Customer Loyalty or Profitable Growth?

The Harvard Business Review published an article in their December 2013 issue, titled “The One Number You Need to Grow.” Frederick F. Reichheld makes the argument, based on the Enterprise Rent-A-Car example and his own research, that for a company to gain profitable growth there is a correlation between increasing customer loyalty and removing those who take away business. On its face, I agree with Reichheld, but it may not be applicable to the insurance field (where I work).

Keeping customers happy, the argument goes, improves retention rates. Those loyal customers who promote the company brand are the best form of marketing. Two common referral methods are the word of mouth and mass marketing companies.

However, those firms that spend millions of dollars in marketing have higher new business acquisition costs, which in the long term may impact their growth and profitability. Thus it makes sense if you improve customer satisfaction it will reduce marketing expenses, while observing an increase in growth and profits.

The Net Promoter model that Reichhehld advocates has three categories. Customers who are surveyed are labeled as promoters, detractors or passively satisfied. The promoters are the consumers with “the highest rates of repurchase and referral,” that is, those who rate the company a nine or ten out of a ten point scale. Passive scores are sevens and eights, while detractors have scores from zero to six.

In the Enterprise case, customers who had a positive experience would likely rent again and recommend them to a friend or relative. Other similar models, like the Customer Satisfaction (CSAT) Index, use a ”Top Two Box” score, for overall satisfaction and recommendation likelihood, drawing statistical averages based on this data.

Enterprise takes customer responses a step further, however. Branches or regional managers who fail to produce adequate Net Promoter scores could affect their pay and career path, giving the customer greater authority. This sounds too extreme for me. With a strong enough motive, bribing the customer with incentives in return for favorable results could become the norm.

In the rental car business, the customer experience is fairly straightforward. Pleasing the customer comes down to execution – having a car ready, avoiding hidden charges, pleasant employees, etc. In the insurance narrative, the experience is more strenuous. Customers usually have a traumatic event, rarely have they experienced the process before, and have purchased an intangible product of an insurance policy. Managing a customer’s expectations then becomes critical.

Yes, an insurance company is able to please its customers, but it comes at a price. Smaller to medium sized firms who are trying to stay competitive, naturally, have a harder time competing with national carriers. Pricing and attracting the right customer base becomes arguably the most important part of the business. An insurer must balance its operational expenses with its product costs (that is, paying for losses). If it pays every claim that is reported, it may be paying fraudulent claims, losses its customer is not legally liable, or paying for losses where no coverage was purchased.

I will submit there may be a strong correlation between customer loyalty and profitable growth, but it may not be applicable to the insurance industry, where customer satisfaction is closely tied to a settlement payment and the monetary value contained therein.

One study my employer conducted on customer feedback indicated positive results when the interaction was with courteous and knowledgeable staff and the process was speedy. This makes the reliability of surveys less attractive. Customers whose claims get denied, are found liable, or only have partial coverage are going to be less satisfied and, in return, less loyal.

One fine point that Reichheld makes, however, is having companies track survey responses with their purchasing behaviors and referrals over the long term. Having a customer say one thing, is much different than what they actual do. But I doubt most companies pursue customer surveys this passionately.

Perhaps then the takeaway is the following. Use surveys to identify those “good” customers and attempt to cater to their needs. Recall the Best Buy example, where they identified the 20% or so of their profitable customers and rearranged the store and trained staff to increase their sales, and, at the same time, moved away from promotions or incentives that attracted those less than profitable consumer base.

More loyal customers will likely yield profitable growth, which may be a company’s best marketing tool, for some industries, at least.

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