Many managers in service industries who are trying to develop relationships with their customers believe that satisfying them is enough to create a committed customer base. It is true that satisfaction is important because it can lead to increased customer loyalty. But this is not the complete picture.
In fact, satisfaction levels in the U.S. often do not vary much between competing firms. This is supported by recent findings by the American Customer Satisfaction Index. Despite earning similar satisfaction ratings, firms in many industries do not enjoy the same level of customer loyalty and retention. To understand why, let's look beyond satisfaction.
Relationship-Seeking Customers
Customers will behave in a committed fashion only if they think it is appropriate to have a relationship with the firm or one of its employees. There is great diversity among customers in terms of their willingness to form commercial friendships. In a recent study, for example, while 4 in 5 clients had developed a friendship with their hairstylist, the remainder thought it was inappropriate to do so. A sizable minority of clients thought that pursuing a close relationship was improper.
At the heart of this finding was the fact that many customers did not think that mixing business with pleasure would be right. They reasoned that since customers are expected to pay their hairstylist and friendships do not usually thrive on the basis of money changing hands, it was wrong to define their interaction in terms of a friendship. These customers preferred to make their decisions about which stylist or barber to use on a day-by-day basis and chose not to concede the kind of personal or even intimate information that might have produced a friendship.
Identifying these customers in advance is difficult, but firms have to help themselves by learning to listen, even to those who avoid commercial relationships. One customer recollected her experience of receiving literally dozens of commercial solicitations from a credit card company over the course of a year. Viewing these mailings as inconvenient and wasted on her (she already had two credit cards and did not want more), she twice requested the removal of her name from their mailing lists. Several months after being reassured they would, she continues to receive frequent solicitations from the same company. As a result, she now feels ignored and disrespected, and at every opportunity she takes the time to tell her friends about her negative feelings toward the firm. Can firms afford to ignore the wishes of people who are not their customers?
There are other reasons customers avoid developing relationships with firms. It could be that the customer does not care much about the purchase decision and doesn't see much difference between brands or service providers. For example, a lot of people just don't want to think very hard about where to get their oil changed or where to fill up on gas. Unless their car is on fire, they certainly don't want to have more than a brief conversation with the attendee. This reality could be interpreted as a firm's failure to adequately differentiate its products, but it is still true that there are some products that customers have a hard time getting excited about.
Other people quickly get tired of buying the same thing and will try new brands just for the sake of variety. Experiencing the same thing, like listening to the same music selection or eating the same meal all the time, bores them. With people wanting variety, there often isn't a commitment to any one place of business, so relationships don't have time to develop and firms don't have a chance to learn how to serve the customer better.
Avoiding a relationship could be related to a person's concerns over privacy. In order to behave in a loyal way, customers are often asked to share information about themselves. Why do many video rental stores 'need' a customer's social security number, and why do many electronics stores ask for a home phone number when paying cash for batteries? Many people don't trust companies enough to be so forthcoming. Clearly, it's an issue many people care about, for why else would credit card companies now be offering "no telemarketing" cards? For firms who don't protect their customers' privacy, or observe other important customer values, it will not be possible to keep or woo customers in a commercial relationship.
Investment
For customer loyalty to emerge, it helps if the customer somehow invests in the firm. For example, a customer could become emotionally attached to a brand, thereby savoring and identifying strongly with it. She might buy from the firm more often in an effort to increase her standing in a loyalty program like cumulative discount programs at a grocery store. Or she might start liking and trusting a service provider such as a hair stylist or car mechanic.
These investments are important. The customer who is attached to the brand will only feel she 'belongs' if she continues to purchase that brand. In a more economic sense, she can benefit from her investment only by staying in the relationship and by behaving in a loyal fashion. The beauty of this proposition is that her investment has little or no value relative to competitors. For example, when customers fly, they cannot usually apply frequent air miles accumulated on one airline towards another.
