Customer Satisfaction and Customer Loyalty Overview

Table of Contents

What does the term "Customer Satisfaction" refer to?

What is "Customer Loyalty"?
More about Loyalty Behavior
More about Loyalty Attitudes
What is the Value of Greater Customer Loyalty?
If Loyalty is the Goal, why is it Necessary to Work on Customer Satisfaction?
What are some of the Major Considerations in Improving Satisfaction?
Measuring Customer Satisfaction
Which Analyses and Reports are Important in a Customer Satisfaction Survey?
What are Some Good Ways to Set Satisfaction Improvement Priorities?
What else is Important in a Customer Satisfaction Program?

Customer Satisfaction and Customer Loyalty Overview

This summary of customer satisfaction and customer loyalty is for people who want to make
their existing customer satisfaction or loyalty program more effective or who are considering
starting a customer satisfaction program in their organization. Also see our:

 Interactive Diagram of the Customer Satisfaction Process

 Overview of Customer Focus and Customer Relations

CLICK THE COLORED WORDS for related books, websites or links to further information
on this website.

What does the term "Customer Satisfaction" refer to?

Customer satisfaction is a measurement of customer attitudes about products, services and

brands. While it's always been smart to keep customers happy, the term "customer
satisfaction" became popularized in the 1980's with the total quality movement. Customer
Driven Excellence and Customer Focused Results remain important aspects of the Baldrige
National Quality Program.

What is "Customer Loyalty"?

Loyalty has two definitions. Loyalty BEHAVIOR means the act of customers making repeat
purchases of their current brand, rather than choosing a competitor brand instead. Loyalty
behavior is also called "customer retention." Loyalty ATTITUDES are those judgments and
feelings about your product, service, brand or company that are associated with repeat
purchases.

Sometimes customers exhibit loyalty behavior without having loyalty attitudes, as in markets
dominated by a monopolist. And sometimes customers exhibit loyalty attitudes without
demonstrating much loyalty behavior, as in the case of true blue customers who buy very
infrequently. Still, it is worthwhile to examine loyalty BEHAVIOR and ATTITUDES in
more detail, because each definition has value.

More about Loyalty Behavior

The value of the BEHAVIOR definition is that it directly relates to sales and market share.
Loyalty behavior is measured by analyzing customers' sales transactions, revealing customer
retention rates and customer defection rates over various time periods. As transactions of
individual customers are tracked over time, this shows their repeat purchases and "lifetime
value." Then lifetime value is linked to demographics, and used in developing marketing
strategies that target high value customers.

More about Loyalty Attitudes

Loyalty ATTITUDES are a softer measure than BEHAVIOR because people can feel one
way and behave quite differently. Sometimes customers are classified into loyalty attitude
groups such as "new arrivals", "repeat buyers," "advocates," "loyalists" and so on as they
slowly bond with your company over time.

Loyalty attitudes are measured by means of customer surveys. There is no widely accepted
standard for what questions to ask or what is a "good" score. Instead you need a good process
that produces useful information.

For example, you can track your customers' loyalty attitudes over time and use this trend
information to see where your company may be improving or slipping, and learn which of
your improvement efforts are having an impact on customer attitudes. Also consider
administering the same questionnaire to your customers and competitors' customers blind
(sponsor undisclosed), then benchmark your scores against resulting competitor scores.

Loyalty is a big topic. Our favorite introductory book on loyalty is Loyalty Rules! by Fred
Reichheld. This book has examples of successful loyalty practices in leading companies,
useful checklists and even a loyalty questionnaire for surveying customers. Reichheld, from
Bain & Co. is probably the most well known loyalty expert.

What is the Value of Greater Customer Loyalty?

Loyalty behavior is worth almost any effort unless it is achieved by deep price cutting or
major promotional giveaways that destroy profits. Loyalty is so valuable because it has a
huge impact on market share. It is undeniable that each customer who switches from Brand A
to Brand B raises Brand B's market share and lowers Brand A's market share. In most
markets there is a fairly high degree of this brand switching or "churn". Churn is a pool of
potential customers that smart competitors pursue.

Established repeat customers may often generate superior profit margins. They require less
customer care, have less price sensitivity, need fewer advertising and promotional
inducements, they refer their family and friends to your brand and so on.

If Loyalty is the Goal, why is it Necessary to Work on Customer Satisfaction?

Loyalty behavior is the RESULT or OUTCOME of very high satisfaction. What has to be
worked on and improved is SATISFACTION. As customers become more satisfied they start
to take on some loyalty attitudes. In managing a loyalty program it makes most sense to
consider loyalty attitudes to be part of customer satisfaction.

All your efforts in this field need to be directed at winning more favorable customer attitudes
so you can get more loyalty behavior. Don't spend your time trying to "improve" loyalty
behavior, it's just the result. It's a metric. Spend you time improving the root causes of
customer satisfaction and that will create loyalty behavior outcomes.

