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R. Eric Reidenbach Ph.D.

Quality Insider

Growing Market Share Through Customer Retention

Value is a much stronger predictor of loyalty than satisfaction

Published: Tuesday, July 13, 2010 - 05:46

How loyal are your customers? That’s a question I bet many companies can’t answer with any specificity. Yet, it’s a critically important question. If you haven’t heard by now, loyal customers are profitable customers—an annuity, if you will, with recurring payments.

Customer retention is an important component of growing market share. It does little good to spend significant resources acquiring new customers only to lose them to some other competitor that offers greater value. Consider the wireless telecom company that was hemorrhaging customers at the rate of 50 percent per year. It had no idea about customer loyalty and regarded this excessive churn rate as a cost of doing business.

Companies can take several steps to assess the loyalty of their customer base and manage it as a profit center.

Step 1: Understand how your customers define value

Many organizations still believe that satisfaction is the best indicator of loyalty. If your company is one of these, you might want to take a look at a report issued by the Corporate Executive Board, which found that satisfaction accounted for a paltry 18 percent of the change in loyalty. That means 82 percent is explained by something else. Satisfaction, then, is not a good predictor.

Value is a much stronger predictor of loyalty, and understanding how your customers define value is essential. Value is the X in an equation where we want to control Y. It is the independent variable over which we have control to achieve the outcome (loyalty) that we want.

Figure 1 shows a value model for the wireless telecom company with the destructive churn rate.

Figure 1: Value model

This value model has two components: a predictive component that shows how well the value drivers (i.e., quality, image, and price) predict value, in this case with a R2 of 0.77. It also shows the trade-off between the three drivers the market uses in defining value. Quality is significantly and substantially more important that either image or price.

The managerial component identifies the critical-to-quality (CTQ) factors that make up overall quality. In this case there are four: “customer focus” (the most important) followed by “technical competence,” “product features,” and “billing.” This model is the voice of the market and provides an information platform for managing customer loyalty. It is the definition of value for this company operating in this market.

Step 2: Assess the loyalty of your customer base

Assessing the loyalty of your customer base requires the use of the customer loyalty matrix, which is shown below in figure 2.

Figure 2: Customer loyalty matrix

A customer loyalty matrix uses the two main drivers of value—quality and price—to locate groups of customers onto its surface. The intersection of the mean scores for the two drivers forms the four quadrants of the matrix. Groups of customers located in the outstanding value quadrant are the ones indicating they receive superior value. They are the most loyal, the most likely to renew contracts, and the most willing to recommend the company to others. In this case, about 33 percent of the company’s customer base is loyal.

In the poor value quadrant are three groups of customers that indicate they are receiving poor value for three different reasons. Poor-value group 3 (13%) indicates less-than-average quality and less-than-average price satisfaction. Poor-value group 2 (7%) reports even poorer quality and equally poor price satisfaction. Finally, poor-value group 1 (6%) reports the lowest quality and even lower price satisfaction. These customers are the least loyal and are active shoppers waiting to make a move once contracts expire. They are far from their apostolic brothers in the outstanding-value group and are most likely to denigrate their current supplier.

The company has a large group of average-value customers (41%) who are passive shoppers looking for another carrier with a better value offering. Because the company is not providing them with a compelling reason to stay with them, it is highly likely that a large percentage of them will join other defectors.

Step 3: Get management’s attention

Nothing gets management’s attention like revenues and losses. Linking the value groups to their economic contribution to the firm sounds the alarm to start managing retention efforts. Some of these links are shown in figure 3.

Figure 3: Linking value groups to their economic contribution

The team focusing on retention was able to link the different value groups to internal financial information. This information shows the ramifications of ignoring the problem. For example, all three poor-value groups account for a higher average number of units (handsets) than the outstanding-value group. The patterns for average cell usage, average billed revenue, average total cost/unit, and estimated average margin/unit were similar. When this information was extrapolated to the entire customer base, management realized the company was losing significant revenues and incurring greater-than-necessary costs trying to replace lost customers.

Step 4: Plug the leak

Plugging the leak involves understanding where the problems reside. Figure 4 provides insight into this issue.

Figure 4: Value-group assessments of performance

Examining value-group assessments of performance (on a 10-point scale where 1 = poor performance and 10 = excellent performance) on the four CTQ factors provides an initial understanding of where the company needs to focus to plug the leak. As the value declines from group to group, so too does the performance evaluation. Because “customer focus” is the most important CTQ factor, it represents the most likely starting point for remedying the loyalty problem.

A deeper dive into the “customer focus” CTQ factor provides a more granular road map to ensuring loyalty. Figure 5 shows the different criteria that comprise the “customer focus” CTQ factor.

Figure 5: Customer focus CTQ factor

Value is delivered to the market and the customer base through people, product, and process flows. Individual evaluative criteria point out the performance on the people, product, and process issues that are at the heart of the loyalty problem. For example, there are a number of representative issues concerning poor-performance evaluations by the poor-value groups and the average-value group. These can be addressed through more comprehensive training. Process issues (e.g., problem resolution, service request changes, reaching the right person when you have a problem, providing business solutions) should be subjected to quality initiatives focusing on improving the processes that support them. Repeat this process for each of the CTQ factors.

Step 5: Grow market share

Understanding the issues and the consequences of poor value, the company was able to grow its market share simply by reducing its churn from 50 percent to 25 percent within a year. A greater emphasis on “customer focus,” especially those issues that were created early in the customer life cycle, headed off a number of problems that reduced the value customers were receiving. Receiving greater value eliminated the need to seek it elsewhere.

Lessons to be learned include:

Don’t ignore customer defections. If you don’t know how loyal your customer base is, dig and find out. Defection is like a cancer that goes undiagnosed.
Assess your company’s value-delivery performance. Value is a strong leading indicator of loyalty, and it should have a dominant position on any dashboard that you use.
Link your value information to internal financial statistics so you can track the implications and cost of poor value-delivery.
Identify the causes of poor value and address them. Don’t accept them—fix them.
Set up a monitoring system so that at any time you can put your fingers on the pulse of customer loyalty. Be sure that someone owns the issue of customer loyalty. Stop being a source of low-hanging fruit for your competitors.

Discuss

About The Author

R. Eric Reidenbach Ph.D.’s picture

R. Eric Reidenbach Ph.D.

R. Eric Reidenbach, Ph.D., is the developer of Six Sigma marketing a disciplined and fact-based approach to growing market share in targeted product/markets by creating and delivering superior value. His book, Six Sigma Marketing: From Cutting Costs to Growing Market Share (ASQ Quality Press, 2009), has been described as the next generation of Six Sigma. His book Listening to the Voice of the Market: How to Increase Market Share and Satisfy Current Customers (Productivity Press, 2009) was released November 2009.


Reidenbach is currently the director of the Six Sigma Marketing Institute. Six Sigma Marketing is a fact-based disciplined approach to growing market share in targeted product/markets by providing superior value.   For a free pdf of his new book Best in Marketing: The New Imperative for U.S. Manufacturing go to www.6sigmarketing.com and go to the contact page.