The Role of Customer Delight in Achieving Loyalty

Timothy L. Keiningham Douglas R. Pruden and Terry G. Vavra

June 2004

2004 Ipsos Loyalty

About Ipsos Loyalty

Ipsos Loyalty is a global, specialized practice dedicated to helping companies improve business performance through customer satisfaction management, customer relationship management, and employee climate management. Ipsos Loyalty provides a state-of-the-art approach to customer-driven business performance through a modular suite of innovative research tools that provides an integrated framework to identify complex global business solutions. Ipsos Loyalty is an Ipsos company, a leading global surveybased market research group.To learn more, visit www.ipsosloyalty.com

Authors
Timothy L. Keiningham, Senior Vice President and Head of Consulting Douglas R. Pruden, Senior Vice President and General Manager Terry G. Vavra, Chairman Emeritus

Design and Illustrations

Barbara Day, Ipsos North America

Production
Roland Clifford, Ipsos North America

This Ipsos White Paper is protected by copyright and may not be physically reproduced without the expressed permission of the Ipsos Loyalty Corporation. Subscribing organizations may extract or synthesize data or text of their choosing for internal or limited public use.

2004, Ipsos Loyalty June 20 04

A Chain of Events
While businesses have customer loyalty permanently on their corporate dashboards, lets remind ourselves that loyalty is not an end in itself, but rather an intermediate business goal that helps achieve greater success. Businesses attempt to build loyalty among their customers to move their outcomes further along a progression that we call the Satisfaction-Prot Chain.

The Satisfaction-Profit Chain

Attribute Performance
Ipsos-Insight 2004

Satisfaction

Customer Retention

Market Share and Profits

On the Chain, customer loyalty is the step immediately preceding business protability. But there are steps before loyalty: how a business conducts itself (functional performance) and customer satisfaction. While loyalty is currently commanding substantial attention, we should remind ourselves that it is driven by customer satisfaction. Consider this, customer loyalty is actually an outcome; satisfaction can be considered the input. In our modern businesses we only control inputs. Inputs are the only things that we can manage! But management requires that we are able to accurately measure the satisfaction we deliver . As many concerns have sadly discovered, measuring satisfaction accurately is far from easy! In this paper well share a philosophy and an approach weve developed which solve many of the problems inherent in conventional customer satisfaction measurement and management.

An Epidemic of Ineffective Customer Satisfaction

Surveying the landscape of customer satisfaction, one would have to conclude that far too few satisfaction programs have actually improved customers satisfaction with the sponsoring business! In this respect CSM (customer satisfaction measurement) has generally failed its promise. This failure is especially evident, on a macro perspective when examining national satisfaction barometers like the American Customer Satisfaction Index. Over a six-year period of intense customer satisfaction activity (over $800,000,000 spent annually on customer satisfaction in the United States), the satisfaction of American consumers has nevertheless failed to increase!

The Role of Customer Delight in Achieving Loyalty

2004, Ipsos Loyalty

Six-Year Trend in ACSI Scores

Trend in ACSI Scores
80 70 60 50 40 30 20 10 0 2002 2001 2000 1999 1998 1996

Year
Source: American Customer Satisfaction Index Ipsos-Insight 2004
TM

As principals at Ipsos Loyalty, we have created a new approach to customer satisfaction that yields demonstrable improvements in customer loyalty. Our approach is drawn, in part, from our 2001 book, The Customer Delight Principle, (Keiningham & Vavra). In the book and our practice weve identied many aws in the conventional practice of CSM; in this article well focus on just one, the improper or inadequate analysis of satisfaction data.

Exploring The Problem

Most customer satisfaction programs treat the data they collect as if the underlying relationships were completely linear. Nothing could be farther from the truth! Customer satisfaction data is really non-linear and asymmetric.This means traditional analyses can be terribly misleading. Our Customer Delight CurveTM shows the way corporate performance and customer satisfaction are really related.

