Creating loyalty on the Web

Marketing with the e-values of the new century

Editor’s note: Robert Passikoff is president of Brand Keys, a New York research firm.

Brands have long been with us, used as a means of distinguishing the goods of one provider from those of another. Their importance has grown in direct proportion to the acknowledgment that the primary capital of many businesses is their brands and the attendant brand equity and loyalty they engender.

The importance of brand equity has been compounded by the incontrovertible reality that as various economies (particularly that of the United States) have matured, they have produced more savvy consumers, with access to near-immediate reserves of information, looking for new sorts of brand values.

These are values that often go well beyond the practical issues of functional product performance or rational product benefits, and further than the emotional and psychological aspects of brand personality and image. These deeper values must be factored into any definition and measurement of brand equity, especially if one is to use this measure as a means of assessing the return-on-investment (ROI) of loyalty programs. And if it is possible to redefine and measure brand equity in this way, it will have profound implications about how 21st century marketers think about brands and branding, particularly for e-brands.

What will drive the success of e-commerce brands? After spectacular early success on Wall Street, Internet stocks are getting mixed - sometimes contradictory - reviews. Web companies’ dynamic business models are admired, but their stock performance is hard to anticipate, and longer-term leading indicators - like customer loyalty - will become increasingly more important in predicting e-tail profitability.

Dot-com accounts are still in a frenzy of advertising, self-promotion and, most especially, the search for customers, with many attempting to leverage loyalty programs to their best advantages. But how effective are these programs? Do they actually induce people to buy anything? Does their existence as part of the site experience ultimately contribute to building real customer loyalty?

Online booksellers have high-profile sales and share value despite their lack of profitability. The category leader is Amazon.com. Neither a bookshop nor a retail chain, Amazon exists only in cyberspace, its Web site listed by powerful marketing partners such as America Online, Yahoo!, Prodigy and other popular search engines.

With Amazon’s dominance over Barnes & Noble.com and a howling pack of wannabes, the question emerges: Is there enough space for other online booksellers to prosper? The answer depends upon each brand and how loyal the customers of those brands will remain.

In order to thrive in the increasingly bustling e-marketplace a company must build a brand to which customers will be loyal - and profitable. And to do this a company must understand both the market and consumers’ ever-changing values.

Amazon showed that it understood that the Internet was more than a high-speed cash register. It turns out it’s a whole new way of connecting with customers - not a distribution channel but a community. And, like any community, it has certain key values that govern behavior. Early, early on Amazon asked such questions as: What’s this new community like? What do members of the community want? What are their brand values, and which of those values do we share? Which loyalty programs - based upon these values - can we provide, beyond a fast, cheap way to buy stuff?

Research in the past decade has shown that measuring program effects on brand equity provides leading-indicator assessments from which successful marketing programs can be launched. One needs, however, to possess customer measures of the category purchase drivers, real levels of customer expectations about these drivers, and an e-brand’s core-brand equities. Needless to say, these must be identified in a manner that is based upon what customers think as opposed to what they say they think.

When e-brand loyalty efforts are measured in terms of how they affect, support and/or alter brand equity, the result is a leading-indicator measure of profitability. By calculating a value we call the loyalty multiple (the customer-loyalty version of a price/earnings ratio), any movement in actual loyalty levels can be easily spotted.

Defining brand equity

The concept of brand equity has been defined a number of different ways for a number of different purposes. The highest-profile definitions have generally been provided by advertising agencies looking to differentiate products and services with layers of discriminators. Some of the coined terms which act as sometimes-interchangeable surrogates for brand equity include brand image, brand personality, assets, added-values, brand strength and so on.

Clearly, most of these definitions refer back to imagery and positioning. In other words, they are attempts at creating manifestations of a brand’s equity - not a definition of brand equity. Talking about brand equity in those terms is easy. But if we define the central goal of strategic brand marketing and planning as the creation of an expanding pool of loyal customers, then, clearly, talk is cheap. If each conception of brand management (and its related advertising campaigns and marketing programs) yielded loyal customers, there would be a lot more loyal customers in the world.

