Rim Report

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Measuring Your Customers Loyalty TRGiSKY Relationship Investment Model® A TRGiSKY Study December 2009

Kevin Schulman, Schulman, SVP SVP TRGiSKY TRGiSKY Kevin [email protected] [email protected]

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The Theory There is near unanimous support among marketers, operational executives and brand professionals that “Relationship” is the new coin of the realm. The notion of delivering high quality products or services to produce satisfied customers and yield repeat business is as outdated as it is intuitively appealing – a dangerous combination. The reality is that if functional exchange theory – rationale actors making cost/benefit based decisions – is no longer (if it ever was) a valid theory to explain, measure and therefore, manage customer behavior. The problem however, to quote Susan Fournier of Harvard Business School, is: “In a sense, the field has lept ahead to application of relationship ideas and the assumption of benefits without proper development of the core constructs involved.” The Relationship Investment Model (RIM) fills this void by identifying the core constructs of a healthy customer relationship, the items to measure them and how the constructs work together to explain customer behavior. We introduce the model and how it can be applied to customer acquisition, retention and brand equity valuations as part of our first annual Relationship Investment Model (RIM) Report. The data in the report comes from 3 nationally representative online studies of consumers in clothing retail, grocery and cable/satellite. From this data we’ve assembled the first nationwide set of Relationship Investment Scores (RIS) for over 30 different companies and 3 industry averages to compare and benchmark. In subsequent administrations we will focus on other verticals while repeating these to build a more complete and longitudinal database. THE MODEL What makes for a healthy and strong interpersonal relationship? Read enough of the academic theory on relationships and you’ll no doubt come across the core ideas (i.e. constructs) in this graphic – reliability, fidelity and especially trust. Is it possible that these same constructs

MustHaves • Includemeasures of consumer’sfunctional and emotional connection to brand • Be predictive of consumer behavior • Be parsimonious

RIcaptures customer level motive or intent – degree of commitment to maintain relationship

Personal Connection I believe what BRANDsays about their products BRANDis committed to the satisfaction of its customers

Diagnostics(Inputs) • • • • •

Product Service Brand Operations Marketing

Personal (Fidelity)

Attachment (Trust)

Behavior(Output) • Spend • Engage • Recommend

Functional (Reliability)

Functional Connection I know what to expect when I use BRAND With BRANDI get good value for my money

AttachmentOverall I am a committed BRANDcustomer BRANDis my favorite I feel a sense of loyalty to2 BRAND

are at play in B2B and B2C worlds? The short answer, from our own work and that of others, is yes. Having a theory driven view of the world to determine what to measure – i.e. identifying the constructs – is however, only part of the answer. One must know how to measure each (include flash component that shows the measures for each construct by hovering over them in graphic?) and how they fit together. Then a theoretically sound model must be proven out in the real world with real data across different points in time and industry settings. It must be shown to actually predict key behaviors (the outcome side) and map or link well to firm inputs – i.e. those marketing or operational levers designed to build consumer relationships. The Relationship Investment Model (RIM) meets all these criteria and serves as a Key Performance Indicator for your business. The model measures consumer commitment to your brand including its strength, source and financial value to your business.

Predictive Strength How well does RIM predict consumer behavior and more importantly, how much better is it then other well established measures? In the grocery industry RIM is 135% more predictive of share of wallet than customer satisfaction, which performed the best of the “competitors”. This means you can better predict where the next grocery dollar will go for a given consumer (or segment) when measuring their functional, personal and Attachment than their satisfaction or willingness to recommend the brand. FIGURE 2

Overall Overall Opinion Satisfaction

Unique Experience

Recommend

0% -50% -100% -150%

Predictive -200% Strengthof Other -250% Attitudinal Proxies IndexedAgainstRI -300%

Satisfaction is 135%worsethan RI at explaining grocerySOW

-350% -400% -450% -500%

TRGiSKYSelf-FundedGroceryStudy-National Sample,1000n, ResearchNow

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In clothing retail RI has 65% more discriminating power than satisfaction or recommend on total spend. To be a good predictor it must capture the highs and lows of the variable of interest – in this case, spend. RI does this much better than these other measures. FIGURE 3

Monthly Clothing Retail Spend

$75

$70

$65

•RI has 65%morediscriminating power on retail spend than Satisfaction •RI has 25%morediscriminating power on retail spend than Recommend

