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A TelSpan Webinar Series: Measuring and Managing Customer Loyalty Part 2:

A TelSpan Webinar Series: Measuring and Managing Customer Loyalty Part 2 Aldy Keene President and CEO Loyalty Research Center 317.465.1990 akeene@loyaltyresearch.com www.loyaltyresearch.com

Loyalty Analysis and Management:

Loyalty Analysis and Management What are the key steps in loyalty analysis and management? Building a Loyalty Profile of your customer base Understanding why customers fall into specific loyalty segments Is the customer predisposed toward a lack of loyalty? Did the customer have a strongly positive or negative experience in dealing with the company? Determining how to migrate customers from one segment to another What portion of customers can be migrated? What experience must change and by how much?

Summary of Last Session:

Summary of Last Session Although customer behaviors are an important component of defining loyalty, customer preferences (through satisfaction or value) must also be included. There are other measures which might be applicable to your customer or industry. There are various rules for combining these measures . For example, scoring only the respondents that give a top score or top 2 score to each question as Loyal. Which measures to use and how to combine them into an index is a critical step. Your decision must be guided by validating the segments with key behavioral components that are not part of the definition. Share of business and cross-purchase percentage are two common validation criteria.

Slide 4:

If we simply examine the levels of responses, this suggests that on-time delivery might be a serious issue, along with some issues involving the account manager. However, are these the real issues? How can we be sure? Are their needs at odds with what our business model does well? Have we provided inconsistent experiences? Question Loyal Neutral Vulnerable AM – knowledge of my business 84% 77% 54% AM – responsiveness to my issues 72% 59% 56% CS – order cycle time 78% 72% 65% Prod – Available inventory 87% 82% 77% Del – On-time 65% 53% 49% Why Are Customers In These Segments? It’s not unusual to examine question by question evaluations by respondents in each loyalty segment and look at where there are large differences. For example:

Needs Different From Business Model?:

Needs Different From Business Model? This example involves a very successful manufacturer of commodity-like products for distribution through hardware stores (e.g. market leader, above average profitability). They built their dominant position in the small owner-operator hardware stores that dominated the landscape up to the 1990s. They accomplished this with a sales force that spent time in the store with a consultative sales approach. As the “Big Box” chains like Home Depot and Lowe’s came into the market, sales migrated to those outlets. This manufacturer eventually began competing for sales in these chains. However, they had a significant issue with this new channel. Same sales techniques were not valued. The Big Box stores wanted JIT delivery and other inventory management activities. Their needs were significantly different from the small stores.

Needs and Loyalty:

Needs and Loyalty Needs identification is a vital first step in determining loyalty. If your business model doesn’t meet the critical needs of customers (or segments of customers) as well as competitors, that is a straightforward explanation for the lack of loyalty among some customers or segments. How would the index we discussed in the first session be affected by a lack of fit between your business model and some of the customers? Would they be likely to recommend your company? Would they claim to receive high value from your company? Would they be shopping for alternatives? There are sophisticated research techniques that determine preference structures. Value analysis – what determines the value a buyer obtains from a particular transaction? Choice analysis – what determines the choices a buyer makes?

Slide 7:

There are some basic techniques which you can implement to help you achieve a better understanding of the needs of your customer base and potential underlying segments. One useful technique is to ask: Which company do you consider your (next) best alternative? Which company do you use as a benchmark to set expectations for the performance of your company? Example: Major B2B information-oriented company that collects and distributes information to its customer base. When asked to name a benchmark company, roughly 50% named a research company while the other 50% named a software company. What does this say about the underlying needs of their customers? It tied closely to how their evaluations linked to measures of the relationship. Basic Needs Assessment

Slide 8:

Another approach to consider is to ask the customer to identify the primary benefit they are looking for from the relationship. This works particularly well when there are clearly different offerings. EXAMPLE: A chemical manufacturer competed in a B2B industry that supplied an input for paper production. Whereas most of the competitors produced a product with little differentiation, this company: Researched different needs (e.g. cardboard, newsprint) Developed and patented unique, customized solutions Built their business model around this different product This company had a significant percentage of vulnerable customers. Asking the customers what their company was looking for revealed that a high percentage of the vulnerable segment wanted the benefits that resulted from the commodity business model. “Poor Man’s” Needs Segmentation

Multiple Need Segments:

Multiple Need Segments Product Attributes Loyal Customers Vulnerable Customers Type 1 Type 2 Product variety Major Moderate Minor Local relationship Minor Major Minor Lease offerings Minor Minor Major National financial services company with Auto Finance unit focused their business strategy on the finance managers of auto dealers – a push/referral strategy. They looked at the various components of the market in an effort to identify growth opportunities. Their vulnerable “customers” did not place a high value on this company’s strength in making their decision. This company could not easily change their business model to compete for these vulnerable customers.

Slide 10:

How can a company end up with customers that are not a good fit for its business model? The customer’s needs may evolve over time. Think about how an individual’s (or household’s) needs change over time. There may be a change in the structure of the customer base. Companies that served the middle tier of financial institutions have seen that segment get smaller with the consolidation that has taken place. Of course there’s always the obvious – sales are made to any customer that can afford the product. There can be serious repercussions to this strategy. How Can This Happen?

Profitability Distribution:

Profitability Distribution If you sell to customers that are not a great fit for your business model AND you cannot adapt your business model, a frequent response is to “Love ‘em to death.” This strategy can create problems for the company. Examine the relationship between fit with business model and customer profitability. Fit with the Business Model High Profit

Slide 12:

The first step in determining why customers are located in various segments of the Loyalty Profile is to examine the match between their needs and your business model. These needs can be established in a variety of ways: asking about benchmark firms, asking about primary benefits being sought, and/or conducting analysis of the segments. The fit between customers’ needs and your business model not only contribute to explaining your Loyalty Profile, but also to the linkage between loyalty and profitability. Next session: For the customers that DO have a fit between needs and your business model, why are some neutral and/or vulnerable? Which are the critical experiences? Summary

Slide 13:

Questions? To ask a question, press “0” followed by a “1” on your touch-tone phone. To retract a question, press “0” followed by a “2”.

Contact Information:

Contact Information Loyalty Research Center 931 E. 86 th Street – Suite 120 Indianapolis, IN 46240 Telephone: 317.465.1990 Website: www.loyaltyresearch.com If you would like more information on virtual events, please contact TelSpan Worldwide Conferencing Telephone: 800-800-1729 Website: www.telspan.com These slides can be downloaded from the Loyalty Research Center’s website.

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