Editor’s note: Douglas Pruden is senior vice president at Paramus, N.J.-based Marketing Metrics. Ravi Sankar is a project director with Marketing Metrics. Dr. Terry G. Vavra is the firm’s president and an associate professor of marketing at Pace University.

Why do we need to focus beyond total customer satisfaction? Customer satisfaction is an acknowledged mandate for a substantial portion of today’s business organizations. As Alex Trotman, chairman of Ford Motor Company has said, "If we aren’t customer driven, neither will our cars be!" But as companies awaken to the importance of satisfaction many become almost blinded by its seeming singular importance. For example, in a recent Harvard Business Review article Jones and Sasser equate totally satisfied customers with truly loyal customers. We think these authors and others have oversimplified the loyalty equation.

The goal after all is greater customer loyalty and in the long-term improved profits, not higher satisfaction scores. It is loyalty, resulting in increased quantity and frequency of repurchase, increased cross-sales and the generation of more positive word-of-mouth, that must be achieved. To view such behavior as simply an outcome of satisfaction ignores some very real independent considerations for the marketing strategist.

In fact, investing in product and service quality to boost customer satisfaction is not an end in itself. Several studies have shown satisfaction scores relatively high among customers defecting from a brand, or product or service.

We believe there exists a complex relationship between satisfaction and loyalty. Certainly satisfaction is a necessary criterion, but it is not by itself sufficient to instill loyalty (e.g., Oliva, Oliver and MacMillan). The linkage between satisfaction and loyalty is complex for the following reasons:

  • The relationship between satisfaction and behavior is non-linear, involving two critical thresholds. There appear to be thresholds of service for affecting customer behavior. When satisfaction rises above the upward threshold, loyalty climbs rapidly. In contrast, when satisfaction falls below the downward threshold, loyalty declines rapidly. However, between these thresholds, loyalty is relatively flat. We believe that this is the region of loyalty opportunity, where marketing programs can be designed to modify behavior.
  • Behavior lags behind satisfaction. Dissatisfaction with a single transaction is unlikely to cause the customer to switch loyalties, particularly when switching barriers are high. Similarly, a single transaction producing a state of excitement is unlikely to lead to new loyalty. Customers have many encounters and state of mind builds over time. For example, a string of encounters in a short period producing dissatisfaction can lead to anger, then to a behavior change. Or a string of encounters producing an excited state can lead to the belief that the provider is unique.

Product marketing - market evolution

To enter a market or to sustain a product or service over time, a product needs to have some minimal functionality that fulfills customer needs. But having only minimal functionality grants the product nothing more than a commodity type status - hardly enough to ensure market success. To move beyond commodity type products marketers have created brands. The thrust of brand marketing is to create and sustain an image that differentiates the brand from other products in the category. An oft cited example of such differentiation is that of Perdue chicken, where branding helped raise Perdue up from the clutter of the other commodity type products. Creating brands based on adding an appropriate image ensures market success, when most other products in the category are commodity-like.

Once the category has several brands developed, however, the opportunity to gain share and move to the next level is sought through differentiation in customer satisfaction. Customer satisfaction is achieved not just by offering a quality product or service, but by surrounding it with after-sales care and service. In the early ’90s, achieving total customer satisfaction proved to be a competitive advantage over competing brands. Two major success stories are Motorola and Xerox. But as with any evolution, competitors within most categories have caught up or are attempting to catch up, in achieving total customer satisfaction. This has leveled the playing field once again.

To now break away from the competition firms will have to move to the next level and begin differentiating their products and themselves with customer loyalty. The main strategy for achieving customer loyalty is "aftermarketing" or retention marketing - offering value- added services, one-to-one customer dialogue and the building of emotional connections. Retention marketing, it seems, is becoming an industry buzzword as we approach the next millennium. It has become well understood that:

  • 65 percent of the average company’s business comes from its present, satisfied customers;
  • It costs five times as much to acquire a new customer as it costs to service an existing customer.

Firms have to look beyond achieving total customer satisfaction. Even totally satisfied customers can leave a company as their needs change, when a better offer is made or just to examine the benefits of the available options. Companies have to build lasting relationships with their customers. This involves acknowledging customers for their business, communicating with them, responding to their concerns and auditing them for their satisfaction on an individual basis (not to be part of research, but to understand their individual needs and expectations).

Measuring brand loyalty

Traditionally, brand loyalty research has used various behavioral measures drawn from panel data. These measures include proportion of purchase (Cunningham 1966) and purchase sequence (Kahn, Kalwani and Morrison 1986).

