Understanding and Measuring Customer Loyalty

At the core of every business is its need to understand how customers view their relationship. From this understanding, a business can focus on developing sales, marketing and customer service strategies that translate into sales. To appreciate customer loyalty, we must understand that there are four types with each having its own characteristics.

Cognitive Loyalty

Sometimes called functional loyalty, can be the strongest type of loyalty between businesses and its customers. Here a customer utilizes a product or service because it fits a specific need for the customer that is difficult or not possible to acquire elsewhere and this has been proven based on past use of the product or service. The customer has carefully weighed options and decided on the brand and there has developed a strong and proven bond between the business and the customer. Great examples of cognitive loyalty based relationships include automobile purchasing. Car companies are usually functional to their customers and work to build strong brand relationships with them over time. If they are successful, they maintain loyal customers.

Emotional Loyalty

Emotional loyalty is the most sought after type of loyalty for businesses. This is where customers feel a strong emotional attachment to the brand that translates into customers having a psychological preference for it. Customers will often pay a higher price for the product, even though it has similar function, or convenience as a competitor. Additionally, if there is a disappointment with the product, the customer will tend to remain loyal to the brand. Customers tend to put these types of products on a “core needs” list and will purchase them even if their economic situations worsen. Emotional loyalty is based on intangibles and has a lot to do with feelings. As such it can be difficult for a business to create and delicate for a business to maintain with customers.

Contractual Loyalty

Companies will often enter into written contracts with customers to provide them products or services. These can include: magazine subscriptions, mobile phone contracts, and others that often have recurring payments. These types of customer relationships can be very profitable because once the customer is acquired, they tend to continue with the service throughout the life of the contract. However they can have risks for the business because if the service or product is not up to expectations, customers can feel trapped and then have higher levels of dissatisfaction with the company. Also they inspire extremely competitive environments where companies battle for customers, often leading to price wars.

Transactional Loyalty

When a customer buys products or services repeatedly from a business, without a contract and the purchase is simply based on convenience, value and price, the business has a transactional loyalty relationship with the customer. These types of relationships tend to be weak with customers often looking for options in the three key areas that fit better. If one is found, the customer will take the option with no hesitation. A great example is convenience stores. Customers may frequent a local convenience store regularly until one opens up closer to the customer’s residence or offers better pricing. Transactional loyalty is often maintained with constant promotions that keep customers interested in and frequenting the business. This of course can cut deeply into the profits of the businesses. Businesses may also try and cause obstacles for customers who want to switch to another company. These include loyalty programs that require a certain amount of activity between the customer and business.

Measuring Customer Loyalty

Businesses must be vigilant about understanding if their customers are loyalty to them and why. The key in measuring loyalty in customers is to closely monitor the foundations of their preferences and to look for any changes in perceptions of key attributes compared to those of the company’s competitors. Perhaps the best tool for companies to use to achieve this is a survey designed to generate a Net Promoter Score or NPS that gives the business an idea about the cognitive and emotional loyalty of a customer.  This simple yet powerful tool is vital and provides insight into how a business can maintain or modify their customer service, sales and marketing approaches.