3 Benefits of Customer Satisfaction and Loyalty
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- Published on Friday, 08 June 2012 19:16
- Written by Jonathan Story
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Not all satisfied customers are loyal, and not all loyal customers are satisfied, but the customer that is both satisfied and loyal is the best outcome of all. Satisfaction: How Every Great Company Listens to the Voice of the Customer, written by Chris Denove and James D. Power IV, provides an engaging and informative examination of the impact of customer satisfaction. One of the effects of customer satisfaction is loyalty, which has three benefits, each of which can have an impact on the bottom line: Referrals; Price Premiums; and Share of Wallet.
Referrals
Personal endorsements are valued more than newspaper or television advertising. The impact of this word-of-mouth advertising varies from industry to industry, and is affected by three considerations:
- Is a significant investment involved in the purchase?
- Is there sufficient information available for the consumer to be able to make an informed decision without any other help?
- How often are consumers in the market for the particular product or service?
A classic example is car mechanics. A repair bill could potentially be quite expensive, but there is not much available information to separate the skilled, conscientious mechanic from the one eager to prey on your ignorance. As a result, when a friend sings the praises of a mechanic who worked on his car, the information is put to good use.
Although it is true that unhappy customers are more likely to speak up about their experiences, customers at the other extreme will also go out of their way to give positive recommendations.
Price Premiums
Achieving a reputation for providing great customer satisfaction gives you the ability to charge a price premium without impacting market share. However, a reputation for marginal satisfaction means that building sales can only be done at the cost of discounts and other incentives that take away from the bottom line. Denove and Power compare two midsize sedans that both provide basic, reliable transportation: the Toyota Camry and Chevrolet Malibu. Based strictly on the similar functionality and features, one could expect that the models would compete strictly on price, so that a $500 rebate on the Malibu would force Toyota to respond in kind in order to remain competitive. This expectation is completely wrong.
In fact, although the current actual difference in quality between the two models is very small, the historical record has given consumers a better perceived reputation for the Camry. As a result, General Motors must make up for the perceived inferiority of the Malibu by offering discounts and incentives that amount to as much as $2,000. Given that General Motors sells about a quarter million Malibus per year, the discount is a loss of about a half billion dollars of revenue that stems from customer satisfaction not matching Toyota's.
Share of Wallet
Although consumers generally like to vary where they spend their money, they will direct more of it toward brands and businesses that give great customer satisfaction. J.D. Power and Associates conducted a study of investors having multiple online brokers. They measured customer satisfaction with each broker and what percentage of investor trades were placed with each broker. They found that, over time, traders moved more and more of their business to the brokers that provided high customer satisfaction.
Conclusion
Loyalty to a brand or business is associated with great customer satisfaction, and by providing customer satisfaction, businesses can add to their bottom line by getting more personal referrals, introducing price premiums, and retaining a greater proportion of the customer's spending budget.
Satisfaction is available at Amazon.com.