwieldy customer surveys or just one question - it is easy to see why NPS became a popular customer assessment KPI.

NPS is based on the fundamental premise that every company’s customers can be divided into three groups:

• Promoters: Loyal enthusiastic customers who will continue to buy from you and recommend you to others. Promoters fuel growth.
• Passives: Satisfied but unenthusiastic customers who may or may not buy from you again. Passives are vulnerable to a well-positioned competitor offer and don’t necessarily feel any loyalty to you.
• Detractors: Unhappy customers who can actively damage your business through negative word of mouth. Detractors can impede growth.

By asking your customers this one question you can establish how many promoters, passives and detractors your business has and therefore how your customers perceive you.

How NPS drives loyalty and profitability

Loyalty is a strange phenomenon, especially in business. You might assume that loyal customers buy more, more often and therefore make more money for the business. But what constitutes loyalty? What NPS illustrates is that having happy customers is not enough. You need to endeavour to have really happy, enthusiastic customers who will tell anyone who will listen how wonderful you are.

Obviously the more detractors you can turn into passives the faster you will grow. Think of detractors as the brakes on your business – they can really slow you down. To illustrate just how detrimental detractors can be, pause for a moment and consider the last time you were really happy about a product or service you bought.

Okay: How many people did you tell about that? Now think about the last time you were really unhappy about a product or service. How many people did you tell about that? Human nature dictates that your customers will tell significantly more people when they are unhappy with you than they will when they are happy with you. At the very least you need to turn as many detractors into passives as you can so that they don’t actively diminish your results.

If, however, you want to accelerate growth and increase your profit then you also need to turn as many passives into promoters, so they start referring you to others and driving growth.

Interestingly, customer loyalty also increases when they puts themselves on the line for your business. So if a customer recommends you to others and shouts from the rooftops about how fabulous you are, then this active participation in your business builds greater loyalty over time. And that type of loyalty does pay.

Even if your customers are happy they won’t necessary tell other people about you or be any more likely to buy from you again. You need to surprise and delight them – only then will they start spreading the word.

Understanding the NPS formula

Using a scale of 0 to 10, where 0 indicated ‘not at all likely’ and 10 indicated ‘extremely likely’ customers are asked to answer the question: ‘How likely is it that you would recommend [insert company or product name] to a friend or colleague?’

• Promoters are customers that indicated a score of 9–10
• Passives are customers that indicated a score of 7–8
• Detractors are customers that indicated a score of 0–6

Empirical research has shown that there is a striking correlation between the NPS customer’s grouping (promoters, passives and detractors) and actual behaviour in the form of repeat purchase and referrals over time.

Further research mapped the NPS rating to the growth rates of organisations and demonstrated that this one simple statistic explained much of the variation in relative growth rates. In other words, companies with a high NPS grew more rapidly than those with a low NPS.

NPS is a great metric. Not only does it hold you and your employees accountable for how you treat customers and help strengthen the connection between this treatment and results but when NPS is combined with appropriate diagnostics and follow-up actions, it drives improvements in customer loyalty and enables profitable growth.

Measuring NPS in practice

The key performance question NPS helps to answer is: ‘To what extent are our customers willing to recommend us?’ NPS is collected using a customer survey usually conducted over the phone or online. The measure can be collected in two ways:

• Top down NPS to rate the overall strength of the customer/company relationship. This is achieved by setting up an anonymous survey and contact existing customers to ask the NPS question.
• Transaction NPS where you survey your key customers by transaction type or size. Obviously, the more promoters in your high-value customers the better.

The formula for calculating NPS is as follows:

NPS = Percentage of Promoters – Percentage of Detractors

For example say you survey 1000 of your customers. Asking them the one NPS question they respond as shown in Table 12-1:

Table 12-1 A typical response to a customer survey

• Promoters: 350 + 155/1000 × 100 = 50.5 per cent
• Detractors: 3 + 5 + 2 + 0 + 5 + 10 + 20/1000 × 100 = 4.5%
• NPS = 50.5 per cent – 4.5 per cent = 46 per cent

Ironically, customers who are most unhappy also present the biggest opportunity for turn-around. If possible, find out who gave you a score of 0–3. These people are seriously unhappy, and as long as you fix their issue, apologise sincerely and endeavour to put things right you may be surprised to find they become your most vocal promoters.

