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How Scorecards Can Be Used To Determine Customer Loyalty

May 28, 2018 at 2:55 PM

The right customers are important for every business. Marketing to and serving customers who are not profitable removes your focus from your best customers and ensuring they remain loyal to your business. (Click to Tweet!) Scorecards can help you identify and focus on your ideal customers by ranking your customers by the common criteria historically shown to be shared by your best customers. 

Learning from the Financial services industry

Scorecards have a long tradition in the financial industry. Scorecards help loan officers decide whom to lend money to and how much to lend, based on a points system developed by analysing customer data to determine the ideal customer. Different industries have different criteria for the optimal customer. For the financial industry, the ideal criteria include a high probability to pay back a loan within a designated period. Credit risk managers use such criteria as demographics, credit scores, home ownership, employment status, and income - all determined after analysis of data collected from credit bureaux on good borrowers.

The underlying principles here can be applied to other industries and the companies' relationships with their customers. Many businesses have taken the "good borrower" idea and applied it to create a scorecard that determine their most loyal customers and those they most want to remain loyal to their business. (Click to Tweet!)

How can you know which customers are good customers?

In today's digital and social networking world, customer loyalty not only means how often a customer frequents and buys from your business, but also how often they engage with your brand, whether they are willing to leave comments, write online reviews, attend brand launches, or make recommendations to their friends. 

Traditionally marketers used scoring systems such as the Net Promoter Score (NPS), Customer Satisfaction Score (CSAT) and the Customer Effort Score (CES), which measures how likely a customer is willing to recommend a brand to others. However, this method of measuring customer loyalty has been criticised for not providing an accurate gauge of loyalty.  Just because your customer is satisfied and is willing to tell a friend how satisfied they are with your service, doesn’t mean they are loyal. (Click to Tweet!)

Read our blog on why NPS is not enough to measure customer loyalty

Making use of a scorecard as a segmentation and measuring tool could prove more successful as it incorporates far more Key Performance Indicators (KPI) than the traditional methods above, and if done correctly could provide a deeper understanding of your customer, their needs and behaviours.

What are Key Performance Indicators?

Key Performance Indicators (KPI) are the characteristics that guide the in-depth analysis of a customer's loyalty to your brand. Best practice KPIs for measuring Customer loyalty are: 

  • acquisition rate, 
  • attrition rate, 
  • retention rate, 
  • wallet share, 
  • customer participation, 
  • customer price elasticity, 
  • sales increase due to customers, and 
  • funnel drop-off.

For example, analysis over time of the first four characteristics above will give you a good idea of whether you attract enough new customers and whether you are losing too many customers. As the adage goes, it is cheaper to retain customers than to acquire new customers.

The last four indicators mentioned above tell you how you're faring with respect to increasing the loyalty of individual customers. Perhaps these indicators are more difficult to measure than the first four, but there are definitely ways of measuring. For instance, you can measure the number of positive reviews on your website or the percentage of loyal customers who leave positive reviews. If you ask the right questions on your website, you can tell which new customers came to you by recommendation from another loyal customer. You can also use surveys to gather customer information.

Customer price elasticity is a strong indicator that your customers value your product and your services to the point that they don't mind if prices increase along the way.

Measuring Customer Loyalty

Veritude is one company that put customer loyalty scorecards into play. Veritude provides outsource staffing and hiring services. The company developed an on-line customer survey that asked customers how likely they would be to recommend Veritude's services to others. Survey respondents ranked on a scale of 1-10 for loyalty based on that question. Other questions asked what Veritude does to earn customer recommendations and what Veritude needs to do to earn the customer's recommendation. Veritude scored customers who rated 9 or 10 as "promoters". Veritude labelled customers scoring 7 or 8 as "passive" and customers scoring less than 7 as "detractors". Tracking gave individual customer scores as well as an overall score for the company. Veritude obtained the overall score by subtracting the number of "detractors" from the number of "promoters."

Veritude paired this survey with other customer email surveys and follow-up interviews. Each customer making a negative comment received a follow-up phone call. After the follow-up interviews, the company analysed the feedback to determine causes for dissatisfaction and to develop responses. As a result of the scorecard-built system for measuring customer loyalty, Veritude was able to provide its staff with tools to turn detractors into passives and finally into promoters. By understanding the frustrations and needs of their customers, they were able better to communicate and service their customers, proving the usefulness of a loyalty scorecard.

Measuring attrition rates in South Africa

Locally, in South Africa, one large retailer has used scoring to predict attrition, or the likelihood of a store card account holder closing their account, and loyalty. They identified rate and size of payment of debt as key criteria to identify account holders who were likely to remain good account holders in the long-term and those who were likely to close their account. The higher the payment size above the minimum balance due and the more frequent these higher than necessary payments were made, the more likely that the account holder had used credit for a once off large purchase to pay off quickly. These were identified as less loyal to the brand. Those who were making frequent purchases and frequent small payments to cover their minimal payment were identified as loyal customers who enjoyed spending and relied on credit to purchase. By using scoring to identify these two segments of their customer base, this retailer was able to focus efforts on maintaining loyalty from the one and building loyalty with the other through targeted campaigns.

More and more companies are looking for new ways of building and maintaining loyalty to increase share of wallet in a period when economic conditions are decreasing overall spend by many consumers. Scorecards is one innovative way adopted from the financial services industry that retailers can use data science to help them increase customer loyalty and profitability. (Click to Tweet!)

Read more on 4 Types of Data Analytics to learn more about descriptive, diagnostic, predictive and prescriptive analytics as other innovative ways to segment customers to improve acquisition and retention.

To learn more and to discuss the development of scorecards that support your Customer Loyalty and Retention strategies, contact us for a chat over a cup of coffee.

Mark Roberts
Mark Roberts
Mark has over 15 years’ experience within the credit life cycle with 10 years’ specialised in Collections and Recoveries having been gained through exposure in both B2B and B2C markets across Europe, UK, and South Africa. With both extensive operational and strategic experience, Mark has successfully delivered and lead a number of initiatives within collection strategy, operating processes, platforms, and payment solutions. He holds a B.Comm degree in Actuarial Sciences from University of Pretoria.

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