The Power of Advocate™
set priorities, see improvements
This paper discusses how businesses can increase customer loyalty, improve operational performance and increase profitability by better understanding exactly what they can do to transform more customers into vocal brand advocates. Advocates are not only loyal, but they use a company’s products and services more frequently and help strengthen and promote brands by spreading positive word-of-mouth and referring new customers to the brands with whom they feel an emotional affinity.
Advocate is a propriety analytical tool used to identify the most efficient and effective ways to convert more customers into brand advocates who are not only loyal (and more profitable), but who also actively and enthusiastically promote a brand among their friends, family and acquaintances. Every company understands the advantage of having a passionate, loyal and growing customer base. Advocate is a tool that deconstructs the experiences and impressions that contribute toward transforming more customers into vocal brand champions.
The modeling tool also quantifies the sources that contribute toward perceptions of value consumers derive from a brand’s products and/or services. Perceptions of value, or utility, come in three primary forms, including: 1) functional value (i.e., cost, performance, convenience, etc.); 2) emotional value (i.e., gratification, enjoyment, personal preference, etc.); and 3) reputational value (i.e., respect, esteem, admiration, etc.).
The concept of advocacy moves well beyond traditional measures of market performance, including customer satisfaction or net promoter score. The model is designed to identify the relative importance of the product and service attributes that contribute toward (or detract from) the perceived benefits that consumers derive from their experience with a particular brand’s products or services, and how those experiences and impressions translate into different forms of value for consumers.
The model focuses less on predicting consumer attitudes and more on predicting consumer behaviors. It is well documented in the literature that most attitudes, unless held with extreme conviction, are modest predictors of behavior (David Wallace, Rene Paulson, Charles Lord and Charles Bond, Review of General Psychology, 2005). The model delivers an evidence-based, executable and clearly prioritized blueprint that emphasizes the importance of thinking about service delivery as a marketing activity in order to ensure that operational strategy is an integral component of branding strategy.
Every business understands the importance of loyalty, but few understand the importance of advocacy
Most companies and organizations are accustomed to using quantifiable metrics to help manage their organizations. These range from sophisticated scorecards and dashboards to more basic metrics like profit and loss statements and cash in the bank. For many companies, one of the metrics that they try to measure and monitor is customer loyalty because they understand how critical it is to their success. When relationship tenure is longer—as it is among loyal customers—companies transact significantly higher lifetime value from each customer relationship.
We know from years of research what metrics organizations should pay attention to in order to increase customer loyalty and profitability. In today’s increasingly competitive business environment, managers need to focus their attention on the metrics that matter—because they are better predictors of success (i.e., increased lifetime value and increased profitability).
Marketing professionals often note that the continual introduction of new technologies, competing products and media outlets has resulted in an increasingly diverse and fragmented consumer market. Whereas businesses of yesteryears enjoyed the luxury of advertising to a largely homogenous mass audience, today’s audience has atomized into countless market segments defined not only by demography, but by increasingly nuanced and insistent product preferences.
To overcome the difficulties of communicating to a fragmented market, marketing managers have turned to sophisticated scientific methods of identifying the right segments to target. However, despite adopting these advanced analytic techniques, many businesses continue to face difficulty attracting the new customers they want most.
Two explanations help account for why many acquisition efforts fall short of accomplishing their goals. The first explanation finds fault with the research practice of identifying target markets through various statistical procedures, such as factor and cluster analysis. Often, the explanation goes, market segmentation researchers miss the purpose of their research, which is to guide senior management decision-making. Instead, they prioritize the adoption and application of ever-sophisticated statistical techniques into their research, which allows them to slice up the market into smaller and smaller niches. Consequently, they produce an overabundance of “clusters” that “may be mathematically sound, but in no way helpful for determining what management needs to do to reach actual customers” (Jennifer Barron and Jim Hollingshead, Marketing Management, January-February 2002).