  • Proportion of purchases - The commonly used definition of brand loyalty, at least in empirical research, is the proportion of total purchases within a given product category devoted to the most frequently purchased brand or product or service. Proportion of purchases has the advantage of being quantifiable and closely related to market share.
  • Purchase sequence - Loyalty has also been defined according to the sequence of purchasing a specific brand, or product or service.

- Undivided loyalty is the sequence AAAAAA.

- Divided loyalty is the sequence ABABAB.

- Unstable loyalty is the sequence AAABBB.

- No loyalty is the sequence ABCDEF.

Jacoby and Chestnut (1978) have criticized these measures as lacking a conceptual basis and capturing only the "static outcome" (brand purchased) of a dynamic process (brand choice). The main drawback with the behavioral measures is their failure to differentiate among the mechanisms leading to repeat purchase behavior. A research vendor claims to measure loyalty using three measures - complete satisfaction, intention to repurchase and willingness to recommend. We believe that this model is not only simplistic, it also lacks potential diagnostic value.

Implicit in most definitions is the notion that brand loyalty plays a special role in generating repeat purchase (e.g., Kahn, Kalwani and Morrison 1986). Repeat purchase could be due to a variety of reasons, such as low involvement, consumer inertia, merchandise being out-of-stock or true brand loyalty. Hence merely measuring repurchase or retention rate as a surrogate for brand loyalty could lead us to erroneous conclusions.

In addition to potentially erroneous measures of loyalty, there are instances when customer behavior cannot be monitored. When firms do not directly sell to customers, as is the case with many frequently purchased goods, it is not possible to track customer behavior. On the other hand, when repurchase cycles are long as with consumer durables, monitoring customer behavior is impractical and costly. In such instances a measure of customer loyalty can be obtained by measuring attitudes.

The aftermarketing loyalty index

Cognizant of the fact that measuring behavioral outcomes alone does not provide a sufficient measure of loyalty, we review some of the other definitions of loyalty. Day (1969) viewed brand loyalty as consisting of repeated purchases prompted by a strong internal disposition. Consistent with this perspective, repeat purchases that are not accompanied by a strong attitude are labeled as "superficial loyalty" or "inertia" (Assael 1987). Vavra (1995) emphasizes that brand loyal customers not only repeat purchase, but also become "advocates" of the product. This positive word-of-mouth behavior is an oft forgotten consequence of loyalty. Our definition of brand loyalty is a variation of Jacoby and Chestnut (1978): a behavioral response expressed over time by consumers which is the result of a psychological commitment. A single behavioral act like repurchase does not constitute brand loyalty. Brand loyalty is both an attitude and a behavior which is repeated over a period of time. Managerial interest should just not be on the next purchase, but on the pattern of future purchases. In addition to behavior, the individual should also develop a degree of commitment to the brand (or company).

Based on the above definition of brand loyalty we have developed a composite index that includes both attitudinal and quasi-behavioral measures of loyalty called the Aftermarketing Loyalty Index(SM). The two dimensions of Aftermarketing Loyalty Index are Quasi-Behavioral and Attitudinal.

  • Quasi-Behavioral - Intent to repeat purchase and willingness to advocate. The long-term success of a firm is not based on the number of consumers who purchase its products or services once, but on the number who become repeat purchasers. Hence the intent to repurchase is a key outcome of loyalty.
  • Attitudinal - Psychological commitment to a brand (or company). The various factors that lead to a psychological commitment are:

Responsiveness. In various customer listening groups conducted in the computer, insurance and financial services industries, a firm’s responsiveness in responding to a customer’s problems/questions is cited as a critical component of the post-purchase product evaluation process. Responsiveness includes both timely and effective resolution of problem.

Accessibility. To understand customer needs, firms have to open lines of communication with the customer. Providing accessibility through different points of contact offers customers an opportunity to contact the firm, be it with a question, a complaint or a compliment.

Customer empathy. Vavra (1995) points out that customers view a purchase as initiating a relationship, while organizations may view a sale as the culmination of a marketing effort. He argues that customer empathy is a key factor affecting customer loyalty.

Management of evidence. Customers often are unable to adequately assess the value of a product. Providing customers with communication about the value and benefit received from a product reassures customers about the decision they have already made.

Emotional bonds. Superficial loyalty can be had through low prices or frequent promotions, but true loyalty can be cultivated only by allowing a customer to develop emotional bonds through trust and confidence towards a company.

