CUSTOMER SATISFACTION The Loyalty Elephant

1 Here is an old parable about a group of blindmen describing an Elephant . Lacking vision,they must use their sense of touch to under-stand what an Elephant looks like. One blind man touches a leg, and after carefulthought, says an Elephant is like a tree round,straight and tall. Another blind man feels the ele-phant s trunk and exclaims an Elephant is like a bigsnake. A third blind man feels the Elephant s tail andsays the Elephant is like a broom. All the blind menare technically correct in what they are describing, butall are missing the big articles about the differences between cus-tomer SATISFACTION , CUSTOMER value and CUSTOMER loy-alty are reminiscent of this parable. Many authors aretechnically correct in what they are describing butincomplete in their discussions. Some contend you should focus on CUSTOMER satis-faction. Others say no, CUSTOMER SATISFACTION is a wasteQUALITY PROGRESSIFEBRUARY 2003I33 The LoyaltyElephantbySteve Hoisington and Earl Naumannof time, and you should focus on CUSTOMER value or loy-alty.

2 Some say CUSTOMER SATISFACTION and Loyalty arestrongly linked, while others say they are totally inde-pendent of one another. Arguing for or against these con-cepts is futile. All are important, and all are related to SATISFACTION , CUSTOMER value and customerloyalty are all indicators of an animal we ll call beingcustomer focused. An organization devoted to fulfillingcustomer needs is CUSTOMER focused. Some describe thisas their quality environment, stating everything beginsand ends with the CUSTOMER in mind, and all the stuffdone in between is quality. CUSTOMER SATISFACTION , valueTCUSTOMER SATISFACTIONIn 50 WordsOr Less CUSTOMER SATISFACTION , value and Loyalty are related. A four-phase model explains the major relation-ships leading to CUSTOMER Loyalty : business perfor-mance, global perceptions, Loyalty behaviors andfinancial outcomes. The link to financial outcomes is strong a goodselling point when discussing CUSTOMER satisfactionwith Loyalty all indicate just how CUSTOMER focusedan organization truly SATISFACTION , value and Loyalty areclosely related.

3 These are not either/or proposi-tions. All three concepts work together and are sup-ported by good empirical evidence. A four-phase CUSTOMER Loyalty model, shown inFigure 1, explains the major relationships leading tocustomer Loyalty . The model begins with the cus-tomers perceptions of an organization s perfor-mance. These lead to the formation of globalperceptions about the organization, which thenlead to Loyalty behavior. Loyalty behavior leads tofinancial outcomes. Phase One Business PerformanceCustomers use five major categories of perfor-mance attributes to evaluate an organization s per-formance: 1. Product quality. This is the core dimensions of aproduct or service. For a tangible product, thismight include features, usability or compatibili-ty. For a service offering, this would include var-ious dimensions of the service being Service includes all aspects of theservice that wrap around the core offering. Thismight include sales, delivery, billing or customerservice.

4 Each service dimension would typicallyhave several Quality of relationship between CUSTOMER most business-to-business situa-tions, this is very important. Dimensions of rela-tionship might be communication, follow-upand many organizations, image is alsoquite important. Customers may use image as adifferentiator when the product or service offer-ing is difficult to evaluate. For example, IBM,Hewlett-Packard and Sony have strong imagesthat infer product and service quality. Dimen-sions of image might be innovativeness, marketleadership and corporate Price perceptions. These might include initialpurchase price, ongoing cost of ownership orprice of upgrades. The relative importance ofprice is highly variable across industries andtypically becomes more of an issue during , these five categories work togetherto shape customers global perceptions, and allshould be included in a good CUSTOMER satisfactionquestionnaire. It is important for an organization tounderstand the relative importance of these cate-gories.

5 This information allows the organization tofocus improvement efforts on issues that have thebiggest impact on the Two Global PerceptionsWhen evaluating an organization s performance,a CUSTOMER formulates global perceptions. A varietyof global perceptions can, and should, be examined. Six common global concepts are presented in34 IFEBRUARY SATISFACTIONC ustomer Loyalty ModelProduct qualityService qualityRelationshipImagePriceOverall satisfactionWillingness to recommendRepurchase intentCommitmentMet expectationsValue for the moneyCustomerloyaltyMarketshareReducedco stEmployeeattitudesProfitShareholdervalu eGlobalperceptionsLoyaltybehaviorsFinanc ialoutcomes12345678 BusinessperformanceFIGURE 1AT&T began its research into CUSTOMER satisfactionbehavior in the 1980s. Ray Kordupleski, customerservice director at the time, headed the many issues were examined, the linkagebetween value perceptions and Loyalty was well doc-umented. AT&T tracked the CUSTOMER s perception ofvalue using a five-point scale.