Most companies don’t collect customer data frequently enough. At the same time asking customers their views too often will just begin to irritate them. So instead of doing one big survey once a year consider asking the NPS question to 8 or 9 per cent of your customers every month. You are still only asking one question to one customer per year but these insights will allow you to gauge sentiment on an ongoing basis and track the NPS trend.

Although very insightful, NPS will not tell you why customers would or wouldn’t recommend your business or products. As the NPS question is just one question, you may want to include two additional open questions at the end of the survey that allow for customers to elaborate, should they wish to. You might for example ask:

• What do you particularly like about this company/product?
• What would you improve if you had the chance?

The Canada-based online retailer Zappos ask the NPS questions after receiving an order, and also after a customer speaks with a customer loyalty representative. As well as the NPS question Zappos also seek further information that helps them to move their Detractors or Passive to Promoters by asking customers the additional question: ‘If you had to name one thing that we could improve upon, what would that be?’

Once the customer has spoken with the customer loyalty representative, the customer is also asked: ‘If you had your own company that was focused upon service, how likely would you be to hire this person to work for you?’ Further questions ask ‘Overall, would you describe the service you received form (insert name of customer loyalty representative) as good, bad, or fantastic?’ and ‘What exactly stood out as being good or bad about this service?’

Zappos – rather unsurprisingly – consistently score very highly for NPS.

Measuring How Satisfied Your Customers Are (Satisfaction Index)

Measuring customer satisfaction is probably the most common non-financial KPI used in business because it is perceived to predict future performance. The logic is sound – if you have a happy bunch of satisfied customers then they are more likely to buy from you repeatedly and potentially tell others about your product or service.

For obvious reasons satisfied customers are much more likely to be loyal customers, which also keeps costs down because it is significantly more expensive to attract new customers than it is to keep the ones you have.

It makes sense therefore to measure customer satisfaction so you can fully appreciate how your customers are feeling. It also helps clarify whether you are on track or whether you are losing too many customers to your competitors.

Identifying what makes your customers happy

The challenge with measuring customer satisfaction is that it is a very broad term. What makes one customer satisfied will not necessarily be universally appreciated by all your customers.

As a result you will collect more insightful data if you combine quantitative and qualitative techniques. For example, you could survey your customers for overall satisfaction periodically. This is usually achieved by asking customers how satisfied they are with your product/service, where they are asked to indicate satisfaction on a scale of 1–5 (1 being very dissatisfied and 5 being very satisfied). If you gather this same information regularly over time you can gauge the trend of customer satisfaction.

In addition you could also survey your customers immediately after they have received your product or experienced your service. This approach allows for a mix of performance scales, yes/no answers and qualitative questions, so you can uncover the key distinctions that make your customers happy.

Finally, you may choose to conduct focus groups with customers to gain even richer insights into customer satisfaction levels. Measuring customer satisfaction, especially when you seek qualitative or subjective responses, is a great way of finding out exactly what parts of your product or service are most appreciated by your customers. And although this sounds like common sense, many businesses have gone bust because they made assumptions about what their customers really loved about their product or service.

When you do it properly, measuring customer satisfaction can be one of the most insightful management tools because it helps to highlight any gaps that may exist between current delivery and customer expectations. It thus allows a business to close that gap more quickly and improve customer satisfaction in the process.

Creating your unique index

You can measure customer satisfaction in many ways.

One useful approach is the creation of your own unique Customer Satisfaction Index (CSI). A CSI is simply an aggregation of all the attributes that you believe contribute to customer satisfaction. Again don’t assume what creates customer satisfaction – find out what actually does and then measure that.

Since different attributes can contribute differently to the overall customer satisfaction, it’s best to weight the individual attributes. For example customer satisfaction for an airline may include on-time departure, quick transit through security and on-board snacks. Clearly the quality of on-board snacks is pleasant but it’s nowhere near as important as on-time departure – especially for a business traveller. As a result on-time departure would be weighted to account for its importance relative to other factors.

Within an index you can generate a single customer satisfaction score and describe it according to a scale of satisfaction from ‘very dissatisfied’ to ‘very satisfied’.

Measuring CSI in practice

The key performance question Customer Satisfaction Index (CSI) helps to answer is: ‘How well are we satisfying our customers?’

You can create your own unique index based on the factors your initial investigation identified as being central to customer satisfaction, or you can use an existing index.

The widely-used American Customer Satisfaction Index (ACSI) generates a single score based on drivers of satisfaction such as customer expectations, perceived quality, perceived value, customer complaints, customer retention, customer loyalty and price tolerance. The ACSI score is calculated as a weighted average of three survey questions that measure different aspects of customer satisfaction with your product or service.

