Is it really possible to measure customer loyalty?

Let’s start with the dictionary’s definition of ‘loyal’; “Giving or showing firm and constant support or allegiance to a person or institution.

The inference here is a natural tendency to show constant support which, for a business, translates into customers coming back for more — more of your services, more of your products or more of your time.

We probably have the strongest association with the word ‘loyalty’ when it relates to loyalty schemes offered by high-street shops. Nowadays, these schemes are in abundance but it wasn’t until Sainsbury’s introduced their Homebase Spend & Save scheme back in 1982 that we really started to see the concept capture the public’s imagination (and thirst for something for nothing!) that it began to gain traction.

The purpose of such a scheme is to encourage customers to come back and buy more, thereby collecting points which can be redeemed against future purchases — rinse and repeat. Everybody is happy. I know of a highly successful restaurant in Croydon, Surrey, who’s loyalty card scheme results in them giving away more than 200 ‘free’ meals a week, yet turnover and profits continue to rise.

What actually happens (if the scheme is successful) is the companies get to show year on year growth in sales and, despite giving-away discount vouchers or actual money-off a purchase against points collected, an increase in profits. It really is a win-win situation for customers, businesses and shareholders.

However, is that really loyalty or is that just playing to our natural weakness for wanting something for nothing? If the scheme were to be stopped would the customers continue to go to that particular establishment regardless? That is, perhaps, the 64 million dollar question which nobody is brave enough to seek an answer to!

For more than 30 years every type of business from credit card companies to coffee shops to supermarket giants is running some form of card-based loyalty scheme, which is fine for those businesses with high-street footfall, but what of the growing numbers of independent online businesses? How can they measure loyalty?

Clearly we needed a new system that would work online.

In 2003 Fred Reichheld, Bain & Company, and Satmetrix gave birth to the ‘Net Promoter Score’ as a customer loyalty metric. This [primarily] online system is said to “…measure the loyalty that exists between a provider and a consumer” by asking one simple, direct question of the consumer; “How likely is it that you would recommend our [company] / [product] / [service] to a friend or colleague?

The consumer has to simply select their answer from a scale of 0–10. That’s it.

Customers like it because it’s quick and simple and requires no justification/explanation. Business owners like it because, according to Reichheld et al, a lot can be deduced from the answer.

  • Those who score in the range 0–6 are known as Detractors. These are ‘unhappy customers who can damage your brand and impede growth through negative word-of-mouth.’
  • Those who score 7 or 8 are known as Passives. These are ‘satisfied but unenthusiastic customers who are vulnerable to competitive offerings.
  • Those who score 9 or 10 are Promoters. These are ‘loyal enthusiasts who will keep buying and refer others, fuelling growth.

What’s interesting is the assumption that there is a connection between those who would ‘recommend’ (or promote) the company/product/service, and ‘loyalty’ (those who would come back and buy again). Is there really a direct correlation?

This assumption has not gone unnoticed and there are many critics of the NPS system based, primarily, around there being no scientific evidence to support the claims that it is a clear and true representation of consumer loyalty. This hasn’t stopped major corporations around the world from adopting the system though, suggesting that “the practical benefits of the approach (short survey, simple concept to communicate) outweigh any statistical inferiority of the approach“. Well, we all know what they say about statistics. Ok, for those who don’t, they should be used the way a drunk uses a lamppost; for support, not illumination.

So, back to the original question; “Is it really possible to measure customer loyalty?”

In the same way that, in a business, turnover is vanity and profit is sanity, the short answer is no. Not unless you can physically record the same customers coming back, time and time again, of their own volition and not because you’ll stamp their card or award them value-based points. Of course, with eCommerce, this is eminently possible because the majority of online sales require the consumer to create, or log-in to an account so returning customers are therefore really easy to measure.

However, not all businesses wanting to measure customer loyalty are selling products or services online. They may want to direct a customer to their website after they’ve purchased an off-line product or service such as a car repair or hairdressing appointment etc.

The NPS system is simple and cost-effective to implement; is way more likely to be used by your customers than any other system or survey and, as long as you buy-in to the concept of interpreting the results in the same way every other adopter has then yes, it will allow you to ‘accurately’ measure your customers’ loyalty.

Originally posted on www.clivewilson.com

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