The second explanation focuses on the difficulties that businesses have in determining what it is they wish to communicate about their products and services, even after they have successfully identified their target markets. For example, a recent study of U.S. and European firms report that it is exceptionally difficult to find examples of value propositions that resonate with customers (James Anderson, James Narus and Wouter van Rossum, Harvard Business Review, March 2006).
What leading managers need to know?
In this paper we discuss how companies and organizations can become more successful and more profitable by focusing their attention on the right metrics of performance. We will also demonstrate how Advocate provides managers with a strategic business tool that shows them how to better measure, manage and improve the metrics that drive business success.
Businesses correctly understand that they need to pay attention to what customers think about their products and services. The disconnect that exists today is that most businesses manage to customer satisfaction, customer loyalty or other metrics that do not predict organizational success or profitability. This paper describes what an advocate is, and why businesses should manage to customer advocacy.
The academic origins of what most businesses focus on today
One of the widespread assumptions in marketing is that customer satisfaction is likely to result in repeat purchases, acceptance of other products within a brand portfolio and favorable word-of-mouth (Richard Cardozo, Journal of Marketing Research, August 1965). Later attempts to understand consumers’ post-purchase evaluations borrowed heavily from cognitive dissonance theory (Leon Festinger, A Theory of Cognitive Dissonance, 1957). Anderson used assimilation theory to further understand consumer satisfaction, positing that consumers adjust their perceptions about a given product to bring it more into line with expectations (Rolph Anderson, Journal of Marketing Research, February 1973).
Richard Oliver’s academic work on customer satisfaction added to the work conducted by Cardoza and Anderson by formally introducing a methodology to demonstrate how satisfaction is the product of an expectation-disconfirmation framework (Richard Oliver, A Cognitive Model of the Antecedents and Consequences of Satisfaction Decisions, Journal of Marketing Research, 1980). Consumer expectations about a product or service are established prior to a purchase, and perceptions of quality are determined through the act of consumption. From Oliver’s perspective, the important piece of information to understand is consumers’ post-consumption evaluations of quality. High quality post-consumption evaluations provide confirmation for higher consumer satisfaction, and, alternatively, low quality post-consumption evaluations provide disconfirmation (i.e., lower consumer satisfaction).
The need to move beyond customer satisfaction and quality
The early academic work of Cardoza, Anderson, Oliver and others has led to a dramatic proliferation of research and emphasis on measuring and managing to customer satisfaction and quality. Ironically, what we have learned over the past several years is that while we have developed a rich theoretical understanding of what generates customer satisfaction, we have discovered that it is not the most useful metric of performance. We have also learned that managing to quality also requires a subtle shift in emphasis.
The limits of customer satisfaction
It is widely believed that customer satisfaction is synonymous with loyalty and that companies and organizations should measure and track customer satisfaction in order to understand loyalty, and how and why it varies. This makes sense if satisfaction and loyalty are synonymous. However, the academic research indicates that they are not (Thomas Jones and Earl Sasser, Harvard Business Review, 1995). Based on customer satisfaction data from over 30 national companies representing 5 major industries, the research conducted by Jones and Sasser found that the predicted linear relationship between attitudinal satisfaction and behavioral loyalty held up in only 1 out of 5 cases. In response, some businesses have chosen to focus on customers who report that they are “completely” or “totally” satisfied, dismissing “weak” satisfaction. The problem with this approach is twofold.
First, it continues to focus managers’ attention on an imperfect metric of behavioral loyalty. And second, customer satisfaction is the wrong metric because it does not predict profitability. Based on a review of many national companies representing multiple industries, recent scholarship reveals that customer satisfaction does not translate into profitability (Frederick Reichheld, Harvard Business Review, December 2003). Based on what we know from the Harvard Business School, customer satisfaction is not the most useful metric because: 1) it does not predict loyalty; and 2) it does not predict profitability. It is not that businesses should want their customers to be dissatisfied. They should not. It is simply the case that managing to customer satisfaction will not necessarily lead to profitable growth because satisfied customers defect (Thomas Jones and Earl Sasser, Harvard Business Review, November-December 1995).
