Measuring Loyalty
Authentic, self-determined loyalty only occurs after hard-earned, authentic trust is well established. This is true for interpersonal relationships just as it is for the relationships between customers and firms or between an employees and firms. Trust is always a fundamental prerequisite to loyalty. If you are serious about earning sustainable and authentic loyalty, you must have established an authentic and thorough foundation of trust.
Once you have gained trust, the next natural step in your customer relationships is loyalty. The “buy 12 cups of coffee and get the 13th cup free” type of loyalty behaviors some companies use to bribe through discounts or freebies are not sustainable. You have to keep giving the discounts to continue to get the behaviors. The type of blind loyalty demanded by drug warlords or mafia boss “leaders” who use fear, manipulation or outright bribery is generally feigned as well. When a more powerful, more frightening or higher paying leader comes along, loyalty is quickly questioned.
Self-determined loyalty, when it is purposefully earned, results in long-term, profitable relationships with customers is the type of loyalty that creates long-term value and resilience for a firm. It is much easier to sustain. Earning this type of loyalty takes time, positive intent and commitment. When you have earned it, your customers don’t consider your competition for anything they know is in your wheelhouse. If they have a need and you might be able to solve it, you are always their first call. Loyalty represents a key point in the relationship, as they have determined for themselves to engage your firm for your products or services in the future. So how do we measure loyalty?
Similar to trust, we have to start by creating a shared definition of loyalty for our organization, or our department within our firm, to make it measurable. Since many of us have a deep emotional connection to the word loyalty, we have to abstract our personal definitions from how we use it for our business. Loyalty is a powerful and important word in our language and yet, many businesses have superficial and sometimes deceptive ways of measuring it. A common definition I have seen companies use is “recurring purchases,” but this can be dangerous. While it is important to understand the financial transactions, the profitability and the lifetime value of your customers, recurring purchases do not mean your customer’s have self-determined and sustainable loyalty.
In fact, they may feel trapped. They may be buying from you because it is too difficult to switch and you have become “the devil they know.” If this is the case, you have no opportunity for triggering advocacy. They may, unfortunately, be talking negatively about you when you are not around.
A simple and objective definition I found in a Merriam Webster dictionary is: “The quality or state of being true and constant in support of someone or something.”
How might we measure if someone is “true and constant” in an objective way?
The closest proxy we have for “true and constant” is regular engagement. If we can determine how to objectively measure engagement behaviors with a modicum of consistency we will be well on our way to a powerful metric. When these specific behaviors occur at a regular and recurring interval, is reasonable to assume we have earned and are sustaining loyalty as shown in the contextual model below:
I’ve seen many companies get lazy and ignore loyal customers because they are only paying attention to the recurring purchases. Without focusing on actual engagement with these customers, we are missing important cues about the relationship. It is tempting to focus on growth alone and focus merely on new sales or those squeaky-wheel customers. Often, the quiet, loyal customers just chug along buying products and service without complaining and they end up ignored. If you don’t have a pulse on how engaged your customers are with your firm, you are missing a powerful and important metric.
Let’s look at how loyalty occurs. Similar to trust, loyalty occurs incrementally in a step function. When experiences occur, if they are consistent and positive, they move the customer upward on the graph over time, as shown above. We all start at the bottom left corner of the chart with little or no loyalty until a series of things happen, experiences that move us either up or down the trust continuum. When negative experiences occur, loyalty can definitely decrease. Early in the relationship, this can be detrimental. The more consistent we have been over time, the less impact one negative experience will have. Daniel Kahneman’s work in behavioral economics demonstrates this powerfully. When negative things happen, we tend to “value” them more strongly than those that are positive. This is called a negativity bias.
Now, imagine a line across the top of the chart called the “Loyalty Threshold.” Once we establish a clear measure for when our customer is regularly exhibiting loyalty behaviors, this line would represent this point in the relationship. Our goal is to reduce the amount of time it takes to get our customers to cross the “Loyalty Threshold.”
Loyalty generally takes much longer to earn than trust. But here is the beautiful thing about loyalty, the more you build, the more your customers have invested in learning how to use your products or services, the relationships they have with your team and in learning how to navigate your systems and processes. You are the incumbent. Every time they engage with you, they invest in learning your platform and becoming experts. They literally become “vested” in your solution.
The Math: If you were to actually create a loyalty function for your firm expressed in engagements over time, it might look something like this:
Calculus is the mathematical study of continuous change. It can be used to graphically show us the relationship between different factors. If we were to take the integral of this function we would have a clean, mathematically representation of how much investment they have made in your product or service in terms of time.
With each interaction and engagement, they learn who to talk to, how to use your product or service and they get more comfortable, more familiar and more capable. They build relationships with the people in your ecosystem. The integral represents the area under the curve.
When I run workshops, I use a simple thought experiment to explain how this works: “Most of us use a word processor every day to work on documents. How likely would you be to switch to a new word processor? Even if it were free?” The answer is consistently — “I’m not switching.” When I ask why, it is because they are familiar with the product and they know where things are and how to use it. They have people to ask if they get stuck. The investment required to learn a new word processor would not result in enough of gains in those other forms of equity.
When you measure recurring purchase to mean ‘Loyalty’ you fool yourself. It is a lazy form of leadership.
Experiences give you the ability to cause your customers to feel more cared for and to meet more of their higher level needs.
Loyalty often happens without your customers actively realizing it is happening. It is a result of valuable tactics you deploy to solve their problems and build relationships. Customer don’t usually set out to become loyal to your firm. You have to earn it from them over time.
The next step in the loyalty ladder is to trigger the first advocacy event.
