Why investors are attracted to the number zero.
By Vikas Mittal
Don't Get Distracted By The Gleam Of Customer Loyalty And Forget The Real Goal: Customer Satisfaction
Wells Fargo recently paid a $185 million fine and fired 5,300 employees for opening customer accounts, many of them fake. The employees did this to achieve the goal of building customer loyalty through cross-selling. Under the credo "cross-selling to current customers helps strengthen their relationship with the Wells Fargo," employees were incentivized to show results (i.e., open more accounts). Interviews with employees showed they felt pressured to open more than two million deposit and credit card accounts without customer authorization.
On September 9, a former Volkswagen engineer pled guilty in the emissions-cheating case. The reason for this illegal behavior: an attempt to build customer loyalty by showing customers (unsubstantiated) enhanced product performance. Essentially pressured to increase sales and customer retention, engineers installed illegal software that showed the vehicles had lower emissions. Now Volkswagen has been barred from selling diesel vehicles in the United States, and VW America is offering a $2,000 customer loyalty incentive toward the purchase or lease of any new VW gasoline or hybrid model.
When asked, CEOs of most companies say improving customer satisfaction and customer loyalty is an imperative for their companies. And why not? Activities that create value for customers are core to the definition of marketing. How, then, do we end up with a situation where employees behave in ways that are detrimental to customer value and to the employee’s own welfare?
As the above examples show, when companies focus on customer loyalty at the expense of customer satisfaction, they hurt both their employees and their customers. CEOs and CMOs can become too focused on customer loyalty behaviors: more sales, more retention, more cross-selling, more share of wallet. Sometimes this focus can be so strong that employees feel they can bypass customer satisfaction and focus directly on customer loyalty. This can be a mistake. Customer satisfaction is the foundation of customer loyalty.
Companies benefit when their employees are focused on increasing customer satisfaction. When customers are satisfied, they will be naturally inclined to become loyal to the company. This puts in place a virtuous cycle of ever-increasing satisfaction and loyalty. However, when companies focus only on customer loyalty, they can do things to actually dissatisfy customers. This is what seems to have happened at Wells Fargo and Volkswagen.
So, what are three lessons we can take away from Wells Fargo and Volkswagen to avoid the trap of spurious loyalty?
1. Don’t try to improve customer loyalty at the expense of employee welfare, or vice versa.
Both employees and customers are critical stakeholders for a firm’s long-term valuation. A 2016 study in the Journal of Marketing Research examined data from 4,643 firms spanning 1994 to 2010. The goal of the study was to understand the association between a firm’s employee-oriented achievements and customer-oriented achievements. Only companies that simultaneously achieved superior customer-oriented achievements and employee-oriented achievements had higher long-term financial values. Shareholders understand and expect firms to watch out for the interests of both stakeholders.
The implication is to incentivize employees to engage in activities that increase customer satisfaction—not spurious loyalty—so that firms can reap the benefits of increased customer satisfaction. One of those benefits is an increase in real customer loyalty. Customer loyalty, without customer satisfaction, can be deleterious to a firm and its employees.
2. Employee activities affect firm performance through customer satisfaction.
There seems to be a belief that, somehow, satisfied or engaged employees can directly affect firm performance, bypassing customer satisfaction. Rigorous scientific research, however, has debunked this notion.
A recently published study in the Journal of Marketing Research found that employee engagement affects firm performance, but only through customer satisfaction. Analyzing data from 120 different companies over two time periods, the research study showed that the benefits of employee engagement on firm performance are delivered through customer satisfaction. In other words, only if employee engagement leads to customer satisfaction would firm performance be enhanced. CEOs who are interested in enhancing firm performance need to understand the implications of this finding.
The implication is to focus on increasing employee engagement via activities that enhance customer satisfaction. If you engage your employees to directly affect customer behaviors but ignore customer satisfaction, your company will not improve its performance. Worse yet, the quest for spurious loyalty will erode customer satisfaction and motivate employees to do illegal/unethical activities.
3. Improved customer satisfaction improves firm performance through real, not spurious, loyalty.
What do satisfied customers do differently than dissatisfied customers? This question has been answered in many marketing studies. Relative to dissatisfied customers, customers who are more satisfied are more likely to:
- Have a higher share of wallet for your brand,
- Repurchase your brand at a higher rate,
- Display higher cross-buying of different products and services,
- Engage in more positive word of mouth for your brand.
These loyalty behaviors help lower the costs of customer acquisition and improve the base of retained customers. No wonder, customer satisfaction is king!
In life, there are no shortcuts. This is true for companies hoping to build true customer loyalty. True customer loyalty must be based on customer satisfaction. Spurious loyalty, like a sugar rush, can feel good, but it is ultimately dissatisfying and bad for your health.
Vikas Mittal is the J. Hugh Liedtke Professor of Marketing and Management at the Jones Graduate School of Business at Rice Univeristy.
This article also appeared on American Marketing Association's Marketing New as Avoiding the Trap of Spurious Loyalty: Lessons from Wells Fargo and Volkswagen.