RAPID Loyalty Measurement

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This presentation outlines the RAPID Loyalty Measurement Approach, a method of assessing the three dimensions of customer loyalty: Retention, Advocacy and Purchasing.

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RAPID Loyalty Measurement

  1. 1. Selecting the Right Measures of Customer Loyalty Bob E. Hayes, PhD Business Over Broadway
  2. 2. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com  Customer Loyalty and Business Growth  Customer Loyalty has Three Components  RAPRAPID Loyalty Measurement Approach  Customer Lifecycle and Customer Relationship Management  Comparing RAPRAPID Loyalty Measures and NPS Overview
  3. 3. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com  The degree to which customers experience positive feelings for, possess allegiance to, and exhibit positive behaviors toward a company Customer Loyalty
  4. 4. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com  Research shows companies with higher customer loyalty experience accelerated business growth Customer Loyalty and Business Growth 11 Retention, Advocacy, Purchasing, Renewal rate, Churn rateRetention, Advocacy, Purchasing, Renewal rate, Churn rate
  5. 5. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com  Growth relies on three types of customer behavior Customer Loyalty and the Impact on Growth Frederick Reichheld.Frederick Reichheld. The Loyalty EffectThe Loyalty Effect. Harvard Business School Press, 1996. Harvard Business School Press, 1996 Base ProfitBase Profit Profit from increasedProfit from increased purchases and higherpurchases and higher balancesbalances Profit from reducedProfit from reduced operating costsoperating costs Profit from referralsProfit from referrals Profit from price premiumProfit from price premium Customer acquisition costCustomer acquisition cost Growth is all about:Growth is all about: RetentionRetention AdvocacyAdvocacy PurchasingPurchasing
  6. 6. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com Customer Loyalty and the Impact on Growth  Customer lifetime value impacted by three customer loyalty behaviors Based on the article by Gupta, et al. (2006). Modeling customer lifetime value.Based on the article by Gupta, et al. (2006). Modeling customer lifetime value. Journal of Service ResearchJournal of Service Research,, 99(2), 139-155.(2), 139-155. Business Programs Marketing Sales Service Customer Retention Customer Acquisition Customer Development (cross/up-sell) Customer Lifetime Value Firm Value
  7. 7. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com Customer Behavior Retention Advocacy Purchasing Switch to another company* X Purchase from another company* X Satisfaction X Choose again for first time X Recommend X Purchase same product/service X Purchase different products/ services X Increase purchase frequency X Increase purchase amount X Three Dimensions of Customer Loyalty • Analysis of seemingly disparate customer behaviorsAnalysis of seemingly disparate customer behaviors also reveals three primary dimensions of loyaltyalso reveals three primary dimensions of loyalty11 11 Based on factor analysis of self-reported customer behaviors; Results can be found in Hayes, B. E. (2009).Based on factor analysis of self-reported customer behaviors; Results can be found in Hayes, B. E. (2009). Beyond the ultimate question: ABeyond the ultimate question: A systematic approach to improve customer loyaltysystematic approach to improve customer loyalty. Quality Press. Milwaukee, WI.. Quality Press. Milwaukee, WI. * Reverse coded so lower rates of these behaviors indicates higher levels of Retention Loyalty.* Reverse coded so lower rates of these behaviors indicates higher levels of Retention Loyalty.
  8. 8. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com  Retention Loyalty Index (RLI)  Measures the degree to which customers will remain as customer/not leave to competitor  Advocacy Loyalty Index (ALI)  Measures the degree to which customers feel positively toward/will advocate your product/service/brand  Purchasing Loyalty Index (PLI)  Measures the degree to which customers will increase their purchasing behavior RAPRAPID Loyalty Measurement Method
  9. 9. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com RAPID Loyalty Indices Predicted Business Growth Measures Retention Loyalty Index Churn Rate Advocacy Loyalty Index New customer growth Purchasing Loyalty Index Average revenue per customer, dollars spent Predicting Business Growth Source: Hayes, B. E. (2009). Beyond the ultimate question: A systematic approach to improve customer loyalty. Quality Press. Milwaukee, WI.
  10. 10. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com Customer Lifecycle  Understanding how to improve customer loyalty begins with understanding the customer lifecycle AttractAttract Service Service Acquire Acquire Attraction phaseAttraction phase Marketing process attracts customersMarketing process attracts customers through advertising of perceived value ofthrough advertising of perceived value of product and/or serviceproduct and/or service Acquisition phaseAcquisition phase Sales process acquiresSales process acquires customers and sets theircustomers and sets their expectations regarding productexpectations regarding product and/or serviceand/or service Service phaseService phase Service process deliversService process delivers service and ensuresservice and ensures customers’ expectations arecustomers’ expectations are met regarding productmet regarding product and/or serviceand/or service