2004, Ipsos Loyalty June 20 04

The Delight Response Curve

Most firms improvement efforts move customers along the Zone of Mere Satisfaction

Zone of Pain

Zone of Delight

Impact of Loyalty

Dissatisfied
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Merely Satisfied

Delighted

Level of Customer Satisfaction

The challenge is to acknowledge the non-linear relationships inherent in the Satisfaction-Prot Chain. Functional performance (how the business conducts itself) is non-linearly related to the satisfaction customers experience; satisfaction is non-linearly related to the evoked loyalty. We must adopt analytical procedures that respect this non-linearity. Simplistic analyses that ignore the true nature of the underlying relationships yield scenarios in which observed changes in satisfaction and loyalty will generally fall far short of those that might have been anticipated. (Most rms operate in a central region of the Delight Curve, a region we call the Zone of Mere Satisfaction. This is a highly inelastic zone in which improvements in performance are rarely accompanied by proportionate increases in satisfaction.) On either side of this central zone, satisfactions response to changes in performance is much more dynamic, creating two very elastic regions in the Delight Curve. The rst zone, starting at the origin, we call the Zone of Pain. In this region the business is performing sub-optimally causing substantial dissatisfaction among its customers. Any improvement in performance, no matter how small, raises satisfaction levels.Weve labeled the far right side of the curve the Zone of Delight. Here customers are in euphoria, their every need and wish seems anticipated and satised. In this region, increases in performance will also trigger larger than proportional increases in satisfaction. It is critical that a business understand where it lies on its own Delight Curve given its current level of performance. Without this understanding, the business will lack a realistic anticipation of the consequences of its improvement activities ROI will be difcult to prove. A naive analysis of CSM ndings causes yet another breakdown, improvement programs that are difcult to implement and are probably misdirected.

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2004, Ipsos Loyalty

The Solution; Delight Analysis

Our Delight AnalysisSM solves these two problems.The rst step is to determine the shape of a rms individual Delight Curve, and where it currently lies on the curve. That is, how many of its customers are in pain, how many are merely satised, and how many are delighted. Customers in pain are at risk; they wont remain as customers long. Customers in pain arent interested in being delighted, theyre primarily interested in relief from the pain they experience when conducting business with the rm. First and foremost the points of pain need to be removed. Merely satised customers are vulnerable to outreach from competitors. There is no reason for them to remain as customers in the face of a compelling offer. Their departure is documented in numerous lost customer surveys. While a business may think of them as satised, they are marginal customers at best. Delighted customers are the only true enduring assets a business possesses. And they are worth far more than their actual purchases because of the positive word-of-mouth they spread for the business. Priorities for an intelligent improvement program ought to be dictated by how a businesss customers are distributed across the Delight Curve. A properly formulated plan should rst focus on removing customers from pain, by eliminating or at least minimizing customer experiences we call points of pain. Once these problems are eliminated or substantially reduced, then, and only then, can improvement efforts be directed towards escalating customers from mere satisfaction to delight.
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The second step in Delight Analysis is to identify how to most effectively improve performance. Delight Analysis recognizes that not all performance attributes (monitored in a CSM program) exert equal weight in generating overall satisfaction. We believe that there are two types of attributes: those that merely maintain satisfaction, and those that are capable of creating delight. Satisfaction maintaining attributes are often the basics of a category; Does a bank process checks accurately? Does a retailer have stock on its shelves? Frequently satisfaction surveys are overloaded with these tickets to entry This is because in creating the satisfaction . survey operational areas are frequently asked to submit questions theyd like answered.Their knee-jerk reaction will be to identify the basics of their operation or product. But it is almost always the case that these basic functionalities can be measured more efciently by internal metrics (quality control statistics, inventory reports, etc.) than by burdening customers to verify operational basics.

2004, Ipsos Loyalty June 20 04

What are often too sparsely represented on satisfaction surveys are delight creators issues that can elevate customers to delight and in so doing differentiate an enterprise from its competitors. Identifying delight creators is more difcult. But the opportunity they offer is substantial. Delight creating attributes are often leading indicators of customers shifting requirements or evolving needs. They either are born within a category or may be transferred over from practices in another sector. The chart below shows these two sets of drivers as we commonly depict them. This two-way bar chart shows the differential impact of each activity measured on alleviating pain or on creating delight. The bars on the left show each attributes relationship to curing pain. The longer the bar, the greater the relationship to pain.The bars on the right show each attributes similar ability to deliver delight. Almost always different issues will be associated with pain than are related to delight. Again the message should be clear; eliminate points of pain before striving to elevate customers to delight!