$60

$22

$13

High

$18

Low

$55

$50

$45

Investment

Satisfaction

Recommend

TRGiSKYSelf-FundedGroceryStudy-National Sample,1000n, ResearchNow

This data showing the link between RI and key behaviors and its relative superiority to well established and broadly used measures is the RI proof of concept - the reason one should bother reading the rest of this report. So, how can the model be applied to drive more profitable consumer behavior? The balance of this report will provide multiple examples of ways to use the Relationship Investment Model to improve business performance through better measurement and management of customer relationships. Brand Positioning A picture is worth a thousand words. This map adheres to that philosophy and chances are, so does someone in senior management within your firm. The value of knowing, in an instant, where you stand against the competition and, at a broad level, your strategic advantage or weakness is powerful. And if nothing else, the Personal (Y axis) and Functional (X axis) Relationship dimensions demonstrate the ability to differentiate and stand out from the competition in the often crowded space of the consumer’s mind.

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FIGURE 4 Functional Connection

Strong Personal and Weak Functional Connection

Strong Personal and Functional Connection 82

Publix

Harris Teeter

HEB

Kroger 68

Wal-mart

Shaws

73

ti c lC a n o rs e P

74

Whole Foods

Winn Dixie

SuperValu Piggly Wiggly

Giant

75

FoodLion

73

75

Safeway Weak Personal and Strong Functional Connection

Albertsons

Weak Personal and Functional Connection TRGiSKYSelf-FundedGroceryStudy-National Sample,1000n,ResearchNow

FIGURE 4a Functional Connection Strong Personal and Functional Connection

Strong Personal and Weak Functional Connection

Ann Taylor Banana Republic Kohls

Wal-mart

J Crew Abercrombie& Fitch

ti c lC a n o rs e P

Nordstrom Macy's

J.C. Penny Target Ross Stores

Weak Personal and Functional Connection

TheGap

Weak Personal and Strong Functional Connection

TRGiSKYSelf-FundedGroceryStudy-National Sample,1000n, ResearchNow

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Key Driver Analysis Up until this point, the model and application has been a lot like one hand clapping – showing only how well the Relationship constructs map to the “output” side of consumer behavior. But what about the “input” side? What does the firm do from a marketing or operational standpoint to impact and manage customer RI? This analysis, often referred to as key driver, identifies the levers of firm activity that actually impact RI.

FIGURE 5

Personal Dimension 0%

10%

20%

30%

Functional Dimension 40% 50%

40%

30%

20%

10%

0%

Hasbest value for prices Store ismodern and inviting Store is modern and inviting Carriesawide variety of productsI'minterestedin Hasknowledgeableemployees

Keepsme informed about safety and recalls

Hasknowledgeableemployees

Has favorite foods/brands instock Keeps me informed about safety and recalls Trust I amcharged correctlyfor my purchases

TRGiSKYSelf-FundedGroceryStudy-National Sample,1000n, ResearchNow

Identifying what matters is often not enough to take action, to actually change something. In this instance, taking the “modern and inviting” finding back to the operations and store layout people will likely result in a big “now what?” response. And so we combine the model with text analysis of open-end customer comment to gain the kind of nuanced insight and context that can only be found in more qualitative analysis. This chart, courtesy of Wordle, shows how consumers define the “modern & inviting” phrase with frequency of mention denoted by word size. This definitional analysis combined with linkage analysis of open-end consumer comment on the parts of the store that do the best job of conveying “modern & inviting” provides enough detail, nuance and context to get the discussion with operations on exactly

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how to make the store more modern and inviting much further down the proverbial road. FIGURE 5a Sizeof word denotesfrequency– “Clean”(37mentions) &“Friendly”(15mentions) wereremoved

Produced using Wordle TRGiSKYSelf-FundedGroceryStudy-National Sample,1000n, ResearchNow

FIGURE 5b Lighting(19) Layout(12) UseColor(5)

Floors(4)

Aisles(16) Carts(5)

Parking(6) Displays(4)

Well Lit(6)

Signage(9)

Services(3)

Products(9)

TRGiSKYSelf-FundedGroceryStudy-National Sample,1000n, ResearchNow

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Customer Acquisition Marketing success is partly about efficiency – where should my next dollar go to have maximum benefit? Targeting your competitors’ customers who give them low share of wallet is a good strategy since it suggests greater receptivity to your marketing dollar. Targeting those who give low share of wallet and have little or no relationship is an even better one since it virtually guarantees greater receptivity. FIGURE 6

Walmart Relationship Map by Share of Wallet (SOW) Strong Personal and Functional Connection

