RAPID Loyalty Measurement

Selecting the Right Measures of
Customer Loyalty
Bob E. Hayes, PhD
Business Over Broadway

Copyright © 2011 Business Over Broadway · Bob E. Hayes, PhD · bob@businessoverbroadway.com · www.businessoverbroadway.com
 Customer Loyalty and Business Growth
 Customer Loyalty has Three Components
 RAPRAPID Loyalty Measurement Approach
 Customer Lifecycle and Customer
Relationship Management
 Comparing RAPRAPID Loyalty Measures and
NPS
Overview

 The degree to which customers
experience positive feelings for,
possess allegiance to, and exhibit
positive behaviors toward a company
Customer Loyalty

 Research shows companies with higher customer
loyalty experience accelerated business growth
Customer Loyalty and Business Growth
11
Retention, Advocacy, Purchasing, Renewal rate, Churn rateRetention, Advocacy, Purchasing, Renewal rate, Churn rate

 Growth relies on three types of customer behavior
Customer Loyalty and the Impact on Growth
Frederick Reichheld.Frederick Reichheld. The Loyalty EffectThe Loyalty Effect. Harvard Business School Press, 1996. Harvard Business School Press, 1996
Base ProfitBase Profit
Profit from increasedProfit from increased
purchases and higherpurchases and higher
balancesbalances
Profit from reducedProfit from reduced
operating costsoperating costs
Profit from referralsProfit from referrals
Profit from price premiumProfit from price premium
Customer acquisition costCustomer acquisition cost
Growth is all about:Growth is all about:
RetentionRetention
AdvocacyAdvocacy
PurchasingPurchasing

Customer Loyalty and the Impact on Growth
 Customer lifetime value impacted by three
customer loyalty behaviors
Based on the article by Gupta, et al. (2006). Modeling customer lifetime value.Based on the article by Gupta, et al. (2006). Modeling customer lifetime value. Journal of Service ResearchJournal of Service Research,,
99(2), 139-155.(2), 139-155.
Business
Programs
Marketing
Sales
Service
Customer
Retention
Customer
Acquisition
Customer
Development
(cross/up-sell)
Customer
Lifetime
Value
Firm Value

Customer Behavior Retention Advocacy Purchasing
Switch to another company*
X
Purchase from another company*
X
Satisfaction X
Choose again for first time X
Recommend X
Purchase same product/service X
Purchase different products/ services X
Increase purchase frequency X
Increase purchase amount X
Three Dimensions of Customer Loyalty
• Analysis of seemingly disparate customer behaviorsAnalysis of seemingly disparate customer behaviors
also reveals three primary dimensions of loyaltyalso reveals three primary dimensions of loyalty11
11
Based on factor analysis of self-reported customer behaviors; Results can be found in Hayes, B. E. (2009).Based on factor analysis of self-reported customer behaviors; Results can be found in Hayes, B. E. (2009). Beyond the ultimate question: ABeyond the ultimate question: A
systematic approach to improve customer loyaltysystematic approach to improve customer loyalty. Quality Press. Milwaukee, WI.. Quality Press. Milwaukee, WI.
* Reverse coded so lower rates of these behaviors indicates higher levels of Retention Loyalty.* Reverse coded so lower rates of these behaviors indicates higher levels of Retention Loyalty.

 Retention Loyalty Index (RLI)
 Measures the degree to which customers will remain as customer/not
leave to competitor
 Advocacy Loyalty Index (ALI)
 Measures the degree to which customers feel positively toward/will
advocate your product/service/brand
 Purchasing Loyalty Index (PLI)
 Measures the degree to which customers will increase their purchasing
behavior
RAPRAPID Loyalty Measurement Method

RAPID Loyalty
Indices
Predicted Business
Growth Measures
Retention Loyalty
Index
Churn Rate
Advocacy Loyalty
Index
New customer growth
Purchasing Loyalty
Index
Average revenue per
customer, dollars
spent
Predicting Business Growth
Source: Hayes, B. E. (2009). Beyond the ultimate question: A systematic approach to improve customer loyalty. Quality Press. Milwaukee, WI.