Drivers of Pain and Delight

Impact in Maintaining Satisfaction Impact in Creating Delight

Importance to Curing Pain

Can solve problems in one call/visit Clearly communicates the required information Have confidence in advice given by advisor Makes you feel like a valued customer Provides right amount of information and assistance

Importance to Creating Delight

1.5

1.0

0.5

0.5

1.0

1.5

Driver Weights
Source: Keiningham, Timothy L. and Terry G. Vavra (2001) The Customer Delight Principle. Chicago: Contemporary Publishing (American Marketing Association). Ipsos-Insight 2004

Our division of attributes into these two classes is supported by the ideas of other theorists including: Kano; Oliver; and Anderson and Mittal.With this dual perspective, Delight Analysis identies two sets of key drivers. A more realistic and manageable roadmap for improvement comes from this two-step process.

The Role of Customer Delight in Achieving Loyalty

2004, Ipsos Loyalty

The Importance of Guiding Improvement

All too often CSM programs fail to guide or mentor improvement. Not so with Delight Analysis! When a satisfaction maintaining attribute is inadequately performed, customers are placed in pain. The guide for improvement will be a quadrant or importance-performance grid. However, Delight Analysis yields a special quadrant chart, one with two planes. The rst plane directs activities to eliminate points of pain and is always executed rst. The second plane identies the opportunities to create delight. This unique quadrant chart guides the two-step improvement process.

Pain and Delight Quadrant Charts

2. Priorities for Creating Delight
Importance (Weighted Corresponding to Overall Delight) High Importance Low Performance
0.46

High Importance High Performance

2 3

Importance (Weighted Corresponding to Overall Dissatisfaction)

1. Priorities for Curing Pain

High Importance Low Performance
0.51

0.30

2 3

6
39.0%

7
58.0%

0.34

4 5

Low Importance High Performance Percent Delighted (Excludes Missing)

0.17 27.0%

6
10.0%

7
0.0%

Low Importance Low Performance Percent Dissatisfied (Excludes Missing)

Low Importance High Performance

1 Attribute 1
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2 Attribute 2

3 Attribute 3

4 Attribute 4

5 Attribute 5

6 Attribute 6

7 Attribute 7

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Proof of the Process

Our Delight Analysis is no idle speculation. Our clients have subjected it to rigorous scrutiny. In a B2C retail environment, weve been able to place a dollar value on a delighted customer as compared to a merely satised customer. The chart below shows the incremental spending that delighted customers deliver over merely satised customers. When you can evaluate the benets of moving customers from merely satised to delighted, you have clear proof of the value, and you have an identiable limit for your spending to achieve an ROI.

Delighted Customers Spend More

$ Annual Purchase Levels $Y $ Average
Impact of Delight

$X

All Customers
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Merely Satisfied Customers

Delighted Customers
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The Role of Customer Delight in Achieving Loyalty

2004, Ipsos Loyalty

We will almost always attempt to link satisfaction ratings with individual customer behavior. But when our client doesnt have the information available, we can nevertheless validate our model based on future purchasing intentions. In a B2B engagement, delighted customers were ve times more likely to plan on repurchasing than merely satised customers (See Chart 6).

Likelihood to Repurchase
Would you recommend/buy again?
Definitely would recommend/buy

22%

60% 94%

Dissatisfied
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Merely Satisfied

Delighted

10

More recently, weve investigated the impact of delight on share-of-wallet. Again, delighted customers allocate a greater share of their spending than merely satised or dissatised customers. In many of these cases weve had the luxury of longitudinal data and the ability therefore to monitor customer spending over time. Not only do delighted customers spend more in a particular instance, but over time they increase their reliance and dependence on the rm delighting them, making them true assets for the enterprise. And by increasing the percentage of customers who are delighted, businesses will improve their sales and ultimately their prot performance.

Delighted Customers Allocate More of Their Spending

25 20

Share of Wallet

15 10 5 0 0 1 2 3 4 5 6 7 8 9 10

Overall Satisfaction Level

Ipsos 2004

At the point of delight, there is an exponential increase in share of wallet

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Our idea of striving for delight works, but its hardly new. The father of the quality movement, W. Edwards Deming, over half a century ago urged manufacturers to improve the quality of their goods by observing, It will not sufce to have customers that are merely satised! For further information the reader is referred to: The Customer Delight Principle, Timothy Keiningham and Terry Vavra, New York: McGraw-Hill and the American Marketing Association, 2001. ISBN 0658010042. Also available at www.ipsos-loyalty.com

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The Role of Customer Delight in Achieving Loyalty

2004, Ipsos Loyalty

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