For example, the ACSI uses customer interviewing and econometric modelling to measure and analyse customer satisfaction. An econometric model in this context seeks to specify the statistical relationship that exists between customer satisfaction and, say, perceived value or price tolerance.

Initially, professional telephone interviewers collect survey responses from randomly selected customers. The data is then put into the model which scores the variables and effectively spits out a customer satisfaction index score or ACSI score.

The index runs from 0–100. Although your ACSI score could theoretically be anywhere between 0 and 100, in practice scores tend to be from the low 50s to the high 80s. The beauty of the ACSI and the UK equivalent the The National Customer Satisfaction Index-UK (NCSI-UK) is that they ask the same questions (tailored slightly to each industry), which means that you can compare your business to others in your sector and to your nearest competitors. The downside is that they might ask questions that are not relevant to your specific business needs.

Customer satisfaction is often measured on a rolling basis and reported quarterly along with any specific insight gained from the qualitative information.

The real gold when it comes to customer satisfaction is the qualitative data that explains why someone is satisfied or not. If you want to make real progress in customer satisfaction and use the measurement to improve performance from this perspective you must collect, analyse and interpret the qualitative data so you can act on the information and improve customer satisfaction.

Don’t be over zealous about measuring customer satisfaction as a quantitative ‘score’. It’s helpful to know you are trending in the right direction but if you are not then it’s not that helpful at all.

Plus don’t confuse loyalty with satisfaction. Just because your customers are satisfied - even very satisfied does not mean they are loyal and will buy from you again. Think about the last time you stayed in a mid range hotel. No doubt the room was spotless, the service impeccable and the food pleasant. If asked you probably said you were very satisfied with your stay but that didn’t necessarily make you feel any loyalty to that hotel or chain. The reason for this seeming contradiction is that the hotel simply delivered on your existing expectations. Cleanliness of room, quality of service etc are just the minimum expected from a good hotel. If those aspects were poor then it would have affected your satisfaction and your loyalty as you probably would not visit the hotel again. But if they are good, it may impact satisfaction but not loyalty. The hotel would have to deliver on something unexpected or go above and beyond for you to feel any genuine loyalty to the hotel.

Tracking How Likely Your Customers are To Leave (Retention/Churn)

Knowing how satisfied your customers are is one thing, but tracking how likely they are to leave is another. It may be obvious that unhappy customers are more susceptible to a competitor, but that may also be true of customers who are satisfied – even very satisfied.

Customer retention/churn is a popular KPI used to track how many customers you are losing, and is therefore a powerful indicator of future financial performance. Obviously, if you are losing more customers than you are gaining then you are going to run into trouble. Customer satisfaction surveys may indicate whether a customer feels satisfied or not but this metric looks at customer behaviour. What are your customers actually doing? Do they stay or do they leave?

Churn and retention matters!

Keeping the customers you have already managed to attract and sell to is much easier and cheaper than trying to find new customers.

Churn and retention matters because once a customer has bought from you once, they are invested in your product or company, albeit in a small way. The hardest decision for any customer is the initial decision to purchase from one company over another. The reason for that choice may vary, but whatever the reason the customer decided to trust you. Making sure they don’t regret that choice is what customer KPIs seek, at least in part, to measure.

Once you have a customer and they have taken that first step and bought the first product or service, it is always considerably easier to sell to that customer again, up-sell them to a more expensive product or cross-sell them a different product from your range.

Customer retention therefore offers you not only repeat sales but increased value of sales and new sales in new products or services. If you fail and your customers leave then you don’t just lose one sale – you potentially lose many, varied and valuable sales.

Minimising churn or customer turnover should therefore be a key objective of business.

Measuring it in practice

There are two main KPIs to measure retention and churn so you can establish how many customers you are managing to hold on to and how many you are losing over any given period. They are Customer Retention Rate (CRR) and Customer Turnover Rate (CTR)

KPI: Customer Retention Rate (CRR)

The key performance question Customer Retention Rate (CRR) helps to answer is: ‘To what extent are we keeping the customers we have acquired?’

