Customer SatisfactionResearch

The majority of organisations today, both public and private, include customer satisfaction as aprimary business or organisational objective

Customer Satisfaction

Research

An introduction to customer satisfaction research techniques and how it can

help your business

January 2001

The majority of organisations today, both public and private, include customer satisfaction as a primary business or organisational objective Indeed, most aim to deliver high levels of customer satisfaction and many have made significant investments in Customer Care or Customer Service programmes The ability to set customer satisfaction objectives is dependent on the

organisation’s ability to understand the priorities of its customers in the first place, and

subsequently to put in place mechanisms to measure accurately levels of customer satisfaction Customer Satisfaction Measurement (CSM) is the term used by market researchers to describe broad research activities that help to understand and measure customer satisfaction This

document provides an overview of why CSM is important to all organisations no matter how large

or small, outlines the objectives of different types of customer satisfaction research studies, and highlights some of the primary objectives of effective CSM programmes

Why Measure Customer Satisfaction?

Most businesses lose a certain proportion of their customers in every year they trade, and in many cases the customer is lost because they have defected to the competition This is often referred

to by marketeers as ‘customer decay’ or ‘customer attrition’ In some markets, the average attrition rate is between 10 and 30%! There are many reasons why a customer defects, but

without a doubt the primary driver is dissatisfion with the product or service being offered

Providing organisations can replace the lost customer with a new customer, ‘customer decay’ is not necessarily perceived as an urgent problem But ‘customer decay’ should in fact be a

problem for all organisations and ignoring it is both dangerous and inefficient

The underlying logic for minimising `customer decay’ is simple: the cost of acquiring new

customers is higher than the cost of retaining existing customers As we shall see, there is such a

thing as an unprofitable customer and, therefore, circumstances when acquiring new customers

is a better strategy than holding on to undesirable customers, but in general it is now a widely accepted business theory that customer retention optimises profitability

So, there is a fundamentally good reason for measuring customer satisfaction: understanding customer needs and delivering high levels of customer satisfaction ensures a high levels of

customer loyalty, and this in turn enhances profitability

For public sector organisations also, customer loyalty is a key measure of their performance Public sector bodies which provide excellent service to their “customers” are fulfilling a key tenet

of contemporary public service philiosophy and most government departments now set rigorous requirements for meeting the highest customer service standards

Defining Customer Loyalty – three underlining principles

In the early 1990s UK supermarkets, followed by a host

of other retail businesses, began introducing new consumer incentive schemes usually referred to as loyalty programmes If customers signed up to the loyalty scheme and continued to shop at the supermarket with their personalised loyalty card, they would enjoy regular price discounts on their

purchases through accrued loyalty points Years later some of those supermarkets withdrew their loyalty schemes because they realised loyalty wasn’t so easily bought Indeed, it became clear that many customers were simultaneously holders of several loyalty cards from competing supermarkets! More recently, internet retailers basing their customer loyalty strategies purely on discounted pricing also found to their dismay that customers were only loyal to the latest highest discount

First principle – loyalty isn’t bought cheap

Loyalty is not bought through discounts or cheap bribes Demonstrating competitive pricing can have a crucial role in winning or retaining customers, but this has to be seen in a wider context of

a valuable product or service proposition The most effective way to retain profitable customers

is, therefore, to offer a product or a service package which the customer values as superior to the competition But before you can put together a value proposition which will generate customer loyalty, you have to understand what customers really value the most

Second principle – there are different types of loyalty

The second principle of loyalty is about differentiation Your customers are not a homogeneous group; they do not all have the same buying characteristics Equally, there are fundamentally different types of customer loyalty

At the bottom end of the scale there are customers who are simply

‘locked in’ with their supplier or have limited scope to change supplier regularly This is not uncommon in business to business markets For example, the significant investments made by manufacturing companies to acquire ERP software stops them purchasing new systems regularly They are, to all intents and purposes, ‘locked in’ with their supplier for a minimum of a few years no matter how dissatisfied they may be with its performance Consumers are in a similar position with monopoly suppliers - they are forced to be loyal Customers who are forced to be loyal are not really loyal at all Loyalty, and more importantly, genuine commitment to a supplier, is a voluntary action and has to be earned ultimately by consistently giving the customer what they need

