Why customer loyalty doesn’t always pay
Vanderbilt management professor Bruce Cooil and collaborators write in the latest 'Harvard Business Review' that customer spending--not satisfaction--matters most.
It’s time to update the old adage that says, “The customer is always right.”
Instead, it’s the customer’s wallet that’s always right, according to research published by Vanderbilt University management professor Bruce Cooil and his coauthors in the October 2011 issue of Harvard Business Review.
For all the attention paid to achieving high satisfaction levels, Cooil and his collaborators find that what matters most is how well a company ranks in comparison to rivals.
(The HBR article was coauthored by Timothy Keiningham, MBA '89, Global Chief Strategy Officer and Executive Vice President at Ipsos Loyalty, a leading marketing research firm; Lerzan Aksoy, Professor of Marketing at Fordham University; and Alexander Buoye, Vice President of Analytics at Ipsos Loyalty.)
“Customers may be very satisfied with your brand and happily recommend it to others—but if they like your competitors just as much (or more), you’re losing sales,” Cooil and his coauthors write. “Making changes to increase satisfaction won’t necessarily help.”
What will help? Focusing on a new measurement developed by Cooil and his colleagues called the Wallet Allocation Rule, which uses customer rankings of brands to predict the percentage—or share—of spending a company will capture in its segment. Researchers created the tool after examining the purchasing habits of 17,000 consumers in more than a dozen industries over a two-year period.
To illustrate the disconnect between traditional customer satisfaction levels and actual spending, Cooil and his coauthors turn to the example of Walmart. In 2008 the discount chain launched Project Impact, a companywide remodeling effort undertaken at least in part to raise customer satisfaction scores. Walmart accomplished its goal of raising customer satisfaction, but at the same time saw shoppers drift to more stores. That meant, “Even as satisfaction increased, share of wallet fell,” the authors write.
“If your brand is one of only two a customer uses for a given purpose, the [Wallet Allocation Rule] shows that the difference between being her first choice and being her second can have a major financial impact,” Cooil and his coauthors write. “In such a situation, even being tied has grave consequences: Half of each dollar you could be collecting from the customer is going to your competitor instead.”
In practice, managers should focus less on customer satisfaction scores for their own sake, and more on how to drive a brand’s rank among competitors.
Cooil and his colleagues write, “If you’re not number one, you should ask your customers why they prefer your competitor and use the insights you gain to move up the ranking ladder.”
Tips included in the HBR piece explain how to improve your brand’s rank:
- Follow the Wallet Allocation Rule to establish the share of wallet of each competitor your customers use.
- Determine how many of your customers use each competitor.
- Calculate the revenue that goes from your customers to each competitor.
- Identify the primary reasons your customers use your competitors.
- Prioritize your opportunities to improve your share of wallet: Estimate the costs of addressing each reason your customers choose a competitor and weigh those costs against your potential financial return in each case. Remember to take into account the cumulative impact of addressing issues that apply to multiple competitors.
Copyright 2011 Vanderbilt Owen Graduate School of Management