Customer Loyalty is Dead. Long Live Engagement

Customer loyalty is notoriously difficult to measure. Loyalty is typically gauged by proxy, such as via surveys that capture a stated intention to recommend or to repurchase. But stated intent and actual behavior can be very different.

Consequently, loyalty as a business metric is often misleading and worse: It’s difficult to correlate with other business management metrics used by executives to assess strategic decisions. This, in turn, makes loyalty problematic for justifying increased resources and for fostering credibility among customer executives.

Customer engagement, on the other hand, is an effective leading indicator of loyalty and profitability. Customer engagement is the extent of a customer’s willingness to invest his or her discretionary time with a company for mutual benefit. It is easier to measure, easier to influence, and more strongly correlated with revenue and profits than loyalty measures such as Net Promoter (NPS), Customer Loyalty Index (CLI), or others that are poor proxies for revenue.

Long live customer engagement! There are two key components of customer engagement: advocacy and involvement. Engagement is measured by the sum of activities that build positive connections between a company and its customers, which result in greater involvement that positively impacts revenue.

The most successful companies with engagement strategies materially involve customers in their growth efforts, especially in marketing efforts around acquisition and retention, operations, products, innovation, and overall business strategy.

Effective engagement activities create emotional attachments that draw customers closer to protect them from competitors; encourage repurchasing while lowering price sensitivity; gather insights to refine strategy; and ultimately promote evangelism. To succeed, customer engagement efforts must have a correlation to growth metrics, especially revenue and profits.

Engagement will become a key metric of business performance in the future. Following are three characteristics of customer engagement that will be critical.

Engagement is intuitive.

If customers are providing referrals, serving as references, participating in product and strategy advisory boards, speaking at conferences on behalf of the company, and advocating company products on Facebook, they are clearly more likely to repurchase and increase company share of wallet, with reduced price sensitivity

Engagement is a more accurate measure of customer perception and is a leading indicator of loyalty.

Loyalty is an emotional state, whereas engagement is actual behavior. One of the greatest challenges to loyalty is consistently accurate measurement. It is typically measured once or twice annually via survey. But surveys merely capture a snapshot of the customer’s emotional well-being at the time they’re taken, and well-being is prone to adverse effects from factors outside the company’s control. And survey granularity is typically insufficient to discover crises-in-the-making. In addition, survey fatigue and falling response rates indicate that surveys aren’t working for customers either.

By contrast, engagement is based on observable behavior. Is a customer participating in relevant activities that lead to purchase or renewal?

By structuring metrics with sufficient granularity, a company can tell how often and to what degree a customer participates across a range of platforms and activities over time. Waning participation is a leading indicator that loyalty and future revenue may be at risk.

Engagement is highly correlated with revenue and profits.

Engaged customers trust your brand, advocate for you, and buy a greater breadth and depth of your products without as much price-sensitivity. They recognize that their strategies and your strategies are aligned. The engaged customers of one large technology company I talked to generate 33 percent greater revenue. And they are 4 percent more loyal and represent 12 percent greater share of wallet than transactional customers.

In a report titled ”Enhancing the Customer Experience and Engagement in Retail,” PeopleMetrics writes that companies focusing on customer engagement realize a 13 percent revenue reward, compared to a 36 percent revenue penalty for those companies obstructing customer engagement.

This is the Age of Engagement. Customers are demanding to be heard and involved. The most successful companies will grow as they engage customers in customer acquisition, retention, operations, innovation, and even strategy.