6 The researchers thenwent back a year later to see which customers werestill doing business with AT&T (see Table 1, p. 38).Customers with high perceptions of value wereloyal, and those with lower value perceptions weremuch more likely to defect. AT&T also investigated the linkage between valueperceptions and market share, both within andacross business units, tracking both for businesstelephone equipment for more than four years (seeFigure 2). The dotted line represents value scoresfrom CUSTOMER surveys. The solid line representsactual market share four months later. Value percep-tions turned out to be the single best predictor ofmarket share across most AT&T business the data, AT&T developed value models (seeFigure 3) to help manage CUSTOMER perceptions. Thisportion of the value model includes only the dimen-sions of product and service quality. The issues ofimage, relationship and price were excluded for pre-sentation purposes. The percentages in the valuemodel indicate the relative importance to the cus-tomer of both the category and the attributes withinthe category.

7 AT&TQUALITY PROGRESSIFEBRUARY 2003I35 Perception of Value vs. Market Share at AT&TPoints of sharePerceptions of valueYear oneYear twoYear threeYear four*Perception of value mirrors market share four months (-4 months)*Market share (percentage)AT&T Value ModelBusiness process CUSTOMER need/expectationInternal metricOverallproduct and service quality30% productReliabilityEasy to useFeatures and functionsKnowledgeResponsiveFollow-upDel ivery interval meets needsDoes not breakInstalled when promisedNo repeat troubleFixed fastKept informedAccuracy, no surpriseResolved on first callEasy to understand40%20%40%30%25%10%30%25%10%30% 25%10%45%35%10%Number of repair callsNumber of calls for helpFunctional performance testSupervisor observationsPercentage of proposals made on timePercentage of follow-up madeAverage order intervalPercentage repair reportsPercentage installed on due datePercentage repeat reportsAverage speed of repairPercentage of customers informedPercentage of billing inquiriesPercentage resolved first callsPercentage billing inquiries20% sales15% installation15% repair15% billing FIGURE 3 FIGURE 2the model, but some organizations might also useothers.

8 Each concept is different from the others,but all are closely related. In other words, each reveals something differentabout the customers global perceptions, but thecorrelation among these concepts is quite six concepts have been well validated withempirical data and are not theoretical in nature. The biggest lesson to learn is each concept has astrong correlation or linkage to key financial mea-surements within an organization. Demonstratingthe financial impact of improved CUSTOMER satisfac-tion levels is critical to elevating CUSTOMER satisfac-tion to a strategic initiative. This is usually accom-36 IFEBRUARY SATISFACTION10 years of IBM AS/400 division dataCostSatisfactionMarketCustomerofEmpl oyeeJobwithRightsharesatisfaction Productivityqualitysatisfaction SATISFACTION managerskillsMarket SATISFACTION (CS) (P) of quality (Q) SATISFACTION (ES) with Between Employee SATISFACTION , CUSTOMER SATISFACTION and FinancialPerformance for IBM-RochesterProductivity (P) = revenue per employeeCost of quality (Q) = hardware warranty costEmployee SATISFACTION (ES) = index of job SATISFACTION , satisfactionwith manager and SATISFACTION with right skillsCS = (1 Q/P) To improve employee SATISFACTION , focus on improving job satisfac-tion, SATISFACTION with manager, and watisfaction with having theright skills for the job.

9 To improve job SATISFACTION , focus on improving SATISFACTION withmanager and SATISFACTION with having the right skills for the job. Improving SATISFACTION with having the right skills for the job willimprove employee SATISFACTION , job satis-faction and will directly impact productivity,market share, and CUSTOMER SATISFACTION . Improving employee SATISFACTION will direct-ly impact productivity and market share. To improve CUSTOMER SATISFACTION , focus onimproving productivity and employee satis-faction and decreasing the cost of quality. Decreasing the cost of quality will directlyimpact CUSTOMER SATISFACTION and marketshare. Improving CUSTOMER SATISFACTION will direct-ly impact market 4 MarketshareProductivityCustomersatisfact ionEmployeesatisfactionSatisfactionwith managerJobsatisfactionSatisfactionwith right skillsCost of qualityIBM-RochesterIBM s AS/400 Division in Rochester, MN, conductedextensive research to determine actual CUSTOMER loyaltybehavior. Tze-Hsi Sam Huang headed the researchefforts.

10 Using years of data, the researchers examined the rela-tionship between revenue growth and SATISFACTION . Thecorrelations between key variables of interest and otherresults are presented in Figure 4. IBM also found 95% ofplished through the use of these global important points must be made regardingthe global concepts: 1. They are satisfactionresearch measures customers perceptions of anorganization s performance. In contrast, cus-tomer Loyalty is a behavioral outcome of the cus-tomer perceptions. To illustrate, repurchaseintent is a perceptual indicator of actual loyaltybehaviors such as future purchases, contractrenewals and revenue growth. For some organi-zations, the linkage between global, perceptualmeasures and Loyalty behavior is strong. Forothers, the linkage is weaker. QUALITY PROGRESSIFEBRUARY 2003I37revenues came from customers who were very satis-fied and satisfied (top two boxes). The ratio of revenuegrowth between very satisfied and satisfied customerswas 3:1 (see Figure 5).