Customer Loyalty

Exhibit 6.3   Defining, measuring and segmenting loyalty. Composite loyalty measure.

Customer loyalty is akin to the notion of brand loyalty. It is an attitudinal state of mind — customers are “loyal” if they have a positive, preferential attitude towards the service or product and the organization delivering it.

Attitudinal (or emotional) loyalty differs from behavioural loyalty. The latter reflects the behaviour to buy and to continue to buy a product or service. While attitudinal loyalty may induce behavioural loyalty, the two do not necessarily co-exist. A customer may continue to repurchase for a number of other reasons — force of habit, the inertia to change, convenience, affordability, or the lack of other options.

Being multi-faceted, customer loyalty is usually measured using a series of statements that reflect different aspect of loyalty. For example:

• Likelihood to recommend the product/service.
• Likelihood to continue using it.
• Favourite or preferred product/service.
• Willingness to pay more for it.
• Willingness to overcome inconveniences to secure it.

A typical approach to measuring loyalty involves a composite of three (or four) statements such as those shown in the Exhibit 6.3. The scale used in this example is a 5-point scale; the top two boxes are 4 and 5 (“agree” and “strongly agree”), and the composite score, i.e., the sum of the ratings for all three statements, varies from 3 to 15.

There are a variety of ways of crafting a loyalty index. One could base it on the intersection — the percentage of respondents who rate the product 4 or 5 (top 2 boxes) for all the three statements. Using this approach, on a 10-point scale, the loyalty index may be derived by dividing intersection score by 10. In the example shown in Exhibit 6.3, this approach yields a loyalty index of 3.2 (32/10).

Alternatively, a simple or weighted average of the top two box rating (40, 75, 45) on all three measures, may also serve as a measure for the loyalty index.

The composite score which varies from 3 (1 + 1 + 1) to 15 (5 + 5 + 5) may be used to craft loyalty segments. In the above example, 28% of the respondents with a composite score of 13 to 15 are classified as loyal, 34% (score 11 or 12) are classified as satisfied, 24% (score 8 to 10) are classified as neutral, and the remaining 14% (score 7 or less) are classified as dissatisfied.

To diagnose issues and identify the factors contributing to satisfaction/dissatisfaction, it is useful to drill down to the segments. For instance, to determine the factors contributing to dissatisfaction among respondents in the “dissatisfied” segment, a derived importance model would need to be crafted for that loyalty segment. (Refer Section Drivers of Customer Loyalty and Customer Satisfaction).