Applications

An attitudinal measure of customer loyalty could conceivably have several applications:

  • Customer segmentation. The customer base can be divided into three segments based on index scores - loyal, vulnerable and non-loyal. Different marketing programs can be designed for different segments. Equally important, index scores can be used to filter out undesirable customers, those who cannot be served profitably.
  • Drivers of loyalty. The scale provides diagnostic input about the drivers of loyalty. This helps determine those factors that influence customer loyalty for a particular brand and enable them to be manipulated to achieve higher levels of loyalty.
  • Retention program tracking. Measure index scores before initiation of retention programs and then track improvements in customer commitment which results from implementation of the programs. When combined with information about retention program costs, the index can be used for comparing various retention programs.
  • Benchmarking against competition. Firms can monitor competitive activity by measuring index scores for company and competition’s customers. By assessing the drivers of loyalty, a firm can design marketing programs proactively to gain a competitive advantage.

Case study

Based on listening groups we conducted with customers in several industries, we developed a 21-item scale for measurement of loyalty - the Aftermarketing Loyalty Index. This scale was pre-tested among a small group of consumers (about 20), for a variety of industries. The scale was further refined and used to measure loyalty among consumers of a leading athletic shoe manufacturer.

Management at the shoe manufacturer had developed a rudimentary customer loyalty program with the expressed purpose of determining what specific "leverage" a relationship marketing program might help develop. The customer base was divided randomly into two groups, a test and a control cell. The customers in the test group were offered the loyalty program, while those in the control group were not. After the test period, the Aftermarketing Loyalty Index was administered to both the test and control groups.

A factor analysis was performed to identify the underlying factor structure. The factor structure was close to the hypothesized factors in the Aftermarketing Loyalty Index construct:

  • quasi-behavioral measures (intention to repurchase and willingness to advocate); * accessibility/responsiveness;
  • emotional bonds;
  • evidence of concern;
  • management of evidence.

The group of customers who had enjoyed the loyalty program scored 29 percent higher on overall measures, with even higher scores on key measures relating to crucial issues of trust and confidence. Specifically the test group’s attitudes regarding the shoe manufacturer were:

  • 8 percent higher for quasi-behavioral measures;
  • 65 percent higher for accessibility/responsiveness;
  • 23 percent higher for emotional bonds;
  • 32 percent higher for evidence of concern;
  • 25 percent higher for management of evidence.

The differences between the test and control group were statistically significant at the 95 percent confidence level, demonstrating the sensitivity of the scale in differentiating between loyal and non-loyal customers.

Currently we are testing the use of the Aftermarketing Loyalty Index as a predictive tool in identifying non-loyal customers. Subsequently behavior will be tracked to determine the extent these customers leave the company.

In the final analysis, firms that go beyond customer satisfaction and focus on building customer relationships by achieving loyalty are the ones that will witness sustained market success. Customer loyalty is an asset. It increases marketing efficiency by lowering customer acquisition costs (generating new customers through positive word-of-mouth), while simultaneously increasing price tolerance and reducing susceptibility to competitive brands. Total customer satisfaction is the starting point of the loyalty process. Companies should nurture their satisfied customers through aftermarketing -- developing after-sales care and service, for them to become loyal customers.

References

Assael, H., Consumer Behavior and Marketing Action, 3rd ed. (Boston: P.W.S. Kent, 1987).

Cunningham, Scott M., "Brand Loyalty - What, Where, How Much?" Harvard Business Review 34, January-February 1966, p. 116-128.

Day, G.S., "A Two-Dimensional Concept of Brand Loyalty," Journal of Advertising Research, 9, 1969, p. 29-36.

Jacoby, Jacob and Robert W. Chestnut, Brand Loyalty Measurement and Management. (New York: Wiley, 1978.)

Jones, O. Thomas and W. Earl Sasser, Jr., "Why Satisfied Customer Defect," Harvard Business Review, November-December 1995, p. 88-99.

Kahn, Barbara, Manohar U. Kalwani, and Donald G. Morrison, "Measuring Variety Seeking and Reinforcement Behaviors Using Panel Data," Journal of Marketing Research, 23, May 1986, p. 89-100.

Oliva, Terence A., Richard L. Oliver and Ian C. MacMillan, "A Catastrophe Model For Developing Service Satisfaction Strategies," Journal of Marketing, 56, July 1992, p. 83-95.

Vavra, Terry, Aftermarketing: How to Keep Customers for Life Through Relationship Marketing (Burr Ridge, Ill.: Irwin, 1995.)