Customer Retention Rate (CRR) = No. of those customers that are still customers at the end of period/No. customers at start of period × 100

For example say you have 145,000 customers on the 1st January 2014 and 142,500 at the end of 2014

CRR = 144.500/145,000 × 100 = 99.65 per cent for 2013

CRR measures the percentage of customers a company is able to retain over a specified period. The most common formula provided for this metric is number of customers at the start of a period divided by number of customers are the end of the period, expressed as a percentage. But this formula includes new customers and doesn’t differentiate between those new customers and the customers who have stayed with your business. CRR is supposed to tell you how many customers you have retained, not how many customers you have. For CRR to be accurate, you need to look only at how many customers you had at the start of the period in question. Save that file. Then at the end of the period cross reference the saved file with current customers to see how many customers from the saved file you have retained.

If you want to be even more accurate, you can divide the number of customers at risk of leaving at the beginning of a period by the number of customers that remained customers at the end.

Say at the start of December 2013 a telecommunication company had 150,000 mobile phone contacts coming to an end. In telecommunications the CRR can be quite low because people are always shopping around for better deals – especially as their contract comes to an end. By the end of December they had been able to renew 132,000 of those contracts. The CRR would be 88 per cent (132,000/150,000 × 100)

How often you collect CRR will depend on the average lifespan of your customer, contract duration or average purchasing cycle although monthly collection in most businesses makes sense. What is considered high or low will depend on your industry so you need to assess your CRR against other businesses in your sector to get a true picture of retention.

Current retention rates are no guarantee of future retention rates.

Pay particular attention to how you count customers and set that as a benchmark for the future. Be really clear about what constitutes a customer. For example, if a customer is a customer of more than one product of yours, are they counted for each product or only once? If there is more than one customer from one household are they counted as individual customers or one household? Whatever you decide make it a rule in the business so that calculations are meaningful and comparable moving forward.

KPI: Customer Turnover Rate (CTR)

The key performance question Customer Turnover Rate (CTR) helps to answer is: ‘How many customers are we losing?’ Customer Turnover, also known as customer churn, customer defection or customer attrition looks at the other side of the coin – how many customers are you losing, rather than keeping, over a given period? The data you will to calculate CTR should be easily accessible from your customer records.

CTR = Lost customers over a period/Total number of customers at the end of a period × 100

For example say you have 86,000 customers at the start of May 2013. During May you gain 1,200 customers and lose 2,100. The net customer loss at the end of May is 900 (2100 – 1200). Your CTR would therefore be 1.05 per cent. (900/85,100 × 100)

CTR is an important metric to keep on top of and certainly if the CTR is trending up you can use this insight to dig deeper into what is really going on in the business to cause these results. CTR therefore alerts you to a problem that given the right investigation can help you reverse the tide. It is therefore wise to measure CTR on a monthly or quarterly basis.

Pay particular attention to how you define ‘lost’ and set that as a benchmark for the future. For example is a customer no longer a customer if they have not bought from you for over 6 months? A year? What is the definition of ‘lost’? Whatever you decide make it a rule in the business so that calculations are meaningful and comparable over time.

Gauging Whether All Customers are Equal (Profitability)

Measuring customer success and how your customers feel about you is important but not all customers are equal. The assumption is that you should work hard to keep as many customers as possible as happy as possible but that isn’t always necessarily true.

The 80/20 rule applies to customers in many ways. Chances are 80 per cent of your revenue comes from 20 per cent of your customers. It is also probably true that 80 per cent of your complaints come from 20 per cent of your customers. And it’s not usually the same 20 per cent!

So before you panic about low retention rates or get flustered about turnover rates you really need to know how profitable your customers are and which customers are financially worth worrying about.

Understanding where the profits are made

Often the temptation is to spend more and more money on surprising and delighting customers in the hope that this additional effort will translate into loyalty and profitability.

While that logic is valid, it doesn’t always work. Indeed many businesses have gone bust spending unnecessary money trying to fix or improve things that were not perceived as being an important issue in the first place. This is why the subjective, opinion based data around customer satisfaction can be so useful.

You need to know where your profits are made and what types of customers are contributing most to that profit. That way you can make sure you invest in those relationships and actively seek out other people like those customers to increase profit still further.

Tracking customer profitability

Customer profitability is the difference between the revenues earned from customers and the cost of servicing those customers over a specific period. This metric is therefore the net dollar contribution made by your individual customers.