You can't improve loyalty by being "results oriented." Again, that is because loyalty behavior
is a result, an outcome, a metric. A high jumper can contemplate clearing the bar at seven feet
(the result or outcome) but this focus on a desired result doesn't help ACCOMPLISH the
result. Only by training and practicing can the high jumper improve performance and start
raising the bar. See The Achievement Zone by Shane Murphy. So, improve loyalty by
improving your product's root causes of customer satisfaction. And be wary of loyalty
literature or programs that don't connect to the things that make customers more satisfied and
delighted.

What are some of the Major Considerations in Improving Satisfaction?

When a company becomes customer focused, everything starts to look different. That is
because everything in a business can be viewed from a customer perspective. For this reason
good customer satisfaction and loyalty programs span the entire organization. Here are the
essential elements of satisfaction and loyalty programs:

 Linkage to corporate vision, goals and strategies

 Measurement of customer satisfaction and loyalty
 Authorization and completion of relevant improvement projects
 Linkage of metrics to employee rewards and recognition
 Program management to assure the above items are done well

Measuring Customer Satisfaction

MEASURING satisfaction is necessary because it reveals the voice of your customer.

Properly done, this tells you which aspects of your product, service or brand will return the
greatest impact on the OUTCOME called loyalty behavior.

First customers must be surveyed to identify what they consider important or significant
about your product and product category. This qualitative information then drives design of
your satisfaction survey, so you can be sure you are tracking things that matter to customers.
This process reveals "customer requirements."

Watch out for too much company input (rather than customer input) in your questionnaire
design. Being customer-centric means you understand quality is defined by customers. If you
use too much management judgment in questionnaire design your results may be accurate but
still misleading. Use the questionnaire for diagnosis rather than confirmation. You can't get
the right answers if you don't ask the right questions.
Surveying your entire customer population (a census) may be cost prohibitive. In that case
you need a SAMPLE survey that produces statistically useful generalizations about your
overall customer population and any relevant sub-sets. Random samples must be drawn and
the sample size must be large enough so that it holds down the degree of sampling error.
Market research companies can help with this.

Which Analyses and Reports are Important in a Customer Satisfaction Survey?

The survey must identify how satisfied customers are overall, how satisfied they are with
each key attribute and how important they consider that attribute to be. Sample surveys must
indicate the degree of sampling error, and which comparisons are statistically different from
one another. Usually this requires involvement of a market research company. Here are some
typical customer satisfaction reports:

 Importance of various product attributes (see books for how this can be calculated)
 Satisfaction, overall and various product attributes (typical scales may be 1 - 5, or 1 -
10)
 Quadrant chart: importance v. satisfaction for various product attributes
 Trend chart: performance of satisfaction over a period of time
 Benchmark comparisons: shows your company and key competitors

What are Some Good Ways to Set Satisfaction Improvement Priorities?

The heart of a satisfaction program is the improvement projects that result. Consider using
these criteria in deciding where to allocate project investments (these may overlap):

 Attributes customers score both high in importance and low in satisfaction

 Attributes customers score both high in importance and moderately high in
satisfaction
 Projects that address reasons why customers defected from your brand
 Projects that can be done quickly with little investment
 Projects that improve satisfaction and dovetail with major corporate objectives

Some additional insight into priority setting can be gained by examining the relationship
between satisfaction and loyalty. Unlike many behaviors, satisfaction doesn't follow a bell
curve, but is instead skewed.

The chart illustrates the typical finding that most customers are 4's and 5's on a five point
satisfaction scale. Customers on the left of this curve are more likely to defect, but there
aren't as many of them. Customers in the middle are less likely to defect, but there are quite a
few of them.

One way of setting priorities is "fixing problems". This addresses customers on the left. Pick
attributes that are both high in importance and low in satisfaction (the first bullet above).
Another way of setting priorities is "differentiation" of the product by creating competitive
advantages. This involves giving customers some good reasons for being loyal. The second
bullet above relates to differentiation. Analyze your lost customers (switching analysis) to see
where the greatest opportunity lies. For our services in these areas see the services page on
our website.

What else is Important in a Customer Satisfaction Program?

Taking action is important. The benefit of customer satisfaction programs comes only from
resulting actions that improve your product, service or brand and result in greater sales,
profits and market share.

It is crucial that your program provide useful customer information. Our criteria for "useful"
are: clear, accurate, current, relevant and complete. When customer information meets these
criteria managers will be more willing to rely on it for making decisions.

Becoming customer driven means making your customer information at least as credible and
useful as your financial information. Managers will use the information that best helps them
solve important business challenges. When financial information is the only reliable
information, the company has a hard time becoming customer driven.