We decided that a real definition was required that:

1) took account of the higher-order customer values which act as components that define the purchase drivers of the category;

2) captured the direction and velocity of customer values in the category;

3) provided real levels of customer expectation about category values and purchase drivers (unconstrained by current product offers in the category) reflecting what people really think as opposed to what they say they think; and

4) was closely correlated with the market behavior and loyalties of the customer.

What we ended up with was this user-friendly definition: “Brand equity is the set of points where a brand exceeds customer expectations.” Correctly measured, customer expectations identify how customer values and category values come together to form the dimensions of purchase, loyalty, and profitability. Correctly measured, customer expectations identify precisely “how high is up” to the customer. And, correctly measured, customer expectations provide a yardstick against which the brand, communications and attendant brand loyalty efforts can be measured. By this definition, brand equity is clearly the engine that drives customer loyalty, sales and profits.

Measuring e-brand equity

To measure brand equity (e- or otherwise) it is necessary to:

• accurately understand what drives a customer’s decision to purchase one brand over another;
• accurately identify a brand’s position among its competitors in the marketplace; and
• know what the customer segment is prepared to believe about the brand.

To provide such strategic intelligence, the selected research methodology must have the ability to:

• identify and compare brand equity;
• quantify levels of customer bonding to the category (and individual brands within the brand set); and
• provide a high correlation to actual market activity and sales.

Our firm has developed a proprietary measurement system needed to accomplish these project objectives. The theoretical framework upon which the system is based was shown to be most highly correlated with sales in the 1990 Advertising Research Foundation Copy Research Validity Project. The system is based upon established psychological theory, which holds that each consumer has psychological tendencies that determine their behavior in the marketplace. It’s been termed “liking” or “bonding”; where liking or bonding levels are high, consumers are more likely to act favorably to one brand over another.

In the marketing context, “acting favorably” toward something means liking it, preferring it, bonding to it, and actually buying it (and, in fact, buying it again), even in the face of tempting competitive price points. All of which sounds suspiciously like customer loyalty.

We also know that a customer measures a company or a product offering against a concept of their ideal. Whether customers do this explicitly or implicitly, it is inevitable. This ideal reference point, so critical in its influence or category behavior and choice, is called a lock. At any one time, any number of offerings in the market could have the potential to unlock the customer’s ideal reference point. The challenge is to win sales and gain ground on the competition by finding or defining a set of values, or keys, that comes closest to opening the lock and forming the essential equity bond between customer and brand.

Traditional research determines where a brand is in the mind of the customer. Our liking/bonding assessments determine where it could be. Traditional research asks what customers believe. Our system finds out what they are willing to believe. And it enables marketers to measure (and replicate) the emotional bond consumers exhibit for product categories, brands within these categories, and communications from above- and below-the-line disciplines, including loyalty programs.

Our research uses a psychological questionnaire which has a test/retest reliability of 93 percent (off a national probability sample in the U.S. and U.K.). Twenty questions are used employing personification as a device for gaining insights into the bonding/liking of a consumer for a category and a brand. The questionnaire asks the consumer/respondent to ascribe various attitudes and behaviors to the brand; it also asks how they would feel or behave if they were the brand itself. In their assessments of a brand (or a loyalty program for the brand), respondents are encouraged to move beyond familiar dictated, sometimes-learned perceptions - like generally used product attributes and benefits - and into an arena of higher-order brand-based values.

Answers to the psychologically factor-loaded questions generate scores that yield a category/brand-specific picture in four category-driver dimensions which “describe” how the consumer views a category, compares brands in a category and, ultimately, buys in a category. In addition, the answers provide a measure of customer expectations for each of the four identified category drivers.

While certain features of our approach are proprietary, it is important to note that the overall methodology is a combination of established research techniques that are widely accepted in the professional research community, including factor and regression analyses and causal path modeling.

Calculating actual effects of e-loyalty for online books

The four category drivers for the online books category - derived from a customer-driven analysis of an extensive inventory of category and customer attributes, benefits, and values - have been identified as:

• product range;
• easy-to-use, secure site;
• good prices/added value;
• useful content - reviews, recommendations and ability to personalize.

