Selecting the Right Measures of

Customer Loyalty

Bob E. Hayes, PhD

Business Over Broadway
Overview
 Customer Loyalty and Business Growth
 Customer Loyalty has Three Components
 RAPID Loyalty Measurement Approach
 Customer Lifecycle and Customer
Relationship Management
 Comparing RAPID Loyalty Measures and
NPS

Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com
Customer Loyalty

 The degree to which customers

experience positive feelings for,
possess allegiance to, and exhibit
positive behaviors toward a company

Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com
Customer Loyalty and Business Growth
 Research shows companies with higher customer
loyalty experience accelerated business growth

1 Retention, Advocacy, Purchasing, Renewal rate, Churn rate

Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com
Customer Loyalty and the Impact on Growth

 Growth relies on three types of customer behavior

Growth is all about:
Retention Profit from price premium
Advocacy
Profit from reduced
Purchasing operating costs
Company Profit

Profit from referrals

Profit from increased

purchases and higher
balances

Base Profit

0 1 2 3 4 5 6 7 Customer acquisition cost

Years
Frederick Reichheld. The Loyalty Effect. Harvard Business School Press, 1996
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

Customer
Retention
Business
Programs Customer
Customer
Lifetime Firm Value
Marketing Acquisition
Value
Sales
Service
Customer
Development
(cross/up-sell)

Based on the article by Gupta, et al. (2006). Modeling customer lifetime value. Journal of Service Research,
9(2), 139-155.
Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com
Three Dimensions of Customer Loyalty
• Analysis of seemingly disparate customer behaviors
also reveals three primary dimensions of loyalty1
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
1 Based on factor analysis of self-reported customer behaviors; Results can be found in Hayes, B. E. (2009). Beyond the ultimate question: A
systematic approach to improve customer loyalty. Quality Press. Milwaukee, WI.
* Reverse coded so lower rates of these behaviors indicates higher levels of Retention Loyalty.
Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com
RAPID Loyalty Measurement Method

 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

Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com
Predicting Business Growth
RAPID Loyalty Predicted Business
Indices Growth Measures
Retention Loyalty Churn Rate
Index
Advocacy Loyalty New customer growth
Index
Purchasing Loyalty Average revenue per
Index customer, dollars spent

Source: Hayes, B. E. (2009). Beyond the ultimate question: A systematic approach to improve customer loyalty. Quality Press. Milwaukee, WI.
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

Attraction phase
Marketing process attracts customers
through advertising of perceived value of
product and/or service

Attract

Service phase Acquisition phase

Service process delivers Sales process acquires
service and ensures customers and sets their
customers’ expectations are expectations regarding product
met regarding product and/or service
and/or service

Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com
Factors Impacting Customer Loyalty

• Retention Loyalty
– Personal values
– Customer experience
• Advocacy Loyalty
– Customer experience

• Purchasing Loyalty
– Personal values
– Customer experience

Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com
 RAPID Loyalty and Business Growth
• Three Ways to Grow Business
Customer RAPID Loyalty Lifecycle Business
Behavior Measures Management Growth

Decrease Retention Marketing/ Customer

1 Churn Loyalty Index Sales/Service
Lifetime
Value
Increase Advocacy
2 Referrals Loyalty Index
Service Revenue

Profitability
Increase
Purchasing Marketing/
3 Purchase Loyalty Index Sales/Service Market share
Behavior

Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com
Net Promoter Score (NPS)
 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) Not at all
Likely
Neutral Extremely
Likely

 0-6 = Detractors
 7-8 = Passives 0 1 2 3 4 5 6 7 8 9 10

 9-10 = Promoters Detractors Passives 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
1 Reichheld, Frederick F. (2003). The One Number You Need to Grow. Harvard Business Review, 81 (December), 46-54.

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
1
customers
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.
2Morgan, 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.
3Hayes, 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.
Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com
Comparing RAPID Indices and NPS
• RAPID indices are reliable, valid and useful predictors
of business growth through new and existing
customers
Characteristic NPS RAPID1
Easy to Understand
Reliable
Growth through new customers
Growth through increasing purchasing
Growth through customer retention
Unambiguous
Poor Fair Good Excellent
1 RAP refers to Retention, Advocacy and Purchasing Loyalty Indices. NPS refers to Net Promoter Score.
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
Customer Loyalty
 Churn predicted best by Predictors
retention loyalty Retention Advocacy Purchasing
Loyalty Loyalty Loyalty
 New customer growth

Business Growth
Customer Good Poor Poor
predicted best by Churn Prediction Prediction Prediction

Outcomes
advocacy loyalty New
Poor Good Poor
Customer
 Up/Cross-selling predicted Growth
Prediction Prediction Prediction

best by purchasing loyalty Up/Cross- Poor Poor Good

selling Prediction Prediction Prediction

 To effectively manage business growth,

companies need to intelligently select their
customer loyalty measures

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

Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com