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Customer Loyalty

The second type of loyalty is often referred to as ‘incentivised loyalty’, as manifested by supermarket loyalty cards, airline ‘frequent flyer programmes’ and pricing discounts among telecoms

companies (e.g BT “friends and family”) As mentioned earlier, loyalty cards or other incentive schemes are no guarantee of loyalty and often only succeed in reducing the customer relationship to that

of price

The third type of loyalty is sometimes called ‘habitual loyalty’ If the customer continues to buy from a supplier merely because it is easier

to do so but without truly valuing the supplier’s products or services, then the customer has a relatively low level of commitment to that supplier In these circumstances the chances of a new supplier surplanting the incumbent is high and becomes more likely over time

In business to business markets the buying decision is frequently more complex than consumer markets In general, the higher the purchase value and the more important to the business of a single purchase, the more likely the decision will be made by a group of influencers, users and decision makers But uncomplicated, low value, low risk purchases frequently become habitual purchases

It is also the case that in many business and industrial markets, companies will generally seek to specify several sources of supply Multiple sourcing helps companies to negotiate with suppliers and minimises supply chain problems In these circumstances, even the most loyal business

customer may be unwilling to rely on a single supplier

The most valuable type of loyalty is often referred to as

‘committed loyalty’ Those customers who are committed to a supplier place a lot of value in using that supplier More

importantly, they believe their chosen supplier is the best choice for them in the market as a whole There are a number of

distinguishing characteristics to help identify the ‘committed loyalist’: they tend to buy more products, more often and spend

a higher proportion of their budget on their chosen supplier; they consider competitors less often and recommend their supplier more willingly and frequently to colleagues; they are emotionally committed to their chosen supplier Hence, committed customers are a valuable asset Truly committed customers are more like partners than customers - they actively support the supplier and recommend the supplier to other customers As such, marketeers often refer to these types of customer as ‘loyal advocates’

Third principle – some customers are more equal than others

The third principle of

customer loyalty is

that some customers

are more equal than

others We have seen

that committed

customers and loyal

advocates can be

highly valuable to a

business Other

customers, while

continuing to stay

with a supplier, may

be unwilling to act as

advocates or will

only purchase lower

priced products In

other cases, a

customer will only

remain “loyal” while

discounted products

are offered and will

regularly switch supplier on the basis of the highest short term discount

The real advantage of understanding customer loyalty is being able to differentiate the valuable from the not so valuable customer The ability to identify loyal customer groups and market to them as distinct segments is the very basis of ‘Customer Equity’ strategies - managing a customer base as a valuable business asset

The term ‘customer loyalty’ in essence sets a very high expectation for the majority of businesses and customers In reality, the proportion of customers who are faithful to a supplier to the point of pledging loyalty is tiny in most markets – often fewer than 10%

Customer loyalty can be seen as the holy grail of business; it should be a cherished ambition, businesses should strive hard for it, but as we have seen, their are degrees of customer

commitment In the real world the ultimate goal should not be unquestioning loyalty (for that would be unrealistic); however, it is entirely practical to develop a retained and committed customer base That’s an entirely more tenable and practical goal

Loyal advocates Loyal (spenders)

Won’t pay premiums Incentive shopper

Objectives and Scope of Customer

Satisfaction Measurement (CSM)

Types of Customer Satisfaction Surveys

There are several different types of Customer Satisfaction research exercises, which can be differentiated by both the scope and scale of customer satisfaction measurement Ideally, the CSM programme should be based on the assessment of the full product and service range, including issues of branding, product and price, distribution and service On other occasions the assessment will focus on narrower performance crtiteria, such as customer service performance

or a sub set of it, such as the performance of a help desk function

CSM programmes can also be differentiated by the scale of programme If the focus of the survey is only with the immediate customer base (e.g does not include performance comparisons with competitors) it

is a Customer Perceptions Survey (CPS) If, however, the survey inlcudes competitor organisations and seeks to provide benchmarks of customer satisfaction performance across an industry as a whole, it is a Customer Benchmarking Survey (CBS)