The limits of quality
Quality initiatives are also frequently touted as ways to improve customer satisfaction, organizational performance and profitability. In response to Japan’s rising competitiveness in the 1980s, the U.S. Congress created the Malcolm Baldridge National Quality Award modeled after Japan’s Deming Award. This was followed by the Total Quality Management (TQM) movement and again by the Six Sigma™ movement. However, we know that managing to quality does not always lead to improved performance or profitability. For example, The Wallace Company went out of business just two years after winning the Baldridge Award in 1990, and Florida Power and Light nearly suffered the same fate after winning the inaugural award.
It is not the case that quality does not matter. But quality alone does not necessarily lead to profitability, which is ultimately where most managers are driven to perform. Still, there is an ancillary principle of quality that is important for managers to focus on. Specifically, reducing problem incidence and customer defections is extraordinarily important. Recent research indicates that reducing defections by 5 percent can increase profits by 25-85 percent (Frederick Reichheld and Earl Sasser, Harvard Business Review, September-October, 1990). Understanding quality is not necessarily an important metric in and of itself. However, an emphasis on reducing problem incidence and defections is critical to increased profitability. The key metric to manage to is the behavioral loyalty that occurs when customers do not experience problems. Through this approach, managing to operational excellence actually becomes a tactic of strategic marketing.
NPS and CES
More recent efforts to measure performance include a Net Promote Score (Fredrick F. Reicheld, Harvard Business Review, December 2003) and a Customer Experience Score (Matthew Dixon, Karen Freeman and Nicholas Toman, Harvard Business Review July-August, 2010). Their research clearly indicates that Customer Satisfaction (CSAT) is a very weak predictor or repeat purchase behavior. The Net Promote Score (NPS) is a stronger predictor of repeat purchase behavior, and the Customer Effort Score (CES) is an even stronger predictor or re-purchase loyalty. The Net Promoter Score attempts to measure the likelihood that a customer would recommend the brand, product or service under investigation. The Customer Experience Score attempts to measure the how much effort a customer has to personally put forth to interact with a business.
What are the metrics that matter?
While it is tempting to rely on a single measure of performance (NPS or CES), it is important to recognize that both questions are based on unreliable unlabeled values (the NPS is based on a 1-10 scale and the CES is based on a 1-5 scale). In both cases, only the extreme values are labeled. The NPS 10-point scale labels 10 as “Extremely likely to recommend” and 0 as “Not at all likely to recommend.” The CES scale labels 1 as “Very low effort” and 5 as “Very high effort.” Ironically, both of these highly popular measures do not conform to the academic research demonstrating that survey questions are more reliable and valid using fully-labeled scales (Jon Krosnick and Matthew Berent, American Journal of Political Science, 1993 and Jon Krosnick and Stanley Presser, Handbook of Survey Research 2nd Edition, 2009).
We argue that understanding the metrics that are useful to managers requires careful consideration of organization goals, which vary by business and mission. But if the goals are growth and increased profitability, a growing body of academic literature from the past two decades provides definitive insight regarding the metrics that managers should focus on. The following is a partial list of these metrics and the reason why each one matters.
- A customer would use a business’ products or services again in the future.
Understanding consumers’ intentions to use a product or service again in the future is critical to retention, and retention is critical to profitability. According to research conducted by Reichheld and Sasser, improving retention by 5 percent can increase profitability by 85 percent (Frederick Reichheld and Earl Sasser, Harvard Business Review, September-October, 1990)). Here, the goal is to retain all current market share at no incremental marketing expense.
- A customer would use other products and services from a business in the future.
Most businesses would prefer to maintain an exclusive relationship with their customers rather than share that relationship with their competitors. Academic research confirms what most businesses already know: it is easier to sell products and services to existing customers than new customers, and it is more profitable (Alan Grant and Leonard Schlesinger, Harvard Business Review, September-October 1995). Here, the goal is to use cross-sell and up-sell strategies to grow market share (among current customers) at no incremental marketing expense.
