What could be worse than having customers fall into the Zone of Indifference? Having customers who are Defectors, or even Saboteurs.
Such terminology is part of loyalty indexing, one way of identifying customers who are likely to stop buying from your company. But while the terms may sound overly dramatic, identifying at-risk customers — so that you can work harder to retain them — is serious business.
Victor Hunter, president of Milwaukee-based consultancy Hunter Business Direct, says that widespread use of statistical tools to identify at-risk customers began about 25 years ago. In the 1970s, companies started using cohort, or buying behavior, analysis. Customers were grouped into deciles (tenths) based on their buying behavior over a given period of time. The general rule was that if sales fell by x percent in a given time period, they would continue to fall by that same amount in subsequent time periods if no further action was taken. This provided a baseline for predicting future sales and allowed firms to experiment to see how they could improve customer retention. For example, if a cohort of 1,000 customers purchased a particular item in the first quarter, you could track how many would purchase in subsequent quarters in order to determine the buying cycles and attrition rates for various products.
THE LOYALTY INDEX LOWDOWN
The more sophisticated loyalty index, developed at Harvard Business School in the 1990s, assesses three key elements: absolute satisfaction, willingness to refer the company to others, and willingness to buy from the company in the future. Each element is measured on a five-point scale, and the scores are totaled to create the index. The index is then linked to share of wallet, or the percentage of a customer’s total spending in a given product category that is spent on the particular company.
At the top of the loyalty chain are the so-called Apostles, or brand loyalists, who tell others how good a company is. Then there’s the Zone of Indifference, into which the majority of customers fall. Those who are less satisfied are known as the Defectors, who will readily switch to a different company. And the least satisfied are Saboteurs, who may actually talk negatively to others about a company.
Each category is assigned a point value: Apostles, 15; Loyalists, 13-14; Zone of Indifference, 11-12; Defectors, 2-10; Saboteurs, 0-1. Once you determine the values, you can enter the numbers into off-the-shelf statistical packages such as SAS or SPSS. You can then try to improve areas of customer satisfaction to raise the loyalty index. One of Hunter’s clients found that customers wanted to be able to get technical information and talk to a live service rep whenever they called, rather than getting voice mail. By improving its “service intimacy,” the company increased its loyalty index significantly — and more than doubled its share of wallet.
BACK TO BASICS
Because it requires a fair amount of customer research and analysis, loyalty indexing is neither cheap nor speedy. And unless you do it well, you’ll see little payback.
For those reasons, many catalogers find that RFM (recency, frequency, monetary) analysis, which is typically used to determine how likely a buyer is to respond to a particular offer, also helps identify at-risk customers. Quarryville, PA-based Stoner, a $30 million marketer of industrial cleaning supplies, assigns point values to customers suggestive of their likelihood to drift away, though marketing manager Jeff Campbell won’t provide specifics. But if a customer’s point value drops below a “red flag” level, an account executive will contact the client to discover why. “If a customer’s business has dropped off, we want to know if it’s due to a low-quality product or a bad experience,” Campbell says. Sales teams are authorized to offer incentives or discounts to hold onto at-risk customers.
Similarly, New York-based Alfax Wholesale Furniture constantly monitors sales to its customers, which include governments, schools, and churches. If customers go more than a year without making a purchase, says general manager Gary Heller, Alfax sends an “anniversary” postcard or flyer, to thank them for the most recent purchase — and to remind them of Alfax’s offerings.