The order of importance of the category drivers (read left to right) and customer expectations (expressed as a driver index or height of the bars) appear as shown in Table 1.

Per our definition, equity is defined as any point where the brand exceeded the customer ideal (at any level). That noted, for evaluations of brand strength and weakness, a difference of seven points is required for a significant difference at the 95 percent confidence level. The status of the two brands examined is shown in Table 2.

Interviews were conducted during the first quarter of 2000 among 306 respondents. Half were Amazon.com and half were Barnesandnoble.com customers. Respondents qualified for survey eligibility by having used one of the sites three or more times in the past quarter, thus establishing them as a customer of one site or the other. None of the respondents were aware of the loyalty program that was to be assessed.

As such, assessment variables included: the category ideal; the site (expressed as the brand Amazon.com or Barnes & Noble.com); and one loyalty program (for the site they assessed). The Amazon.com loyalty program is called “New For You,” and provides customers the ability to create a personalized section of the Web site, and a vehicle for getting subscribers to view Amazon.com’s semi-monthly e-mail of new recommendations for customers.

Clearly, this e-loyalty program directly reinforces e-values like “useful content” and “product range.” (See Table 3.) One could argue that the act of having the customer personalize the site also increases involvement with the brand while resonating with “easy to use site” values.

Barnes & Noble.com’s program is called “Barnes & Noble MasterCard Credit Card Reward Certificates.” When customers use the credit card they earn points that can be redeemed for Reward Certificates are good at B&N bricks-and-mortar locations or from B&N.com.

The B&N.com program is a vestige of last century’s version of a loyalty program. If it resonates with any e-values at all, they are to be found in the “good prices/added value” driver, the one driver where B&N.com is actually competitive to Amazon - which is only the third-most-important driver. (See Table 4.)

In theory and creative conception, both of these programs would seem to encourage customer loyalty -  or at the very least continuity. But at the end of the day top management wants to know what return the organization will get back from such programs, not merely how many respondents may or may not have visited - and personalized - the site, or signed up for a credit card which they may or may not use.

Management wants to relate today’s spending to today’s returns, or tomorrow’s or, at the very least, the next quarter’s. The difficulty in answering these questions is that marketing and research managers are generally using or recommending systems that measure communications results based upon attitudinal or image change, not on financial returns to the organization as a result of the planned spending.

What is clear is that when you measure a loyalty effort’s effect on brand equity, you have a leading-indicator measure of profitability. (And remember, the measure we’re talking about is based upon the theoretical precept proved by the ARF to correlate most highly to sales.)

We often judge a corporation’s financial position by its price/earnings ratio, which links share capital with net profit. A high ratio signals shareholder confidence and optimism about the company’s future. Brand equity assessments provide leading-indicator measures of profitability and, as such, a number of industry authorities have agreed that this reasoning may be extrapolated and applied by calculating the loyalty multiple.

The equation looks like this:

Increase in Brand Equity/Loyalty Multiple = Current Brand Equity

Evaluating the customer’s non-transactional-but-highly-correlated-to-purchase (and re-purchase) reactions in this manner allows for a calculation of ROI based upon:

• overall effects upon brand equity;
• the effect upon one (or more) of the individual drivers of customer loyalty;
• the effect upon one (or more) of the individual value components which make up the drivers.

In the case at hand, the loyalty multiple is based on the change in brand equity resulting from the effects of each loyalty program. Table 5 shows the results.

According to the loyalty multiple for each brand, it is clear that Amazon.com’s loyalty program better resonates with its customers. We recognize that many variables can cause a stock to rise and to fall. But for a single-brand company like Amazon.com and B&N.com (as opposed to a multiple-brand company such as General Motors or Proctor & Gamble) that is not involved in a merger or acquisition, is not caught in a long-term sector updraft or downdraft, and is not speculating in rubles, the stock price is highly correlated to sales and, therefore, to brand loyalty.

Examining the direction and velocity of stock prices during April through June 2000 - the fiscal quarter following directly after our brand and loyalty programs assessments and analyses were made - confirms these brand equity-based findings.

