Beyond mere customer retention

Editor’s note: Chris Parcenka is a vice president in the Scottsdale, Ariz., office of research company Synovate.

In today’s competitive world, the measurement and modeling of customer loyalty has become a valuable management tool for companies to better ensure that they remain competitive and maintain, or better yet, expand their current customer relationships. However, measuring customer loyalty in an industry where many customers don’t have a choice of providers doesn’t make sense…or does it? The answer depends on how you define customer loyalty.

Some equate customer loyalty with basic customer retention. If a customer continues to do business with a company that customer is, by definition, considered to be loyal. If this definition were applied to many companies in the utility industry, all customers would automatically be considered loyal. As such, measuring customer loyalty would appear to be unnecessary.

Nonetheless, it was just 10 years ago that deregulation of the power industry seemed imminent. In a deregulated world, customers could have a choice in providers. One might attempt to simulate that situation and have customers speculate on whether they would continue using their current provider. However, this can prove faulty since the thought of having a choice is too hypothetical or far-fetched for many current utility customers.

Another slightly expanded definition of customer loyalty to consider is this:

Customer loyalty is a customer’s predisposition to select a business entity as their preferred provider and their tendency to resist competitors’ persuasive attempts because the selected business entity is perceived as the best-choice alternative.

However, again, for many utility customers, the notion of having a preferred provider and resisting competitors’ attempts does not make sense in today’s environment.

Perhaps a better or more relevant way for utilities to approach the definition of customer loyalty is to further expand how they think about loyalty. Consider the following definition:

Customer loyalty is a behavioral disposition on the part of the customer to respond favorably toward the brand (and company) consistently and across situations. It is the willingness to engage in a variety of behaviors that serve to maintain and deepen the relationship between a brand (or company) and its customers.

So what does it mean to respond favorably to a company? At a basic level, this can mean choosing to remain a customer. As previously mentioned, however, this is essentially a non-issue for many utility companies. It then becomes necessary to think beyond just customer retention. One needs to consider other ways in which customers can respond favorably toward a company.

Other favorable responses or behaviors can be classified into one of three categories that reflect the concept of customer loyalty: expansion; compliance or influence; advocacy.

Expansion is the extent to which a customer is likely to increase the level of business he or she is doing with a company. For a company in a competitive industry, this could mean purchasing more of the same products or services, i.e., expanding the depth of products or services purchased from the company. It could also mean purchasing or subscribing to new products or services, perhaps from a different product line or business unit. This would be expanding the scope of products or services purchased from the company.

For an electric utility customer, doing more of the same, such as increasing electrical usage, may not be a relevant expansion behavior. However, the relationship between an electric utility customer and the provider can be expanded in other ways that benefit the utility company. Specific examples of potential expansion behavior in the electric utility industry include:

  • signing up for programs that help the customer reduce or manage their energy consumption;
  • using the utility as consultant when selecting energy products and services from a third party;
  • paying a premium price.

Compliance or influence  is the extent to which a customer is likely to comply with company requests or be influenced by the company in a way that benefits the company. Specific examples of potential compliance or influence behaviors that utility customers might exhibit include:

  • seeking the utility’s advice or expertise on an energy-related issue;
  • voluntarily cutting back on electricity usage if the utility advised the customer to do so;
  • accepting the utility’s energy advice or referrals to energy contractors or equipment;
  • being influenced by the utility’s opinion regarding energy management advice, equipment or technologies;
  • providing personal information that enables the utility to better serve the customer;
  • paying the bill online;
  • paying attention to advertising.

Advocacy is the extent to which a customer is willing to speak favorably about a company to friends, colleagues or others. Advocacy also includes a customer’s willingness to actively support that company on issues and matters that are important to the company.

Creating customer advocates can be especially important for a company in a regulated industry. In the absence of customer advocates, or worse, in a situation where customers speak unfavorably about a company or actively work to support issues that are counter to those the company supports, companies can suffer a variety of negative consequences. These consequences might include increased business costs, lawsuits, fines and construction delays. For an electric utility, specific examples of potential advocacy behavior include:

  • recommending that other customers specifically locate in the geographic area that is serviced by that utility;
  • supporting the utility’s positions or actions on energy-related public issues, including the environment;
  • supporting the utility’s position on the location and construction of power generation facilities and/or a power transmission grid;
  • providing testimonials about positive experiences with the utility.

Favorable behaviors

To best determine how loyalty should be defined for a given company, the company needs to identify favorable or desired customer behaviors that will benefit the company in some meaningful way. When identifying these desired customer behaviors, customer segment differences should be taken into account and reflected in how the behaviors are measured. The following questions should be considered in identifying the relevant expansion, compliance and advocacy behaviors:

  • What does the company want from its relationship with customers? How would this benefit the company, in both monetary and non-monetary ways?
  • What can customers do to support the company’s mission?
  • What can customers do to help the company better serve them?
  • What can customers do to minimize the company’s cost of doing business with them?
  • How does the company define an ideal customer? What do they do or not do? How do their actions specifically benefit the company?
  • What does the company consider to be a less-than-ideal customer? What sets these customers apart from ideal customers? How do their actions impact the company?

For the researcher responsible for measuring customer loyalty, these questions can best be addressed using internal qualitative research with a mixture of cross-functional company representatives. This could be accomplished via one-on-one interviews and/or roundtable discussions. The above questions help the company to think beyond traditional customer loyalty or customer retention. The desired behaviors could include behaviors that some customers already exhibit today. Behaviors could also include what companies would ideally like their customers to demonstrate.

Statistically verify

After the loyal behaviors are defined and measured among customers, it is important to statistically verify that they reflect customer loyalty. Periodically, it is also important to revisit how loyalty is being defined for a company. When re-examining each measure of loyalty, the following questions should be raised:

  • Is the meaning of the loyalty measure clear?
  • Is this behavior relevant in today’s environment? Can customers do this immediately? If not, how likely is it that this behavior will become relevant in the near future?
  • How important is this behavior for the company, and how does it benefit the company?
  • What is missing from the list?

Once customer loyalty has been defined in a way that is meaningful for the company and statistically valid, it is necessary to understand the customer experiences, interactions, perceptions and attitudes that drive customer loyalty. For example, maintaining and nurturing a reservoir of goodwill is critical in helping to ensure that customers are motivated to behave in a favorable manner, now and in the future. Measuring the extent to which a company has an emotional connection to or bond with the customer is key to assessing the level of goodwill that exists between the customer and company. The higher the level of goodwill is, the more motivated the customer will be to exhibit expansion, compliance and advocacy behaviors, even when things may not be perfect (such as during a power outage).

Intangible asset

In sum, loyal behavior in the utility industry may not be as evident as it is in a more competitive environment. Measuring customer loyalty in a generally non-competitive industry requires one to think about loyalty in non-traditional ways. Customer loyalty is an intangible asset that has positive consequences or outcomes associated with it no matter what the industry. Properly measuring loyalty among utility customers requires thoughtful probing to thoroughly identify the range of expansion, compliance and advocacy behaviors that will ultimately benefit the company in meaningful ways, and foster happier and more loyal customers.