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Evaluating the Customer Loyalty Myth

It's time to face  the awful truth that there


by Karl Albrecht

   is no such  thing as customer loyalty.


More than 10 years ago, whenever I asserted that the term "customer satisfaction" encoded a flawed concept, I would get blank looks from nearly all the executives I talked to -- what one of my associates calls a "staring ovation." My statement often was perceived as a word game, an attempt to obfuscate the obvious. "Everybody knows what customer satisfaction is; it's when you deliver exactly what the customer expects," ran the party line. This was one piece of evidence, among many, that the manufacturing quality mind-set had become the default mind-set for service management.

Gradually, however, the realization set in that customer approval isn't simply a binary proposition. A business can succeed or fail in its customer's eyes to a greater or lesser degree, not just by hitting a mark or missing it. Then the much-revered W. Edwards Deming offered the proposition that every business's objective was to "delight the customer." As other thinkers and writers promoted this view, the term "customer satisfaction" became a source of confusion. What did it really mean?

    Shortly into the customer revolution, a number of thinkers and writers further complicated the debate by promoting the idea of customer loyalty -- that it was more appropriate to focus on lifetime customer value than on managing customer-contact episodes.

The problem with this debate about customer satisfaction vs. customer loyalty is not in our intentions but in our vocabulary. I have long believed that subtle differences in the choice of labels we apply to problems do as much to promote or subvert helpful analysis as the thought processes themselves. "A good catchword can obscure analysis for 50 years," observed Wendell Willkie, an early political figure in America. Or as Mark Twain phrased it, "The difference between the right word and almost the right word is the difference between lightning and the lightning bug."

There can be a big difference between meeting customer expectations and creating the perception of value.

Let's delve into the ideas behind the slogans and look for the operational truth about winning and keeping our customers' business.

The answer to the satisfaction-loyalty debate can be both disheartening and challenging, depending on how it's viewed. We must face two "awful truths" in order to develop a customer focus strategy that has any chance of succeeding.

Awful truth No. 1 -- Aiming for customer satisfaction is a prescription for mediocrity. If satisfying customers means performing at the level of their expectations, then any company that does this will be perceived as no better or worse than its competitors. Parity with rivals offers no competitive advantage at all. Customers might just as well choose a supplier at random, and    indeed many do.

There can be a big difference between meeting customer expectations and creating the perception of value. If the customer is accustomed to abuse, neglect, cheating, lying and bullying, a company can probably meet his or her expectations fairly easily. However, the latent desire for value goes unanswered. This was one of the founding principles of the Saturn car company, with its "one price, no hassle" selling philosophy. This is why SuperQuinn food markets in Dublin enjoys higher sales volume, higher margins and greater customer return rates than its price-obsessed competitors.

Worse yet, expectations and desires usually vary significantly from one customer to another. Age, gender, income, lifestyle, education, social values and experience with a particular product or service all influence a person's desires, expectations and standards. If an organization doesn't know what those expectations are, how can it meet them? As the Third Wave progresses, mass markets disintegrate and new microsegments of customer interest emerge.

And, of course, we know that in many businesses, customers themselves often don't know what to expect. Being hospitalized may be a once-in-a-lifetime experience, so the person who goes into the hospital may have very little idea of what's in store. This often presents the opportunity to manage customer expectations, i.e., to help the customer form a clear concept of the desirable outcome, and then to do the right things to improve upon it.

The basic Theory of Service Relativity formula is V = R - E, which means that customer-perceived value equals results minus expectations. In other words, customers' perceived benefits of any experience with a business are relative to their expectations prior to their experiences and the results they actually experience.

If the results fall short of the expectations, however vaguely stated they may be, then customer perceived value is negative. The surprising implication of this basic quality equation is that, when results are about equal to expectations, customer perceived value is zero. Customer preference results from the accumulation of many such episodes or, for some businesses, a critical few episodes. This means the battle for future business has to be fought at every transaction and at every "moment of truth."

Awful truth No. 2 -- There is no such thing as customer loyalty. The term "customer loyalty" also encodes a flawed concept, just as customer satisfaction does. Both concepts are equally dangerous because they can lead to dangerous assumptions about customer behavior.

Customer loyalty, as most of us like to think of it, usually exists only at the level of one-person microbusinesses such as hairdressers, stockbrokers, travel agents and therapists. Loyalty implies a personal bond rather than merely an ongoing convenient relationship. How can a person be loyal to an airline or hotel chain? People may do business regularly with a bank, but they will take their business elsewhere if the bank fails to perform to minimum standards. The larger the business, the less sense it makes to speak in terms of customer loyalty.

The operative term is not customer loyalty but customer preference, which is the customer's predisposition to do business with one supplier over others. Customer preference is highly perishable, but it's something we can measure and strive to build. There are several options or techniques used by businesses striving to build customer preference. Some are more effective than others, and some are more noble.

  Customer inertia -- It costs money, time and inconvenience to move a checking account from one bank to another, so people generally put up with a certain amount of abuse before changing banks. A bank I worked with in South Australia discovered that virtually no new customers signed up because of its advertising campaign or giveaway promotions; they did so because they were fed up with the abuse they received from its competitors. However, this bank passed on frustrated customers to other banks at the same rate it received them.

