Commentary

Satisfaction and Defection Are Only Symptoms

Satisfaction and Defection Are Only Symptoms

An extremely thorough report by Stephanie Coyles and Timothy C. Gokey in The McKinsey Quarterly, 2002 Number 2, describes their recent two-year study of the attitudes of 1,200 households about companies in 16 industries as diverse as airlines, banking, and consumer products which shows that to increase the customers’ loyalty, companies must do more than track today’s typical metrics: satisfaction and defection. A better appreciation of the underlying forces that influence the loyalty of customers—particularly their attitudes, changing needs and buying patterns—can help companies target efforts to correct any downward migration in their spending habits long before it leads them to defect.

By measuring the value of the customers themselves, some companies identified high-value ones and became better at preventing them from defecting. However, managing migration—from the satisfied customers who spend more, to the downward migrators who spend less—is a crucial next step. This step is important, the writers say, because large amounts of value are at stake.

Many more customers change their spending behavior than defect, so the former typically account for larger changes in value. At one retail bank, 5 percent of checking-account customers defected annually, taking with them 10 percent of the bank’s checking accounts and 3 percent of its total balances. But every year, the 35 percent of customers who reduced their balances significantly cost the bank 24 percent of its total balances, while the 35 percent who increased their balances raised its total balances by 25 percent. This effect showed up in all 16 industries we studied and was dominant in two-thirds of them. Focusing not only on defections, but also on smaller changes in customer spending, can have as much as ten times more value than preventing defections alone.

By learning to understand why customers exhibit different degrees of loyalty, and combining that knowledge with data on current spending patterns, companies can develop loyalty profiles that define and quantify six customer segments, the report says. Emotive Loyalists, Inertial Loyalists, Deliberative Loyalists, Lifestyle Downward Migrators, Deliberative Downward Migrators and Dissatisfied Downward Migrators are six categories of customers discussed in detail in the study, with descriptions and analysis of each that are important in developing advertising and marketing strategies.

The report concludes that by using a coordinated approach to understanding the many facets of loyalty and by tailoring tactics appropriately, several companies have reduced downward migration and defection by 20 to 30 percent, while increasing growth and profitability.

You can find out more here.

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