  11. 11. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com Factors Impacting Customer LoyaltyFactors Impacting Customer Loyalty • Retention LoyaltyRetention Loyalty – Personal valuesPersonal values – Customer experienceCustomer experience • Advocacy LoyaltyAdvocacy Loyalty – Customer experienceCustomer experience • Purchasing LoyaltyPurchasing Loyalty – Personal valuesPersonal values – Customer experienceCustomer experience
  12. 12. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com Customer Behavior RAPRAPID Loyalty Measures Lifecycle Management Business Growth RAPRAPID Loyalty and Business GrowthID Loyalty and Business Growth • Three Ways to Grow BusinessThree Ways to Grow Business Decrease Churn Retention LoyaltyIndex Marketing/ Sales/Service Increase Referrals Advocacy LoyaltyIndex Service Increase Purchase Behavior Purchasing LoyaltyIndex Marketing/ Sales/Service 1 2 3 Customer Lifetime Value Revenue Profitability Market share
  13. 13. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com  Introduced by Frederick Reichheld in 20031  Based on one question: “How likely is it that you would recommend us to a friend or colleague?” (0 to 10 rating scale)  0-6 = Detractors  7-8 = Passives  9-10 = Promoters  Equals proportion of Promoters minus proportion of Detractors (NPS = P – D)  Organizational-level metric, not customer-level metric  Widely used today by major corporations  General Electric, American Express, Progressive, Intuit  Reported in conference calls Net Promoter Score (NPS) 1 Reichheld, Frederick F. (2003). The One Number You Need to Grow. Harvard Business Review, 81 (December), 46-54. 00 10105511 22 33 44 66 77 88 99 DetractorsDetractors PassivesPassives PromotersPromoters Not at allNot at all LikelyLikely ExtremelyExtremely LikelyLikely NeutralNeutral
  14. 14. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com Pitfalls of Using NPS Methodology  NPS is not best predictor of growth1,2  Does not improve growth through existing customers  NPS is ambiguous  Could arrive at same NPS with different number of Promoters and Detractors  NPS = P – D  30% = 50% – 20% OR 30% = 40% - 10% OR 30% = 30 – 0%  Use of only NPS leads you to overlook disloyal customers defined in other ways3  Better to use all loyalty questions to identify at-risk customers1 Keiningham, T. L., Cooil, B., Andreassen, T.W., & Aksoy, L. (2007). A longitudinal examination of net promoter and firm revenue growth. Journal of Marketing, 71 (July), 39-51. Correlations of the NPS and overall satisfaction with revenue growth were not significantly different from each other. 2 Morgan, N.A. & Rego, L.L. (2006). The value of different customer satisfaction and loyalty metrics in predicting business performance. Marketing Science, 25(5), 426- 439. Correlations of the loyalty questions with business performance measures were small and, often times, not significantly different from each other. 3 Hayes, B. E. (2008). Customer loyalty 2.0: The Net Promoter Score debate and the meaning of customer loyalty, Quirk’s Marketing Research Review, October, 54-62. Of customers who are not Detractors, 31% were likely to switch to a different wireless service provider.
  15. 15. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com Comparing RAPRAPID Indices and NPS Poor Fair Good Excellent 11 RAP refers to Retention, Advocacy and Purchasing Loyalty Indices. NPS refers to Net Promoter Score.RAP refers to Retention, Advocacy and Purchasing Loyalty Indices. NPS refers to Net Promoter Score. • RAPID indices are reliable, valid and useful predictorsRAPID indices are reliable, valid and useful predictors of business growth through new and existingof business growth through new and existing customerscustomers Characteristic NPS RAPID1 Easy to Understand Reliable Growth through new customers Growth through increasing purchasing Growth through customer retention Unambiguous
  16. 16. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com Select the Right Loyalty Measurement  Predictability is improved when loyalty measures and business outcomes are matched  Churn predicted best by retention loyalty  New customer growth predicted best by advocacy loyalty  Up/Cross-selling predicted best by purchasing loyalty  To effectively manage business growth, companies need to intelligently select their customer loyalty measures Customer Loyalty Predictors Retention Loyalty Advocacy Loyalty Purchasing Loyalty BusinessGrowth Outcomes Customer Churn Good Prediction Poor Prediction Poor Prediction New Customer Growth Poor Prediction Good Prediction Poor Prediction Up/Cross- selling Poor Prediction Poor Prediction Good Prediction
  17. 17. Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com For More Information Bob E. Hayes, Ph.D. Email: bob@businessoverbroadway.com Web: www.businessoverbroadway.com Blog: www.businessoverbroadway.com/blog Twitter: www.twitter.com/bobehayes

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