- A customer would feel a sense of loyalty – or emotional affinity – to a business’ products or services.
Customers who feel a sense of emotional connection with a business’ products or services are more loyal, and that emotion is derived through experience (Scott Migids, Alan Zorfas and Daniel Leemon, Harvard Business Review, 2015). More powerful emotional experiences are more memorable—and therefore more cognitively accessible— to consumers when making purchasing decisions. We also know that emotional loyalty reduces the risk of defection and predicts positive word-of-mouth (Werner Reinartz and V. Kumar, Harvard Business Review, July 2002).
- A customer would be likely to recommend a business’ products or services to people they know (NPS) and report that it is easy to do business with a company (CES).
The number one predictor of profitable growth is whether a business’ customers are “likely to recommend” them to their friends and family (Reichheld, Harvard Business Review, December 2003). As outlined above, more recent research suggests that interactions with a business that involves “very low effort” is an even stronger predictor of repeat purchases behavior (Matthew Dixon, Karen Freeman and Nicholas Toman, Harvard Business Review July-August, 2010). Here, the goal is to acquire new customers through personal referrals and lowering “friction costs” to encourage repeat purchase behavior.
- A customer reports having a positive experience and not having a negative experience or problems with a business’ products or services.
Reducing problem incidence and delivering high quality experiences are critical to maintaining loyal customers and enhancing profitability. The academic literature consistently demonstrates that reducing defections based on service quality generates profitable growth (James Heskett, Earl Sasser and Leonard Schlesinger, The Service Profit Chain 1997). We also know that customer experiences are a form of marketing (Regis McKenna, Harvard Business Review, January-February 1991) and that consumers are willing to pay a premium for better service experiences (Joseph Pine II and James Gilmore, Harvard Business Review July-August 1998).
- A customer would say many positive things about a business’ products or services to people they know and would NOT say negative things.
In addition to consumers’ likelihood to recommend a business, it is essential for businesses to understand what drives the conversations people have (both positive and negative) about a business’ products or services. Research consistently demonstrates the link between positive word-of-mouth and profitability (Benjamin Schneider and David Earl Bowen, Winning the Service Game, 1995). We also know that companies can engage with consumers in new ways to generate more positive word-of-mouth (Joseph Pine II and James Gilmore, What Consumers Really Want: Authenticity, 2007).
What is an advocate?
The simplest way to conceptualize an advocate is to imagine the behavioral characteristics of an “ideal customer” as indicated by the metrics that matter. An advocate is a customer who: 1) would use a product or service again in the future; 2) would use other products and services within a brand portfolio in the future; 3) would feel a sense of emotional connection to a business’ products or services; 4) would be likely to recommend a business’ products or services to people they know and would report a business is easy to work with; 5) would report having positive experiences with a business; and 6) would not make any negative statements about a business.
At the opposite end of the spectrum is a detractor who: 1) would NOT use a product or service again in the future; 2) would NOT use other products and services within a brand portfolio in the future; 3) would NOT feel a sense of emotional connection to a business’ products or services; 4) would NOT be likely to recommend a business’ products or services to people they know or report a business is hard to do work with; 5); would report having negative experiences with a business; and 6) WOULD make negative statements about a business.
For any given business, their current pool of customers is differentially distributed across this range of advocacy and detraction. Again, as businesses start to think in terms of transforming customers into advocates, operational strategy becomes marketing and brand strategy.
Continuum of Advocate Brand Affinity
What generates an advocate?