Customer Lifecycle
 Understanding how to improve customer loyalty begins with
understanding the customer lifecycle
AttractAttract
Service
Service
Acquire
Acquire
Attraction phaseAttraction phase
Marketing process attracts customersMarketing process attracts customers
through advertising of perceived value ofthrough advertising of perceived value of
product and/or serviceproduct and/or service
Acquisition phaseAcquisition phase
Sales process acquiresSales process acquires
customers and sets theircustomers and sets their
expectations regarding productexpectations regarding product
and/or serviceand/or service
Service phaseService phase
Service process deliversService process delivers
service and ensuresservice and ensures
customers’ expectations arecustomers’ expectations are
met regarding productmet regarding product
and/or serviceand/or service

Factors Impacting Customer LoyaltyFactors Impacting Customer Loyalty
• Retention LoyaltyRetention Loyalty
– Personal valuesPersonal values
– Customer experienceCustomer experience
• Advocacy LoyaltyAdvocacy Loyalty
• Purchasing LoyaltyPurchasing Loyalty
– Personal valuesPersonal values

Customer
Behavior
RAPRAPID Loyalty
Measures
Lifecycle
Management
Business
Growth
RAPRAPID Loyalty and Business GrowthID Loyalty and Business Growth
• Three Ways to Grow BusinessThree Ways to Grow Business
Decrease
Churn
Retention
LoyaltyIndex
Marketing/
Sales/Service
Increase
Referrals
Advocacy
LoyaltyIndex
Service
Increase
Purchase
Behavior
Purchasing
LoyaltyIndex
Marketing/
Sales/Service
1
2
3
Customer
Lifetime
Value
Revenue
Profitability
Market share

 Introduced by Frederick Reichheld in 20031
 Based on one question: “How likely is it that you
would recommend us to a friend or colleague?” (0
to 10 rating scale)
 0-6 = Detractors
 7-8 = Passives
 9-10 = Promoters
 Equals proportion of Promoters minus proportion of
Detractors (NPS = P – D)
 Organizational-level metric, not customer-level metric
 Widely used today by major corporations
 General Electric, American Express, Progressive, Intuit
 Reported in conference calls
Net Promoter Score (NPS)
1
Reichheld, Frederick F. (2003). The One Number You Need to Grow. Harvard Business Review, 81 (December), 46-54.
00 10105511 22 33 44 66 77 88 99
DetractorsDetractors PassivesPassives PromotersPromoters
Not at allNot at all
LikelyLikely
ExtremelyExtremely
LikelyLikely
NeutralNeutral

Pitfalls of Using NPS Methodology
 NPS is not best predictor of growth1,2
 Does not improve growth through existing customers
 NPS is ambiguous
 Could arrive at same NPS with different number of Promoters and
Detractors
 NPS = P – D
 30% = 50% – 20% OR 30% = 40% - 10% OR 30% = 30 – 0%
 Use of only NPS leads you to overlook disloyal
customers defined in other ways3
 Better to use all loyalty questions to identify at-risk
customers1
Keiningham, T. L., Cooil, B., Andreassen, T.W., & Aksoy, L. (2007). A longitudinal examination of net promoter and firm revenue growth. Journal of Marketing, 71
(July), 39-51. Correlations of the NPS and overall satisfaction with revenue growth were not significantly different from each other.
2
Morgan, N.A. & Rego, L.L. (2006). The value of different customer satisfaction and loyalty metrics in predicting business performance. Marketing Science, 25(5), 426-
439. Correlations of the loyalty questions with business performance measures were small and, often times, not significantly different from each other.
3
Hayes, B. E. (2008). Customer loyalty 2.0: The Net Promoter Score debate and the meaning of customer loyalty, Quirk’s Marketing Research Review, October, 54-62.
Of customers who are not Detractors, 31% were likely to switch to a different wireless service provider.

Comparing RAPRAPID Indices and NPS
Poor Fair Good Excellent
11
RAP refers to Retention, Advocacy and Purchasing Loyalty Indices. NPS refers to Net Promoter Score.RAP refers to Retention, Advocacy and Purchasing Loyalty Indices. NPS refers to Net Promoter Score.
• RAPID indices are reliable, valid and useful predictorsRAPID indices are reliable, valid and useful predictors
of business growth through new and existingof business growth through new and existing
customerscustomers
Characteristic NPS RAPID1
Easy to Understand
Reliable
Growth through new customers
Growth through increasing purchasing
Growth through customer retention
Unambiguous

Select the Right Loyalty Measurement
 Predictability is improved when loyalty measures
and business outcomes are matched
 Churn predicted best by
retention loyalty
 New customer growth
predicted best by
advocacy loyalty
 Up/Cross-selling predicted
best by purchasing loyalty
 To effectively manage business growth,
companies need to intelligently select their
customer loyalty measures
Customer Loyalty
Predictors
Retention
Loyalty
Advocacy
Loyalty
Purchasing
Loyalty
BusinessGrowth
Outcomes
Customer
Churn
Good
Prediction
Poor
Prediction
Poor
Prediction
New
Customer
Growth
Poor
Prediction
Good
Prediction
Poor
Prediction
Up/Cross-
selling
Poor
Prediction
Poor
Prediction
Good
Prediction

For More Information
Bob E. Hayes, Ph.D.
Email: bob@businessoverbroadway.com
Web: www.businessoverbroadway.com
Blog: www.businessoverbroadway.com/blog
Twitter: www.twitter.com/bobehayes

RAPID Loyalty Measurement

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