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Customer Satisfaction Measurement

Customer Service Measurement

Scope of Customer Satisfaction Measurement (CSM)

Scale of Customer Satisfaction Surveys

Type of

Customer

Perception

Survey

Confined to the service relationship with immediate customer base

Customer

Benchmarking

Survey

Includes competitor organisations and sets satisfaction benchmarks across the industry

Objectives of Customer Satisfaction Measurement

All customer satisfaction studies share the same underlying principle: to assess the performance of

an organisations’ products or services on the basis of how they are perceived by the customer Whether those perceptions are misplaced, lag behind current performance or are a very

accurate interpretation, customer perceptions matter Indeed, understanding these perceptions provides a critical understanding of future customer behaviour

Creating a new Customer Satisfaction Measurement programme – exploratory research

It is quite possible to design a new customer satisfaction survey and a passable questionnaire to collect the data without first consulting customers Managers who are close to their business and their customers can usually specify a survey which broadly covers the customer-supplier

relationship This is, however, not the best course of action, because it fails to utilise the first hand opinions of customers Where possible, an exploratory phase of qualitative research (e.g depth interviews, focus groups) should be conducted as an integral part of the set up process, and should be conducted to ensure that the subsequent data collection design (a) asks relevant questions (b) directed to the right people In our experience, this is critical to executing

meaningful customer satisfaction programmes

Interpreting Customer Satisfaction Performance

PFIs

Priorities for Improvement (PFIs) are determined by comparing the performance of an

organisation against the priorities of the customer Improving performance on PFIs will improve overall customer satisfaction This is not quite as straight forward as simply asking customers what they want because customers do not always accurately articulate what they really feel Hence,

an effective assessment of customer priorities should include an understanding not only of the

‘stated’ priorities of the customer but of implied priorities as well (sometimes called ‘derived’

importance), which are established through statistical modelling techniques

A rigorous understanding of importance takes account of both

‘stated’ and ‘derived’ importance, as

mentioned above

If an attribute (e.g factors used to measure satisfaction, such as delivery speed, or product reliability) is

considered important by customers

(‘stated’ importance) but in reality

does not strongly effect customer

satisfaction (low ‘derived’ importance)

it is said to have ‘visible importance’ –

you have to be seen to perform (see diagram, left)

At the opposite end of the spectrum, attributes which have both high

‘stated’ and ‘derived’ importance are

critical to customer satisfaction

Attributes which have low ‘stated’ importance but high ‘derived’ importance are unclearly

differentiated in the minds of customers and, therefore, present an opportunity to raising customer

satisfaction levels These are called ‘high potential’ attributes If you can identify ‘high potential’

attributes and perform well on these factors, you have an opportunity for raising customer satisfaction performance

Understanding importance

Limited Importance

Visible Importance

Critical Attributes

Stated Importance

c High

Potential

Moderate Importance

high

Customer Satisfaction Index (CSI)

Having established the importance of the attributes which determine customer satisfaction, an index of satisfaction scores should be produced which allows performance to be tracked over time, when the survey is repeated There are different approaches which can be taken for

formulating the CSI, but in general the satisfaction scores should be weighted according to the relative importance of attributes

Performance Gaps

Good customer satisfaction measurement programmes will determine performance:

§ relative to the priorities of customers

§ in relation to the performance

of the competition

Measuring Loyalty

As we saw earlier in this paper, customer satisfaction research is as much about measuring loyalty levels among customers as it is about measuring satisfaction

The research should determine the precise level of loyalty among customers, and profile the customer base against those loyalty criteria There are many different indicators of loyalty which can be employed, but the most reliable will include measures which describe the strength of the relationship between supplier and customer as well as the satisfaction levels

performance

importance

supplier `a’

supplier `b’

`Performance Gaps’

Depth of Commitment (DoC)

Looking to Switch

Vulnerable

Satisfied but uncommitted

Loyal

Loyal Advocates

Segmentation of

• Propensity to:

- recommend

- continue with supplier

• Share of purchases

• ease of switching supplier

• commitment to supplier

• price sensitivity

• satisfaction levels