Information technology gradually is destroying the inertial advantage for many businesses. For example, the brokerage industry now has a system that allows stock market investors to move all of their holdings from one brokerage to another with a simple telephone call.

  Brand preference -- Strike the words "brand loyalty" from your vocabulary. Is anybody really loyal to a soft drink or particular running shoe? It's marketing investment, not customer value, that creates powerful brand images that become cultural icons. A few companies with great determination and huge levels of free cash flow have succeeded in creating worldwide awareness and preference for their brands. "If someone gave me $500 million and asked me to overturn Coca-Cola as the most-preferred brand of soft drink, I'd give it back and say it can't be done," comments investment guru Warren Buffet. But these success stories are the exceptions that prove the rule. In the battle to sell flavored water, is Coca-Cola really better than Pepsi or some other brand you've never heard of?

  Customer handcuffs -- Frequent-flier programs represent about the only hope most U.S. airline companies have of maintaining customer preference, and these programs apply to a fairly small number of customers. Once super-fliers reach a certain number of miles, they get additional incentives to keep using the same airline. However, people like me, who fly in many directions, tend to spread the miles among several airlines once the total exceeds a carrier's required threshold.

Likewise in the software market, Microsoft is working feverishly to handcuff as many customers as it can to its Windows operating system, but few could argue that its products offer impressive customer value. Intel has enjoyed a similar handcuffed relationship with its computer chip users, even though rival firms have produced better and cheaper processor chips.

  A superior customer experience -- A few firms consistently outperform their rivals and deliver a total value package attractive enough to warrant repurchase and word-of-mouth promotion. Firms such as Disney, Daimler Benz and Waterford Crystal have created legends for themselves with their unswerving commitment to the value package itself as well as to down-to-earth business practices.

  Customer intimacy -- Achievable by some businesses more than others, customer intimacy means nurturing an enduring relationship with the customer that naturally creates more selling opportunities. One reason Volvo Svenska Bil sells insurance to its Swedish customers is to stay in contact with them. If a car buyer disappears into customerland after leaving the dealership, the company has to wait (or pay) for the customer to show up again. With a continuity product such as insurance, the continuing contact provides opportunities to build preference and strengthen the buyer-seller relationship.

Of the possible avenues to customer preference just discussed, customer intimacy offers a special appeal. It is, of course, more feasible in some lines of business than others. However, it's worth exploring ways in which any firm can begin to progress up the five-level hierarchy of strategic customer value. Each level has its own unique characteristics:

  Transactions -- The simplest and least enriched form of customer contact. The customer shows up, a one-time transaction is completed, such as in a bank or at a dentist's office, and it's over with. Transactions have no past and no future; they exist only in the present.

  Products -- Tangible items the customer takes custody of such as a car, a meal in a restaurant, a software product or rented tuxedo. In many cases, a tangible product's appeal accounts for almost all the customer's perception of value received. However, the transaction surrounding the product can and should add value to the greatest extent possible.

  Solutions -- Unique sets of ideas, information, designs, products and transactions that meet an individual need. The firm must understand the customer's particular problems, needs, preferences and constraints in order to sell a designed package of value that answers a particular set of needs. Examples include weddings, vacation packages, medical treatment or the rehabilitation of a home damaged by a hurricane.

  Relationships -- The ongoing interactions, exchange of ideas, empathy, response to changing needs, mutual understanding of deliverable value and joint participation in creating that value. Examples include value packages offered by consultants, financial advisors, trading partners or mall operators who promote their tenant businesses' success.

  Shared success -- The business environment in which both customer and provider recognize and value their interdependence. This might be between a franchiser and franchisee, an auto-maker and its dealers, and the parts supplier that helps the customer improve the end product.

    Not all businesses are equally suited to climb this hierarchy toward customer intimacy and shared fate. In general, however, the search for customer preference has to move toward creating the perception of significant value. Companies must do everything possible to differentiate their offerings from those of their competitors, and one place to start is by reviewing the nature of their relationships with their customers.

"There is no security in this life, only opportunity," commented General Douglas MacArthur at the end of World War II. We have no God-given right to our customers' business. As the level of hypercompetition moves ever higher in this increasingly chaotic business environment, ideas such as customer satisfaction and customer loyalty give way to delivering customer value, earning customer preference and building customer intimacy. It's not a word game. It's for real.

About the author

Karl Albrecht is a management consultant, futurist, speaker and prolific author. His 20 books on management and organizational effectiveness include the bestsellers Service America!: Doing Business in the New Economy, The Only Thing That Matters: Bringing the Power of the Customer Into the Center of Your Business and The Northbound Train: Finding the Purpose, Setting the Direction, Shaping the Destiny of Your Organization. Albrecht may be reached at Karl Albrecht International, 4320 La Jolla Village Drive, No. 310, San Diego, CA  92122, fax (619) 622-4885 or e-mail

©1998 Karl Albrecht.


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