Profitability is directly relevant to a time period so there is no one measure. In reality there are five main ways to measure customer value:

• Historical customer profitability: This perspective looks at the value earned from a customer relationship over a previous historical period such as a fiscal year, quarter or month. It can be measured as an average of previous periods or it can be time weighted which means that the more recent transactions are considered more valuable than older transactions.
• Current customer profitability: This perspective usually looks at a month to coincide with reporting cycles. This shorter time frame makes profitability more volatile as market changes or seasonal peaks and troughs show up in the month(s) in question rather than being averaged out. This perspective can be useful for working out how particular campaigns, new offers or price changes can influence profitability.
• Present customer profitability: This perspective is a future orientated that typically considers future revenue and costs anticipated for the customer. It is useful when looking at the remaining contractual lifetime of a customer and ranking customers according to value. It is also insightful for modelling the impact of pricing changes before they are implemented.
• Customer lifetime profitability: This perspective is also future orientated and looks further than the current contractual period to what revenue the customer might generate after that and what costs are associated with that revenue.
• Time-based activity-based profitability: This perspective measures the present total cost of providing products or services to a customer. In order to calculate this you need the cost per hour of each group of resources doing the work and the unit of time spent by specific activities. For example, say you calculate that your customer service department costs $80 per hour and handling a complaint well takes 27 minutes the cost of customer complaint handling is $36 (27/60 = 0.45 × $80).

Measuring it in practice

The key performance question customer profitability helps to answer is: ‘To what extent are we generating profits from our customers?’

The formula for how you would work this out changes depending on the various perspectives above. The most basic formula would be:

Customer Profitability = Revenue earned from the customer – Costs associated with the customer relationships.

Customer profitability can be an incredibly useful KPI because it allows you to compare customers and establish which ones are making you money and which ones are not.

For example, customer profitability in a US based insurance company found that 15–20 per cent of its customers generates 100 per cent or more of its profit. Further investigation found that the most profitable customers generated 130 per cent of annual profits, the middle 55 per cent of customers broke even and the least profitable 5 per cent lost the company money to the tune of 30 per cent of annual profits.

Knowing which customers are which is clearly very important for long term growth and profitability.

The easiest way to calculate customer profitability is to look as historic data, for example ‘How much did I earn from that customer and how much did I spend on that customer?’ What costs to take into account and how to allocate them to customers can be quite complex, even when you use existing data. The calculations become more difficult and speculative when you start looking into the future. In the next section, I look at the customer lifetime value KPI, which is the most speculative and difficult, but potentially also the most revealing metric for customer profitability.

Calculating Your Customers’ Value (Life-Time Value)

Customer KPIs focus largely on how many customers you have, how many you keep and making sure they are happy. While useful and necessary these KPIs don’t tell you how much those customers are worth.

For some companies the customer is profitable as soon as they make their first purchase. Others may only become profitable after several purchases. Calculating your customers’ lifetime value (CLV) allows you to attribute a life-time value to each customer so you can immediately see which ones are the most valuable and therefore most important to you.

The ultimate customer KPI!

CLV is actually a marketing metric that allows businesses to highlight their most important customers, so they can focus their marketing attention on the ones that are most likely to buy. This metric combines the:

• Anticipated length of the relationship between you and your customers
• Anticipated customer financial value.

Calculating CLV helps an organisation understand how much it can invest in acquiring and retaining that customer so as to achieve positive return on investment. This metric is often used by investors as a way of helping to assess the present and future health of an enterprise.

Measuring it in practice

The key performance question Customer Lifetime Value (CLV) helps to answer is: ‘How well do we understand the financial value from our customer relationships?’ Calculating CLV can be as simple or as complex as you want. But initially, let’s start with the simplest version to give you an idea of CLV.

CLV = (Average Value of a Sale) × (Number of Repeat Transactions) × (Average Retention Time in Months or Years for a Typical Customer)

As an example, let’s look at the customer lifetime value of a mobile phone contract customer: The customer spends $30 every month on the contracts, the average time for a customer to stay with the provider is 3 years. The calculation would be:

$30 × 12 months × 3 years = $1,080 = CLV (or $360 per year).

What this simple calculation does not take into account are the costs associated with servicing or retaining this customer. A more acrurate calculation would substract the costs:

If in the same example, the service or retention costs were $300 per year, then the CLV over the 3 years would be:

$1,080 – (3 × $300) = $180 (or $60 per year)

CLV has intuitive appeal because it represents exactly how much each customer is worth in monetary terms, and therefore exactly how much you can afford to spend to keep them happy! And how much the marketing department can spend acquiring new customers just like them. But unfortunately the reality of CLV is quite different, and it is a notoriously difficult KPI to calculate effectively. Regardless of the formula you use, either the simple one above or one of the more complicated versions the accurate calculation of CLV consists of four steps:

1. Forecast the remainder of the customer lifetime.

   How long is the customer likely to stay a customer?

