Customer Satisfaction does not guarantee Customer Loyalty - Omoto

Customer Satisfaction does not guarantee Customer Loyalty

What is the difference between merely and totally satisfied customers?

“Hardly matters”, most of us would say.

However, Xerox Corporation discovered that its merely satisfied customers were six times less likely to buy again than its totally satisfied customers.

Are we aware of the facts? Apparently not.

According to a HBR report, there are a number of erroneous beliefs widely held by managers of the dozens of manufacturing and service companies. Firstly, most companies believe that it is sufficient merely to satisfy a customer. They believe that as long as a customer responds with at least a satisfied rating (a 4 on a 5-point scale), the company-customer relationship is strong. Secondly, they think that the time and effort required to convert a customer from 4 to 5 is not attractive considering the financial aspects. Finally, it is believed that departments with good ratings (above 3.5) should focus on customers with lower ratings (1 or 2).

Well, all of the above assumptions are deeply flawed.

Except in a few rare instances, complete customer satisfaction is the key to securing customer loyalty and generating superior long-term financial performance. Most managers do realise that customer satisfaction is very important in a competitive market. They, however, don’t understand the denotation of ‘a thin line’ between customer satisfaction and loyalty. 

In markets where competition is intense, such as hard and soft durables, business equipment, financial services, and retailing, there is a tremendous difference between the loyalty of merely satisfied and completely satisfied customers. As shown in the graph below, any drop from total satisfaction results in a major drop in loyalty. 

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The Indications  

Of the five markets that have been considered in the above example, local telephone service was the only one where the relationship between satisfaction and loyalty followed the trend that it was supposed to. However, when the strength of monopoly no longer holds true – due to various reasons such as deregulation, the emergence of alternative technology, or the arrival of new competitors — the curve can shift into the shape of a highly competitive market in an astonishingly short period of time.

And we have facts to support the above-mentioned statements.

In his study of the loyalty of retail-banking depositors, John Larson, a Vice President of Opinion Research Corporation in Princeton, New Jersey, found that completely satisfied customers were nearly 42% more likely to be loyal than merely satisfied customers.

For hospitals, airlines, and personal computers sold to businesses—industries whose hold on customers fall somewhere between automobiles and local telephone services – customer satisfaction in those industries, too, affected customer loyalty much more than managers generally assumed. 

For example, the business-PC market marked the steepest drop in the loyalty of end users relative to satisfaction. The next steepest drop in loyalty occurred in the hospital market—and it’s bound to be steeper if the hospitals continue with the same trend of placing little emphasis on patient satisfaction. In mixed markets such as airlines, switching costs of customers is almost negligible and the carriers can’t really differentiate based on price. Therefore, customer satisfaction is pretty much everything they can do to differentiate themselves.

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Time to pay attention.

Although customers sometimes defect en masse, their departure may also occur in harder-to-spot dribs and drabs or spurts. Customers defect once they’ve had a bad experience; patients defect after a course of treatment; a digital marketing agency loses customers only after a complete failed campaign; often clients also leave once their PoC does. The curve snaps and it is a time of maximum vulnerability for the company. While it takes time to lose such customers, it takes just as long to recapture them once they have moved to another supplier.

The lesson derived from the above table is that though customers are reasonable, they want to be completely satisfied. In case they are not and have a choice, they can be lured away easily.

Now that the problem statement is clear, what steps can companies take to make sure that customers don’t part ways?

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The first step is to make measuring customer satisfaction and loyalty a priority and to ensure that the process is unbiased. This is because there are often forces within the organization that tamper with critical data. 

The second step is to create a curve by plotting individual customer responses. Managers should be aware of the factors that shape their own company’s curve. The third step is to determine the most appropriate strategies for raising customer satisfaction (refer to the table above). 

Also, since expectations of customers regarding a basic product are shifting given the recent developments in technology and spurge of new competitors, the match between the basic product or service must be reviewed continually to ensure that there is still a good fit.

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Companies should be especially careful with neutral and satisfied customers so that they do not fall back into the dissatisfied category. Therefore, they need to implement highly responsive recovery processes with well-designed support services.

The following are the four categories of customers, and companies need to have separate strategies for each one of them.

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Horst Schulze, President and COO of the Ritz-Carlton Hotel Company, the 1992 winner of the Malcolm Baldrige National Quality Award, puts it best. “Unless you have 100% customer satisfaction—and I don’t mean that they are just satisfied, I mean that they are excited about what you are doing—you have to improve,” he said. “And if you have 100% customer satisfaction, you have to make sure that you listen just in case they change…so you can change with them.”

The article has been written based on this HBR case study.


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