In a world with more and more companies focused on customer satisfaction, Tim Keiningham, global chief strategy officer for Ipsos Loyalty, is sounding a warning. It's not that customer satisfaction isn't important, but the mindset that has blossomed – improve customer satisfaction and you'll improve your market share – is wrong. It's far more complicated than that.
Indeed, research he has conducted with colleagues found that the relationship between customer satisfaction and customer spending behaviour is actually very weak. Changes in customer satisfaction levels explain less than 1 per cent of the changes in spending in a specific category, an "almost meaningless amount," he noted in an interview.
The reason, obvious when you think about it, is that we live in a competitive environment. More to the point, for all the marketing buzz these days about forging customer loyalty, consumers actually tend to flit around, taking advantage of many competing companies. What counts is not just your ability to satisfy the specific customer but also how other companies are also able to meet their needs. The question is: Can you increase your share of your customers' wallets, getting them to spend more money with you and less with competitors?
The net promoter score, a leading measure of customer satisfaction first unveiled in 2006, told companies that if consumers indicated they were highly likely to promote the brand to others – rating that possibility at nine or 10 on a 10-point-scale – the customer bond was fine. But Mr. Keiningham cites a report for a client whose customers fell into the hallowed nine or 10 status: "Over 90 per cent of the time, they are also a promoter for another brand. So you're a parity brand and deluding yourself on the strength of the customer's connection [by relying on net promoter score]."
There's a reason they are using that other brand. Instead of just increasing your customer satisfaction scores, you need to delve into those reasons. In his just-published book The Wallet Allocation Rule, co-written with Fordham University Professor Lerzan Aksoy and Luke Williams of Ipsos, he gives an example of a grocery retail chain that discovers most customers are happy with their experience, with 53 per cent giving high marks when asked whether they would promote the store. But only 43 per cent list the store as their primary shopping choice – so, despite the solid satisfaction score, 57 per cent prefer competitors.
Further analysis revealed the reason people recommend the store is the quality of produce and its ambience. The first instinct would be to make customers even more satisfied with those key attributes. But research showed it wouldn't matter much. The reason they shop elsewhere is lower prices at two rivals and the location of a third competitor's stores. To increase share of wallet, the chain has to lower its price on staples sufficiently so that, even though lower prices can be obtained elsewhere, it now isn't worth the hassle to go there. That strategy worked.
A case study his team looked at involved Tim Hortons. It was near the top on customer service but far behind two other competitors in menu range. It might therefore have invested in a more diverse menu. But Mr. Keiningham was blown away by how Tims surpassed its competitors in convenience – its stores are ubiquitous – and he said that is its prime driver of success. There is one Tims location for every 9,700 Canadians, compared with one Dunkin' Donuts for every 44,700 Americans. "I think of Dunkin' Donuts and Starbucks as everywhere in the United States," said the New Jersey-based consultant. "But they aren't close to Tim Hortons."
While the main metric many companies use to hone their marketing strategy is the net promoter score, he counters that they need three performance indicators to apply his book's wallet allocation rule: the percentage of customers listing them as their first choice; the average number of brands used by the consumer; and the share of the customer's wallet captured by the company.
These not only show how you are faring but what is the opportunity for growth. He says it's critical that you be first choice – tying with a competitor is not sufficient. A study he completed for a well-known financial services firm found that 90 per cent of the customers who say they would enthusiastically promote the brand don't list it as their sole, prime brand in the field.
To find out what is driving your customers, you need to ask them about your key attributes and compare the ratings you garner with your competitors. So for Tim Hortons, it might be customer service, convenience, menu range, accessibility (parking and drive-through), and speed. Strategy flows from that analysis.
Some of this will involve sophisticated statistics. But he stresses the ideas can be applied even by small businesses, if they ask customers why they shop at competitors.
Instead of worrying about customer satisfaction, worry about what share of their wallet you are attracting – and how to gain more.
Harvey Schachter is a Battersea, Ont.-based writer specializing in management issues. He writes Monday Morning Manager and management book reviews for the print edition of Report on Business and an online work-life column, Balance. E-mail firstname.lastname@example.org