In several previous articles on this site, I have explained the distinction between customer loyalty, customer satisfaction, and customer service. It's unfortunate that many businesses still don't really understand the difference between them, and worse still, they don't understand the significance of treating them differently.
Very often the words ‘loyalty’, ‘satisfaction’, and ‘service’ are used interchangeably by business owners when they are referring to the relationship they have with their customers. This is a big mistake because a company could give exceptional customer service, but not have loyal customers. Or it could have a high level of customer satisfaction even though it is not necessarily offering good service. And these days, a company can have very loyal customers even though these people are not satisfied at all - and the service level provided could also be very poor!
If you don't believe me, then think about the banks. It is an often quoted (and factually correct) statement that within a person's lifetime, they are statistically more likely to get divorced than to change their bank. Yet most high street banks consistently score very low in customer satisfaction surveys. Speaking in general terms, banks tend to have a very high degree of loyalty but a low degree of customer satisfaction. And many people (myself included) would also argue that most banks also offer pretty dire customer service!
Indeed, research into customer loyalty within UK banking revealed that 80% of dissatisfied customers said they intended to change banks in the future, but only 10% actually did so (Haurant, 2004).
So customer satisfaction doesn’t always result in higher loyalty, and conversely, customer dissatisfaction does not always lead to a reduction in loyalty.
Take for example the low-cost airline Ryanair. As mentioned in other articles on this website, Ryanair have an appalling record for customer service and customer satisfaction. In fact at times they've (bizarrely) even played on this poor record to generate publicity! Their CEO Michael O’Leary is a master of getting publicity from his verbal ‘gaffes’ that come across as accidental, but are probably more deliberate than people actually realise.
(Suggesting that passengers should pay to use the toilet during flights is an obvious example of one of O’Leary’s ‘accidentally deliberate’ gaffes which sounds like bad customer service, but is really intended to generate PR coverage).
Yet despite their reputation for poor service, Ryanair has got some very loyal customers and have grown from virtually nothing, to a very successful international airline in the space of just a few decades.
Customer loyalty is incredibly complex and is linked to many other factors outside of the quality of customer service or levels of customer satisfaction. And it goes without saying that one of the most obvious factors is price. Customers might say they are very satisfied with a transaction, but this might only be because they are happy with the low price, not the level of service that they have experienced.
You only have to look at the two cut price supermarkets Aldi and Lidl (that usually score quite highly in customer satisfaction surveys) to see how it is possible to offer poor service but to still keep your customers satisfied on the basis of low prices. And of course Ryanair mentioned earlier, follow the same principle.
And this principle works in reverse as well. With the rising use of internet price comparison sites over the last decade, many companies are now offering good service, resulting in high levels of customer satisfaction, and still have low levels of customer loyalty. The insurance industry is a good example of this. The level of customer complaints and customer dissatisfaction within the insurance market is much lower than the levels of dissatisfaction within the banking industry. Yet it is common for people to change their house or car insurance provider virtually every year, even when they have been very satisfied with the service.
So if you are a business owner who cares about the relationship you have with your customers, which of the three elements are most important? Customer service, customer satisfaction, or customer loyalty?
In the short term, customer service is king. Good customer service - alongside good prices - are the only factors that you can use to influence the level of your customers' satisfaction.
And customer satisfaction then forms one of the building blocks towards customer loyalty, although as I have illustrated above, customer satisfaction is not the only factor in determining how loyal a customer is going to be.
Research by Loveman (1998) indicated a strong link between satisfaction and loyalty, and Chong et al. (1997) argued that customer satisfaction is the most important (but not only) factor in predicting levels of loyalty. But a common misconception is to think that customer satisfaction will always automatically equate to customer loyalty and vice versa. Reichheld (2001) stresses that customer satisfaction is only one of several factors that helps to create customer loyalty. Reichheld’s research suggests that only 30% to 70% of ‘satisfied’ customers are also ‘loyal’ customers.
This view is supported by Jones and Sasser (1995) who state that “merely satisfying customers that have the freedom to make choices is not enough to keep them loyal.”
Other authors suggest that supplementary factors are required to build a loyal relationship including ‘trust’, ‘commitment’, ‘fairness’ and ‘symmetry’ (Peppers and Rogers, 2004). Indeed in certain industries, customer satisfaction has become virtually an essential requirement for all suppliers, meaning that a business providing customer satisfaction no longer gains any competitive advantage over its rivals. So in these circumstances, customer satisfaction only leads to parity with the competition, not a competitive advantage over them.
In the long term, if you are a business owner then customer loyalty is far more important than customer satisfaction or customer service. The American author Jeffrey Gitomer (1998) once asked the question “which would you rather have: 1,000 satisfied customers or 1,000 loyal customers?”
Purely from the point of view of business survival, the answer is obvious.
Ask yourself this question: What is the point in providing exceptional customer service and having high levels of customer satisfaction if your customers aren't loyal to you, and are prepared to switch to one of your competitors at the drop of a hat?
I'm not arguing that customer satisfaction and customer service aren't important. Obviously they are incredibly important. But I want to stress that customer service and customer satisfaction do not have any importance in their own right as stand-alone items. Their only importance to a business is in relation to how they impact on long term customer loyalty.
And as I explain in my forthcoming book, 'The Loyalty Gap', customer loyalty is something that is far more complex than most business owners actually realise.
© 2019 Darren Bugg