2. Forecast future revenues.

   How much is the customer likely to spend during those remaining months or years?

3. Forecast delivery costs.

   How much is it going to cost to deliver those products or services to the customer in the future?

4. Calculate the net present value of these future amounts.

Needless to say whilst these four steps appear straightforward there are not and your forecasting accuracy can impact the reliability and usefulness of this metric.

Measuring Whether Your Customers are Truly Engaged

Customer engagement became increasingly important as more and more companies discovered that customer satisfaction was not a predictor of behaviour in the way it was once assumed. Conventional wisdom suggested that satisfied customers = loyal customers = profit. The problem is that research demonstrated that customers who, by their own admission were satisfied still defected to the competition in alarming numbers. In other words satisfied customers did not equal loyal customers or necessarily increased profit.

For example, in the mid 1990s Xerox found that more than a quarter of their customers who stated they were ‘satisfied’ defected at the end of their contracts. On digging more deeply into this issue, Xerox found that there was a strong correlation between genuine loyalty and customer longevity when customers described themselves as ‘very satisfied’ and not just ‘satisfied’. When those very satisfied customers were pressed further to explain their satisfaction it almost always came down to the nature of their perceived relationship with Xerox – or engagement. When a customer had developed a strong relationship with their Xerox contact, often over many years their satisfaction increased to very satisfied.

In another more recent example, US-based Rent-A-Car deliberately moved away from basic satisfaction KPIs to their own self-designed KPI metric called the Enterprise Service Quality Index (ESQi). The reason for this move was that internal research demonstrated that a basic satisfaction KPI that indicated whether a customer was satisfied or not was not good enough to help them to establish patterns of behaviour and loyalty. The company discovered that customers who stated they were ‘completely satisfied’ on a 5-point scale from ‘completely satisfied’ to ‘completely dissatisfied’ were three times more likely to return as customers and recommend Rent-A-Car to others than even customers who stated they were ‘satisfied’. This analysis found that these customers valued the relationship with Enterprise Rent-A-Car, and so could be described as engaged. Today all Rent-A-Car offices are measured against how many of their customers are ‘completely satisfied’ which has improved results – not least because everyone in those offices is now fully focused on delivering better than expected service, so they can achieve the prized (and rewarded) ‘completely satisfied’.

Understanding the different levels of engagement

The task of understanding the different levels of engagement has been significantly simplified by the well-known research firm Gallup. Based on the research respondents answers to just eleven questions, Gallup have categorised customer engagement according to four levels.

• Fully engaged customers: Those who are emotionally attached and rationally loyal to your business. These are your most valuable customers
• Engaged customers: Those who are beginning to feel the stirrings of emotional engagement. These customers are ripe for development and could relatively easily be pushed up to fully engaged.
• Disengaged customers: Those who are emotionally and rationally neutral. These customers are also ripe for development because they are neutral so could be swayed upwards (or pushed downwards).
• Actively disengaged customers: Those who are emotionally detached and actively antagonistic. These customers pose a serious threat to your business – especially in the age of the internet and social media.

As a reminder of just how powerful an actively disengaged customer can be, see the sidebar ‘United Breaks Guitars’ in Chapter 4.

Gallup’s data collected from almost three million customers (business to consumer (B2C) and business to business (B2B)) in 16 major industries across 53 countries over a four year period reveals that fully-engaged customers deliver, on average, 23 per cent more in terms of profitability, share of wallet, revenue, and relationship growth than the average customer. Actively disengaged customers represent a 13 per cent discount in those same measures. Companies that have high engagement have outperformed their competitors by 26 per cent in gross margin and 85 per cent in sales growth. Their customers buy more, spend more, return more often, and stay longer.

Clearly customer engagement matters!

Measuring engagement in practice

The key performance question customer engagement helps to answer is: ‘To what extent are our customers engaged with our organisation?’ This metric is usually measured and reported annually and the data needed comes from a customer engagement survey.

Customer Engagement Ratio (CER) = Number of engaged customers (percentage): Number of disengaged customers (percentage)

The CER is a macro-level KPI indicator designed by Gallup to measure engaged versus disengaged customers. The metric is the ratio of fully engaged customers for every actively disengaged customer.

For example, say you have 600 engaged customers and 100 disengaged ones, your CER would be 6:1, which would mean that you have six actively engaged customers for every 1 actively disengaged customer. Due to the size and scope of their research data Gallup can then place your business into the appropriate engagement category and describe likely financial consequences.