Strong Personal and Weak Functional Connection

Walmart competitors should focus here – No brand connection and low SOW to Walmart

ti c lC a n o rs e P

HIGHSOW LOWSOW

Weak Personal and Functional Connection

Functional Connection

Weak Personal andStrong Functional Connection

TRGiSKYSelf-FundedGroceryStudy-National Sample, 1000n, ResearchNow

Customer Retention It is true that a low customer satisfaction score at point A in time is reasonably predictive of what that customer will do at point B. However, if they have a decent or good experience at point B then all bets are off using satisfaction alone to accurately predict points C, D, E…

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Combine satisfaction with RI and you have a powerful identifier for who is truly at risk of immediate and medium or long term flight. Customers with no personal, functional or brand Attachment and a bad experience are almost certainly gone. Those that have managed, despite all this, to give decent share of wallet or be otherwise profitable may be worth saving but most will not. FIGURE 7

Strong Personal and Weak Functional Connection

Comcast Relationship May by Satisfaction (SAT)

Strong Personal and Functional Connection

LOW SAT HIGH SAT At High SAT (and Low SAT) are retention risk but…

…these aren’t

ti c lC a n o rs e P

High SAT are retention risk

Weak Personal and Functional Connection

Functional Connection

Weak Personal and Strong Functional Connection

TRGiSKYSelf-FundedCable/ SatelliteTVStudy-National Sample,1000n, ResearchNow

Customer Feedback Programs Measuring a customer’s satisfaction with a given, recent experience is a good way to know if you screwed up or not – i.e. they give you a low score. If you have this feedback loop incorporated into processes and business rules to remediate and fix the problem then the firm is making good use of this data and as importantly, of the customer’s time to give it to you.

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Applying this model to simply move from a “2 bucket world” of either low or high satisfaction to a “4 bucket world” where you discriminate among the “low satisfaction” crowd is a big step int the right direction. The big leap however is to move beyond the “squeaky wheel” customer feedback program to a true, customer relationship framework where something is done with all four buckets. FIGURE 8

•C-sat and most customer feedbackprogramsareall about problemresolution •This is a mistake •Every single touch is an opportunityto remediate or build relationship (i.e. future cash flows) •Need to discriminate amongst your top box – don’t miss opportunity to engage customer

LowSatisfaction LowSatisfaction

Hig hhSA atisfaction Hig ttachment

HH n e m c ta A h ig n e m c ta A h ig

8% 41%

HH n e m c ta A h ig n e m c ta A h ig

These two groups NOT the same

o n e m h c ta A w Lo n e m h c ta A L

37%

15%

TRGiSKYSelf-FundedGroceryStudy-National Sample,1000n, ResearchNow

This means taking full advantage of the precious time a customer will give to share feedback by collecting the RIGHT feedback. Just asking them if you screwed up this time can create mild customer frustration (in short term) and missed opportunity by not also asking about the status of the relationship for the medium and long term.

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w L n e m h c ta A o

This is the “forgotten” group, 42% high SOW

Tracking/Benchmarking And what would any self respecting model be without a single number or score to sum it all up and track and benchmark against? FIGURE 9

Grocery

Investment Score

HEB

59.0

Publix

58.3

Kroger

55.6

Kohls

56.5

Walmart

55.6

Ann Taylor

55.0

Harris Teeter

52.9

Walmart

54.6

Shaws

52.7

BananaRepublic

54.4

Giant

49.2

J.C. Penny

53.0

Food Lion

49.2

J Crew

50.4

Safeway

47.4

Nordstrom

Winn Dixie

46.5

Whole Foods

Retail

Investment Score

Cable/Satellite

Investment Score

Verizon Fios

68.3

Direct TV

63.8

Dish Network

59.8

49.9

CoxCommunications

59.6

Target

49.1

56.6

46.4

RossStores

48.3

Charter Communications

Super Valu

44.9

Abercrombie & Fitch

47.9

Cablevision

58.2

PigglyWiggly

43.0

Macy's

47.9

Time Warner Cable

55.2

Albertsons

42.4

Gap

43.7

Comcast

52.8

GroceryIndustry weighted)

51.2

Retail Industry (weighted)

51.3

Cable/Satellite Industry(weighted)

58.1

TRGiSKYSelf-FundedStudiesinGrocery,Retail andCable- National Sample,1000n, ResearchNow

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www.trgisky.co m

Kevin Schulman, SVP TRGiSKY [email protected]

© 2009 All Rights Reserved 12