In essence, these investments represent a switching cost to the customer. Not only will she be 'locked in' emotionally or financially to the relationship, but she will also be less likely to defect later since doing so would abandon the future benefits of the relationship. While a firm can encourage customers to make larger investments, they must also be genuine and well executed. A customer of a cellular phone company related how he did not ever use more than about 10% of the airtime that came with his calling plan. Three months after buying the phone, the firm sent him a note saying that based on an analysis of his calling habits, they would like to suggest he upgrade to a plan with about double the airtime. But the recommendation to increase his investment (in the form of a more expensive long-term contract) was obviously not thoughtful and was not based on truly understanding the customer's needs.
Of course the firm must deliver adequate service and quality and keep track of how satisfied its customers are. But customer-satisfaction measures often reflect only how well the firm is doing in an economic or functional sense. Even if customers report being "satisfied" with a service (e.g. their haircut), they might not come back if they were not satisfied about something that the firm didn't measure (e.g. how long was the wait? Did the store smell or was it too loud?). Where non-economic features of the service might be important to customers, firms should attempt to capture this information.
They should start by understanding the experience of what it means to be a customer. A good beginning is to address a different kind of satisfaction, something more like emotional satisfaction. If a customer walks away from a shopping trip satisfied in both emotional and economic terms, she will be likely to make much higher investments in the future. Such a customer probably will recommend the firm to friends (putting her own credibility on the line) and become loyal. On the other hand, if the customer leaves a restaurant content with the taste of her food but unhappy with how she was treated by the servers and with the constant noise coming from the kitchen, for example, she will hesitate or refuse to come back. Trying out a competitor and badmouthing the restaurant at this point are high on the customer's list of priorities.
Interdependence
How committed or loyal a customer is depends on the customer's perception of how interdependent the relationship between the customer and firm is. Satisfied customers often believe that a firm is fulfilling important needs. These customers recognize that they are somewhat dependent on the company for their future needs to be met.
In fairness, most companies value their customers and prize their dependence. They want customers to buy only or mostly from them. But what is often lacking is an obvious sense of reverse loyalty that customers likewise expect from firms. If a customer has invested into a relationship with a company by buying many of its products, sharing personal information and making recommendations about the brand to loved ones, the customer expects distinguished treatment from the firm.
Often he does not get it. For example, after many years of patronage and prompt payment, if a customer receives an impersonal and unpleasant notice from the phone company or credit card agency after being a few days late, he is likely to be upset. When phone companies offer new customers better rates than what long standing customers can obtain, this puts a serious strain on loyalty. Committed customers should be treated as preferred, not as taken-for-granted. Communicating appreciation can be simple. For most service providers, a smile or a thank you is a good start in the right direction. Offering long-standing customers special rates, expanded hours, help-lines with little wait or free products could also reassure customers how important they are.
A good analogy might be a dating relationships, where feeling under-appreciated, one partner will leave the relationship as soon as someone better comes along. Leading up to the termination, he will start to evaluate his romantic options in the dating market more positively. Feeling unwanted, ignored or disrespected, his own commitment depreciates and soon enough, a breakup is inevitable.
Sometimes, customers who are not satisfied or do not feel appreciated continue to buy from the same firm. A company employee looking at this might say that the customer's repeat purchasing is an indication of loyalty. But this is a mistake. Often, the customer remains in the relationship because nobody better has come along. She stays, giving the appearance of loyalty, because there either are no options, or what few options exist are very poor. In essence, the company is in the situation of being "the best of the worst."
As soon as another brand comes out that is even barely better, the customer is gone. Because the firm did not reciprocate the customer's dependence and did not make the customer feel appreciated, the customer starts to see competitors to the firm as more attractive. This likely marks the beginning of the relationship's end.
Loyalty of Commitment
For customers to be truly committed to a firm, they must feel it is appropriate to be in a relationship. They need to make investments into the relationship and perceive a mutual dependence with the firm. And of course, they need to be satisfied. Only then can one expect the customer to be loyal.
