• February 18, 2009
  • By Jessica Tsai, Assistant Editor, CRM magazine

Your Most Loyal Customers Demand the Best Experiences

If this recession hasn't been enough to make companies understand the importance of a good customer experience, there's probably little else that will do the trick. Last year, Bruce Temkin, vice president and principal analyst at Forrester, examined the relationship between experience and loyalty in the report, "The Business Impact of Customer Experience." Even then, back before we knew we were in a recession -- in other words, before the government's official notice that this recession had begun -- even then, customer experience had a high correlation with loyalty. This year, across all industries, the correlation was even stronger, providing tangible support for the notion that attracting long-term customers requires more than slashing prices.

[For more on CRM amid the economic downturn, see the February 2009 edition of CRM magazine, The Recession Issue.]

"We've gotten to a point where most executives will acknowledge that customer experience is important," Temkin says. His findings, though, reveal evidence of action behind those acknowledgements -- even if only among a minority of companies that, as he says, have taken it to the "next level." Executives at those exceptional companies, he adds, display a commitment to integrating customer experience with critical business measures such as loyalty -- a significant step in an economy that clearly favors customer retention over acquisition.

The study, "Customer Experience Correlates to Loyalty," surveyed 4,564 United States consumers in October 2008 on their interactions with more than 100 U.S. retailers across 12 industries:

  • Airlines
  • Banks
  • Credit card providers
  • Hotels
  • Insurance providers
  • Investment firms
  • Internet service providers (ISPs)
  • Personal computer manufacturers
  • Medical insurers
  • Retailers
  • TV service providers
  • Wireless carriers

Temkin calls the report "one the most important pieces of research that I've done," a distinction earned, he says, by its ability to finally provide quantifiable evidence tying customer experience to loyalty. "It's not good enough to think, or intuitively believe [anymore]," he says. "Now we have data that shows that is, in fact, the case."

Temkin deconstructs consumer loyalty according to three criteria:

  • willingness to repurchase;
  • reluctance to switch; and
  • likelihood to recommend.

Across all industries, a consumer's willingness to repurchase -- the likelihood another purchase from the same provider given a good experience -- correlated very strongly with customer experience, as defined by Forrester's Customer Experience Index (CxPi), which is itself based on three criteria:

  • how well the consumer needs were met,
  • how easy the company was to work with, and
  • how enjoyable the interactions were.

Among the 12 industries included in the report, TV service providers displayed the strongest correlation (0.76) between willingness to repurchase and customer experience, followed by ISPs at 0.74. Medical insurers, by contrast, displayed the weakest correlation (0.65).

The correlation between reluctance to switch and customer experience was a bit more varied across industries. Again, TV service providers had the strongest correlation, but banks, credit card providers, ISPs, wireless carriers, insurance providers, and hotels exhibited similarly strong correlations. The remaining verticals had what the report calls a "medium" correlation -- and medical insurers again pulled up in last place, with a 0.41 correlation.

Finally -- and not too surprisingly -- a consumer's likelihood to recommend was very strongly correlated with experience across all industries, with TV service providers exhibiting the strongest correlation (0.75) and retailers the weakest (0.66).

According to Temkin, there are various factors that may contribute to the correlation between loyalty and the customer experience.

  • The opportunity for an alternative: With less competitors in the space, there are fewer opportunities for switching.
  • The commoditization of a product: If a product is commoditized and multiple players offer a similar product at comparable price points, there's less motivation to be loyal.
  • The degree to which customers recognize a good/bad experience: As their spending becomes more cautious, customers have what Temkin refers to as a heightened awareness of their experience. More important, a difficult financial environment increases the effect of both positive and negative experience.
  • The degree to which customer experience becomes a competitive advantage: Service providers and sellers are catching on, Temkin says, citing DirecTV as an example of companies that are "really trying to raise the message about customer service." Whether the message has led to increased sales has yet to be seen, but the approach is clearly nurturing the customer's sensitivity to -- and desire for -- a good experience.

While the diminishing pool of consumers has transformed customer experience into an essential strategy, Temkin doesn't deny that other factors -- such as price and product quality -- have a significant role when it comes to purchasing decisions. "If you're not delivering a product people need, at the price they're willing to pay, it doesn't matter how good the experience is," he says.

The correlation between customer experience and loyalty was stronger across the board -- a sign that, all things being equal, the customer experience is an important part of the loyalty equation. "When times get tough, people start focusing more on the things that they're spending on," Temkin says. "They become even more aware of the interactions they have with companies."

Temkin says he wasn't exactly surprised by the increase in correlation over last year -- in fact, he says he didn't know what to expect. "I had no idea," he admits. "Quite frankly, how often do you get to do [this research] in the middle of a recession?" The flip side, of course, is that the epic scope of this recession makes it hard to predict whether the correlation between customer experience and loyalty will grow even stronger in 2009.

Nevertheless, Temkin says, good customer experience can no longer be overlooked. And amid an economy this turbulent, he says, one thing's for certain: "The recession is changing the mindset of the consumers."

News relevant to the customer relationship management industry is posted several times a day on destinationCRM.com, in addition to the news section Insight that appears every month in the pages of CRM magazine. You may leave a public comment regarding this article by clicking on "Comments" at the top; to contact the editors, please email editor@destinationCRM.com.

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