The Loyalty Effect
Loyalty is commonly defined as faithfulness or devotion. Richard L. Oliver, the renowned consumer scientist and Vanderbuilt University professor referred to customer loyalty as “a deeply held commitment to re-buy or re-patronize a preferred product or service consistently in the future despite situational influences and marketing efforts having the potential to cause switching behavior”. The loyalty effect is created when the consumer becomes an advocate and evangelist of a product or service. The impact of customer loyalty includes, but is not limited to, repeat purchases, brand loyalty and positive word of mouth.
Customer loyalty is not a choice any longer. It is the key to profitable growth. It is the only way to build a sustainable competitive advantage. Easy? No way. It requires a dedication to, and focus on, the delivery of a customer experience that transcends price and product. At the core is an experience with the customer which is so tight that it wards off competition and entices word-of-mouth referrals.
Over the past eight years, Addis Intellectual Capital has conducted a research study on organic agency growth. To date, AIC has administered over 5,600 surveys to insurance agents and brokers across the United States. The survey evaluates key performance indicators including prospect research and qualification, customer relationship management, cross selling, carrier leveragability, reputation and brand, agency culture and the degree to which an agency’s sales process is consultative and diagnostic.
Over 80% of the survey respondents readily admit that they lack a process to measure and benchmark customer intimacy, appreciation and loyalty.
AIC concludes that most agency leaders are not equipped with the tools or resources to evaluate the lifetime value of a customer, perform customer relationship management or analyze the “loyalty effect”.
The Ultimate Question
In the early 1980’s, Fred Reichheld and his colleagues at Bain & Company began investigating the connection between loyalty and growth. The research confirmed that businesses cannot prosper without customer loyalty. Yet, there was no practical metric for relationship loyalty. Companies lacked a system for gauging the percentage of their customer relationships that were growing stronger and the percentage that were growing weaker.
Reichheld and his team came up with 20 survey questions. The goal was to find the one question – the Ultimate Question – that showed the strongest correlation with repeat purchase and referrals.
To the surprise of Reichheld, the one question that captured the essence of the research was “How likely is it that you would recommend Company X to a friend or colleague?” Reflecting upon his findings, Reichheld and his Bain colleagues realized that this question made perfect sense as two conditions must be satisfied before a consumer makes a personal referral:
- They must believe that the company offers superior value in terms of price, features, quality, functionality, ease of use and other practical factors.
- They must believe that the company knows and understands them, values them, listens to them and shares their principles.
In our next post, I will discuss how the Ultimate Question is used to benchmark customer loyalty.