Illusions of Customer Loyalty

October 3, 2009

As I read a WSJ article on the European grocer Asda’s new customer loyalty program, I was impressed to be learning about an actual loyalty program.   Most organizations create customer retention programs and then mistakenly call them loyalty programs.  This wouldn’t be a big deal, except that a mislabeled loyalty program can prevent a company from creating a real one.

Let me explain.  When companies pay customers to try out their products and services, it’s part of a customer acquisition program.  When companies pay customers to remain customers, it’s part of a customer retention program.  When companies invest in activities that increase customers’ willingness to pay, they have a customer loyalty program.  When a loyalty program works, it increases the chance that your customers will choose you over a lower-priced competitor.

European grocers have been touting their “loyalty” cards for years, with Tesco claiming the largest one.  These are effectively retention programs, where customers earn future discounts based on their current purchase behavior.  Companies like Tesco are bribing their customers to remain customers.  This is a classic retention tactic.

I was struck by the following quote in the article, which revealed that Asda might really be going after a loyalty and not retention program:

Making a dig at rivals’ customer-loyalty programs, Asda Chief Executive and President Andy Bond said he thought customer loyalty couldn’t be bought with plastic points or discount vouchers.

Asda is experimenting with a very different set of activities then its competitors.  Instead of offering discounts, it’s involving its loyal customers in strategic decisions such as which products to offer and how they should be arranged in the store.  Some customers will be given early access to products so that their opinions will have more influence.  Good customers will effectively earn the right to be a part of the company’s choice-making process. They will earn the right to co-create the value they eventually consume.

I’m intrigued by this idea because of the shared benefits of greater customer involvement — Asda’s customers make the service better, and become more devoted to the brand along the way.  Everybody wins.  And if customers turn out to be very helpful, Asda will compensate them accordingly:

…starting early next year, Asda also will reward customers who come up with the “brightest idea” that saves the business money. If the suggestion is implemented and saves Asda £2 million, a customer could be in line to receive a check for £100,000, or 5% of the first year’s saving.

Again, that line between customers and employees blurs.

Net Promoter Score – When Logic and Data Diverge

February 5, 2009

I am regularly asked for my opinion of a performance metric called the Net Promoter Score (NPS), which has become a popular way to assess an organization’s effectiveness by measuring the ratio of loyalists to detractors. Many companies have adopted the metric as a leading indicator of growth — the logic being that as the NPS score goes up, increased growth will naturally follow.  NPS is often adopted at the urging of very senior levels of management, and people want assurances that it’s worth the effort. My advice is always to not take anyone else’s word for its utility; test NPS with your organization’s own data, and if NPS correlates with growth (or whichever ultimate measure of performance you are trying to improve), consider using it.

A pattern I’ve observed is that many firms adopt NPS because of the rationale behind it — not because the evidence at their organizations supports its use. Indeed, an uncomfortably large number of managers have sheepishly admitted to me that they found no correlation between their NPS scores and ultimate performance, long after they’ve adopted NPS as a key organizational metric. This puts them in a terrible bind. NPS is often embraced with great fanfare, complete with incentives and systems that are redesigned to focus the organization on improving the metric.  When NPS is not a leading indicator of growth, organizations expend tremendous effort with little to show for it.

After seeing enough of these examples, I began to investigate what was going on.  Here’s what I’ve learned.  The logic of NPS is very persuasive. It’s clean and intuitive, and feeds our hunger for one clear goal on which we can focus the troops. If a company has more advocates than detractors, good things should happen. And the greater the imbalance, the better the things, right? The problem is that while this might be true as a general principle, it may not be true in a specific context. For example, if all those advocates are consuming your outstanding pre-purchase service, but closing the deal with cheaper competitors, as happened to Gateway computers, their advocacy is doing you little good.

Here’s my advice. Most organizations are already collecting the big three customer metrics — customer satisfaction, customer intention to repurchase, and customer likeliness to recommend.  I strongly encourage organizations to have a runoff between all three measures and the performance measure they’re trying to improve. If NPS is the strongest driver of performance, either in an existing time period or as a leading indicator, then by all means use it. But if it’s not, I suggest discarding it, regardless of the shiny appeal of its high-level logic.