Conclusions

Two years ago, after conducting a major survey of e-commerce customers for the Brand Keys Customer Loyalty Index, we published a list of the value drivers that were most important in stimulating e-commerce loyalty.

According to our research, e-companies that were perceived to embrace the values represented by these drivers were well positioned to build a loyal franchise and would, therefore, tend to be more profitable. We also noted that, interestingly, the values to which people responded in Internet retailers were quite different from those they sought in traditional retailers. This was true even for those traditional retailers who, with newly built Web sites, were in the early stages of a clicks-and-mortar strategy.

And then, in the first quarter of 2000, our pronouncements smashed into their expiration date, and we discovered that the two sets of values are officially becoming one. According to our latest measures, customer values in the retail category are well on the way to becoming a mélange of both e-values and traditional retail values.

Many of the values people once associated exclusively with bricks-and-mortar stores are now being sought online, while online values are permeating the non-virtual world. Retailers who miss or ignore this major tectonic shift in customer values do so at their own peril - especially when it comes to creating and marketing loyalty programs.

Barnes & Noble, despite its poor showing in the dot-com arena, recently started advertising that customers who place an online order by 11:00 a.m. can have their books delivered anywhere in Manhattan that same day. This is a pretty good example of the integration of some of the best values of both worlds - the speed and convenience of the Web coupled with the ability to hold the merchandise in your hand on the day of purchase. Whether it results in more loyalty customer or increased profits remains to be seen.

What is clear, however, is that as the number of choices available to customers continues to proliferate, and the values customers embrace continue to evolve, retailers have an ever-growing need for a customer-loyalty strategy that includes a means of tracking and understanding the changes - not to mention the ability to quickly reshape their loyalty programs to reflect those changing values.

How do you stay on top of this changing world? Ask your customers. And how do you do that? As a company that has spent the past two decades honing a customer-listening system, we feel qualified to say that there’s only one way to know what your customers are really thinking: the right kind of research. And we don’t mean the rear-view mirror of satisfaction studies or static marketing research. We mean forward-looking research that accurately tracks the direction and velocity of customer values - and therefore is correlated with, and predictive of, customer loyalty and the profits that flow from such an economic bond.

Coming to an agreement about how to define loyalty is relatively easy, especially in light of the near-universal acceptance of ROI valuations. Measurement - especially in the rapidly changing e-tail environment - is more complex. The problem is compounded by the fact that most evaluation tools currently employed do not provide accurate assessments of the ROI of the development and exposure costs of loyalty programs.

E-value/brand-equity-based assessment systems are powerful tools that enable marketers to capture actual customer values, then design e-loyalty programs that capitalize upon those values. As we have seen time after time, acting appropriately on this kind of research is a sure path to the holy grail of successful retail marketing, whether of the bricks, clicks, or mixed variety: a trusted brand with values and programs that result in loyal customers.

References

David A. Aaker, Managing Brand Equity, (New York - The Free Press, 1991).

Advertising Research Foundation, “Transcript Proceedings, The Copy Research Agenda for the 1990s,” (New York - Advertising Research Foundation, 1990).

Karl Albrecht, Corporate Radar, (New York - AMACOM, 2000).

Richard E.S. Boulton, Barry D. Libert, and Steve A. Samek, Cracking the Value Code, (New York - Harper Business, 2000).

Simon Knox and Stan Maklin, Competing On Value, (San Francisco - Financial Times Pitman Publishing, 1998).

Robert Passikoff, Let’s Move Research Into the 21st Century, Revolution, March 2000, p. 45.

Robert Passikoff, “Loyalty Is Earned, Not Bought,” iMarketing News, February 21, 2000, p. 36.

Robert Passikoff, “Strategic Planning Process: identifying and leveraging the corporation’s brand equity,” Quirk’s Marketing Research Review, May 1999, pp. 46-50.

Robert Passikoff, “Don’t Be Fooled: Value Isn’t All at E-tail,” Brandweek, October 4, 1999, p. 36.

Watts Wacker and Jim Taylor, The Visionary’s Handbook, (New York - Harper Business, 2000).

Sergio Zyman, The End of Marketing As We Know It, (New York - Harper Business, 1999).