Companies who want to retain or expand their relationships with existing customers are finding that measuring and modeling customer loyalty is very valuable. We were recently asked “Do you need to measure loyalty if you are measuring retention-aren’t they the same thing?” Our answer, no, they are not the same thing, and you may need both.
Retention is a measure of whether an existing customer continues to do business with you. That is not to be confused with loyalty, which measures a customer’s predisposition to select a business entity as a preference, and indicates a certain resistance to competitors. Loyalty is a behavioral disposition that suggests that a customer will consistently respond favorably toward a brand/company, and also suggests the willingness to engage. As you can see, there is a distinction and it’s important to understand that a customer who continues to do business with you may be retained, but not necessarily loyal.
Responding favorably covers a lot of territory-from passively choosing to remain a customer, to actively choosing to advocate for a brand/company. Therefore, while measuring retention, once you define what a customer is in terms of tenure, it is a matter of counting. Loyalty takes a bit more sophisticated measurement and needs to take into account three potential behavioral responses if you are going to use the concept to build a model:
- Expansion–the likelihood the customer will increase their level of business, such as by purchasing more of the same product or other products in your portfolio
- Influence–the degree to which they can be influenced by the company in a way that positively impacts the company, such as seeking out advice, paying online, complying with new policies
- Advocacy–the extent to which a customer is willing to actively promote the company, such as online reviews, supporting the company’s position on an issue, participation in case studies, serving as a reference, or making referrals.
Note: The Net Promoter Score (NPS) methodology attempts to account for these 3 behaviors, but the primary goal of this score is to help you ascertain the number of promoters vs. detractors.
You will want to determine which of these behaviors (it can be all of them) best define loyalty for your company. If you don’t know, the answers to these five questions will help you get started:
- What is the ideal customer for your company? What do they do/not do? What does a less-than-ideal customer look like?
- What does your company want from its relationship with customers and why?
- What can customers do to support the company’s mission?
- What can customers do to help the company improve service and reduce the cost to serve?
- What can customers do to reduce the cost of doing business with them?
You may want to engage a number of stakeholders in conversations around these questions. Once you determine the behaviors that define loyalty, you can build a model and begin to measure loyalty. It may be necessary to take different customer segments into account, and as a result you may need more than one model. To validate the model, you may need to conduct some research with customers who meet the loyalty criteria as well as customers you believe do not. Then, set about defining how you will use the model to measure and improve loyalty.
Customer loyalty is an intangible but extremely valuable company asset. By distinguishing retention from loyalty you can begin to understand the customer experiences, interactions, perceptions and attitudes that drive and impact loyalty.
You are probably familiar with the idea of scenario analysis used for strategic planning. With scenario analysis you focus on possible different outcomes to design a strategy that is flexible enough to accommodate whatever outcome occurs. By developing multiple scenarios, your company attempts to anticipate what might happen in order to develop a strategic response in advance. Scenario building for strategic planning in this instance is used to create potential actions based on a possible set of conditions or circumstances. But what if we stepped back and could use scenarios as a creative way to segment the market? After all, different customer sets face different scenarios which trigger their response. By understanding the various scenarios different customers face, you can take a unique marketing approach to each scenario. This is what is known as scenario marketing.
To understand how to apply the concept of scenario marketing let’s start by defining a scenario. Webster allows us to formulate this definition, “an imagined sequence used to account for a possible course of action or events.” By analyzing the possible scenarios each segment potentially faces, you can create marketing strategies and programs suited for a particular scenario.
Let’s create an example to illustrate the concept. Imagine that you manufacture, market and sell test, measurement and monitoring instrumentation. If you used a traditional approach to segmentation you might segment your customers into verticals, perhaps network equipment manufacturers, semiconductor manufacturers, and cable service operators. If you took a persona approach (creating a rich picture of an imaginary person who represents each targeted user that takes into account that person’s experience, tasks, objectives, etc.) to segmentation, you might segment your customers into buyer types, such as network operators, laboratory managers, test engineers, directors of manufacturing, etc. In each of these examples, the segmentation assumes that everyone in that segment is facing the same situation. But what if that weren’t the case? Rather there were similar situations being faced in different verticals or by different buyers, such as a situation where the instrumentation is needed to develop new products vs. a situation where a set of customers need the same type of instrument in order to solve a quality problem within an existing product family. How you would market to each scenario would be different regardless of the vertical or persona. And because it is very likely that several scenarios are occurring at the same time in different parts of the market, as a marketer you can build different strategies and programs designed to solve the various scenarios thereby creating more customer buying opportunities.
By using scenarios as the foundation for your market segment model you may be able identify a common set of needs across verticals and buyers that will fuel your growth and enable you to create a competitive advantage. Scenario marketing enables you to think of the world outside of pre-defined boxes such as geographies and verticals. And it opens up new possibilities for cross-selling and internal synergies among product groups by being able to see how your product offering can address different scenarios. Scenario marketing facilitates an even more customer-centric approach. With scenario marketing you can move beyond “who” is using the product to seeing similarities in how people need to be treated during the buying process thus enabling you to further maximize customer value.
Think of scenarios as simulations of how various offerings can be used in a variety of situations. Through a scenario analysis process, marketing can spot the relevant behavior for different groups of customers even if those customers are in the same vertical. Taking a scenario approach enables sales people to ask questions that focus on the buyer’s needs and the scenario. The seller who comes closest to matching the buyer’s scenario is more likely to close the deal. The salesperson who takes this approach has an advantage from the outset because they are engaging in a different conversation with potential buyers by focusing more on each buyer’s particular situation rather than assuming a similar scenario because that potential buyer is in a particular vertical or buyer persona. The use of scenarios encourages companies to be more outward looking, forcing marketers to ask two important questions:
• What are the different situations faced by potential users of our products that our products can solve?
• How do we solve those problems better than any alternatives they could choose?
Let’s take a look at one more example. One of the biggest challenges companies face is the adoption of new products. Success often depends on how well the value of the product is communicated to the largest number of potential customers. A typical product launch attempts to communicate how the product solves a broad number of customer needs, requirements, and expectations. Using scenario marketing, you can test and design unique strategies and marketing programs designed to respond a potential set of scenarios. This approach enables you to consider various customer situations and response in order to build relationships with customers truly based on their needs and wants.
Ten steps for developing scenarios (The first three steps may require doing research.):
Step 1: Identify each potential unique situation.
Step 2: Determine all the factors and forces directly affecting each situation.
Step 3: Rank the factors and forces in terms their importance and degree of certainty.
Step 4: Using a 2X2 grid, map each situation based on their importance and certainty scores.
Step 5: Identify all the situations that you can address that create both a competitive advantage for you and your customer and score each situation based on the degree of competitive advantage created for you and for the customer.
Step 6. Using a 2X2 grid, map each situation based on the degree of competitive advantage for you and your customer.
Step 7: Identify the situations with the highest score for importance and lowest degree of certainty that are also in the grid with the highest degree of competitive advantage for both you and the customer.
Step 8: Fill in the details for each high scoring situation and create a name for the scenario.
Step 9: Test the scenarios with existing customers.
Step 10: Develop a strategy to market to each scenario.
Conclusion: Creating segments from scenarios is about more than simply developing interesting stories. It should improve your clarity about the situations your customers face and enable you to assess the strategic implications for each situation. By using scenarios as the basis of your segmentation model, marketing can better understand what might happen with their customers leading to more effective marketing strategies and programs.