Advocate not only focuses managers’ attention on the metrics that matter. It also shows them what they need to do in order to improve their business performance (i.e., increase loyalty, grow market share and increase profitability). Advocacy is a latent concept that is indicated by the metrics that matter. Consumer advocacy is driven by a combination of individual impressions, which, in turn, inform summary judgments of perceived value. Consumers either perceive value or do not perceive value in a business’ products or services based on impressions that come from a variety of sources, including: 1) direct sources (i.e., what a consumer experiences directly when they see, use or consume a product or service); 2) indirect sources (i.e., what a consumer experiences indirectly through word-of-mouth); and 3) mediated sources (i.e., what a consumer experiences when they read, see or hear something about a business’ products or services through paid and earned media exposure. Each of these sources of impressions can be measured and statistically linked in a causally specified direction on advocacy. The model also carefully separates the functional, emotional and reputational value that consumers realize through their purchase or selection decision. At the end of the day, Advocate delivers managers with a precise tool to understand which impressions (and impression sources) create the most advocates. With Advocate, managers can make fully-informed decisions about every business function within their organization knowing precisely where improvements will have the maximum impact on profitability.
How do I “move the needle”?
Using a single indicator (NPS or CES) does not provide managers with insight into what they can do to improve performance. We take exception to the following conclusion that a single “net promoter score” is all that managers need to know:
“By asking this one question, you collect simple and timely data that correlate with growth. You also get responses you can easily interpret and communicate. Your message to employees—‘Get more promoters and fewer detractors’—becomes clear-cut, actionable and motivating, especially when tied to incentives” (Frederick F. Reichheld, Harvard Business Review, December 2003).
We believe that managers need more than a single indicator of organizational performance. To illustrate this point, take the following example.
Under Reichheld’s original scenario (Scenario A), or the implicit logic of using a Customer Effort Score, a manager is given a Net Promoter Score of 62 and told by her CEO to “get more promoters and fewer detractors.” Under our scenario (Scenario B), a manager is given an Advocacy Score (based on an index constructed from multiple behavioral indicators) of 62 and provided with precise information regarding the relative impact of different courses of action. She would know, for example, to pursue Action C with a sense of urgency because it would have a greatest impact on the company’s performance goals. She would also know that Action A should be given much lower priority. Armed with this insight, our manager has an action plan for setting clear priorities in order to achieve maximum success. This approach is consistent with more recent research. Specifically, “to understand how to achieve customer satisfaction, a company must deconstruct it into its component experiences” (Christopher Meyer and Andre Schwager, Harvard Business Review, February 2007). We believe strongly that this is a much more appropriate approach because it provides managers with prescriptive information for taking action to improve business performance. The ultimate variable of interest should be Advocacy, not a single indicator, such as CSAT, NPS or CES. Despite Reicheld’s advice to “Keep it Simple” using a single performance indicator, we believe that research should be customized depending on a company’s business model, mission and goals.
The graphic above is, or course, an overly simplified example which is merely meant to illustrate the importance of delivering specific information regarding the relative importance—or impact—of different courses of action on the metrics that matter, or KPIs (Key Performance Indicators). Without it, managers have no direction to guide planning. With it, they are provided with a blueprint to prioritize operational and communication functions and allocate resources accordingly.
How we do it?
Advocate is a statistical model that identifies the specific experiences that drive brand advocacy. Each model is customized to each business we work with. It is not an off-the-shelf solution. It is a theoretical model that we use to identify the customer experiences and impressions that predict advocacy. The model identifies the relative importance of every experience and impression on brand advocacy. The relevant experiences and impressions vary for every business we work with, and so every model is customized to meet the unique needs of each of the clients we work with. It also identifies how customers rate a business for every experience and impression under investigation, allowing us to not only identify the relative impact of each one, but also which experiences are most in need of improvement.
Why you need it?
Advocate gives managers a tool that outlines a clear action plan for maximum impact. It provides managers with precise information to set clear priorities and see improvements in performance quickly and efficiently. The model also gives managers a tool to control strategic referrals and positive word-of-mouth so that they can influence what their customers say about their business to people they know. Most importantly, it delivers insight to craft an evidence-based plan that seamlessly integrates operational, marketing and communications strategy to maximize loyalty, profitability and the lifetime value of every customer relationship.
Printable version here: Advocate 2016