Enhancing customer satisfaction and loyalty has been an area of focus for managers, business leaders, academics, and research consultants for more than two decades. The advantages of focusing on enhancing customer loyalty are well understood. Compelling statistics around the costs associated with maintaining an existing customer versus attracting a new one abound. As customer loyalty increases, so does share of spend in a given category, positive word-of-mouth, and retention rates.
Since our inception in 2000, PeopleMetrics has played an important role in the evolution of customer loyalty measurement. We have interviewed close to 600,000 customers in the hospitality industry alone. In our academic and business literature reviews, as well as client research (including focus groups and qualitative feedback from customers), we have uncovered two dimensions of "loyalty" that are missing in today's common metrics. Both of these dimensions relate to the emotional connection customers feel to an organization and its service. They go beyond saying that a customer will recommend and return to an organization in the future; they assess the strength of the connection.
Our primary and secondary research has led us to hypothesize that organizations need to engage their customers — connect with them rationally and emotionally — more than merely build word-of-mouth loyalty. An engaged customer will not only
be an advocate of the company and say he will return in the future; he will also go out of his way to do business with you again and will feel passion, even love, for the brand and experience. This is the ultimate goal for managers in any service industry — to create engaged customers who feel an emotional tie to their organization. This bond makes it harder for competitors to attract these customers.
In order to assess the strength of our customer engagement concept this past year, PeopleMetrics commissioned a survey among 10,000 customers of service industries in the United States. The goals of the research were to:
- Assess whether customer engagement as a concept truly makes a difference to organizational performance
- Identify the rational/functional and emotional drivers of customer engagement
- Assess how these drivers differ across industries
In July 2007, PeopleMetrics conducted a self-funded study to test our thinking on customer engagement. Partnering with Greenfield Online, we collected 10,000 interviews across four service-based industries: casual dining, hotels, retail, and banking.
Customers were asked to rate two of more than 100 service providers on a recent service experience (within the last three months) along a number of dimensions. Questions related to the outcomes of customer engagement (retention, effort, advocacy and passion) as well as the service experience itself — from functional elements around the service environment and process to emotional pieces related to attention, courtesy, feeling valued, etc.
Only publicly traded companies were included in the research to allow us insight into the relationship between customer engagement and business performance.
This paper explores our findings for the casual dining sector, consisting of 1,250 interviews.
Nine of the largest publicly traded casual dining chains were included (e.g. Applebee's, Red Lobster, etc.). The following research questions were posed:
- Can customer engagement really impact business performance in full service restaurants?
- If so, what can full service restaurants do to improve customer engagement levels?
- How do engagement drivers within the casual dining sector compare to overall drivers of customer engagement?
The first step in answering the above question was to segment restaurant brands into high and low performers based upon customer engagement. We then examined how these two groups performed financially on a number of dimensions.
- Step 1: Identifying High and Low Performers
We divided our data set into high and low performing companies based on their customer engagement levels. Specifically, we calculated the average level of engagement (percent of fully engaged customers) across all companies and defined high performers as those with engagement at least five points above the average and low performers with engagement at least five points below the average. The average percentage of fully engaged customers within these two buckets is illustrated [below].
- Step 2: Gathering Financial Data
For each publicly traded chain the following year-to-year financials were gathered:- Return on assets
- Return on investment
- Return on equity
- Gross margin
- EPS (earnings per share)
- Step 3: Correlating Engagement to Financials
The next step was to determine the average financial score for each metric across companies in the low vs. high customer engagement groups. The results of this analysis confirmed our hypothesis that companies with high levels of customer engagement perform better financially than companies with low levels of customer engagement.
- Key Findings:
- Overall, companies with low customer engagement perform below the industry average across all financial metrics.
- High performing companies are able to yield an average increase of 7% on return on investment year-to-year, while low performing companies experience an average decrease of 22%.
- The average annual increase in EPS for high performing companies is 75%. Low performing companies are well below this figure (average decrease of 50%).
Once PeopleMetrics confirmed the direct relationship between customer engagement levels and financial performance, we conducted a driver analysis to identify the most influential factors impacting customer engagement in the casual dining industry.
The analysis showed that customers are engaged most by emotional drivers, with one functional area playing a key role:
- Emotional Driver #1: The Need to be Recognized and Valued.
Customer engagement is largely driven by the staff's ability to enhance their customers' self-esteem. Providing consistent service quality, valuing guests and fulfilling promises positively impacts levels of engagement.
- Emotional Driver #2: Engaged Employees Make a Difference.
Customer engagement and employee engagement seem to be strongly linked. In the casual dining industry, employees who make the customer experience fun yield positive engagement results.
- Functional Driver #1: The Value of a Pleasant Service Environment.
The actual physical environment of any establishment is also a key driver of customer engagement within the casual dining industry. Convenience, cleanliness, and a variety of offerings available are essential to securing engaged customers.
The table below compares the customer engagement drivers within casual dining to overall drivers of customer engagement for all service industries (which also take into account banking, hotels, and retail).
As can be noted, there is a fair degree of overlap between the two industries. This confirms that, regardless of industry, customer engagement is impacted by more than just the functional elements of the experience and can be maximized through the development of an emotional connection with customers.
Implications for the Reader.
Clearly, a focus on customer engagement will make a difference to your business. Restaurants that engage more of their customers have better financial results than those that fail to engage. And engagement is going to be impacted by a combination of functional and emotional elements of the experience. Functional elements include convenience, cleanliness, choice, and efficiency; and emotional elements include feeling valued, having fun, and trusting in the consistency of service delivery.
In thinking about how this research applies to your business, you should consider the following:
1. Do You Know How Engaged Your Customer Base Is?
More than a single measure of advocacy or retention, customer engagement introduces an emotional element to the measurement process. Are you currently measuring these emotional pieces? Do you know what proportion of your customer base would strongly agree that they would go out of their way to visit one of your restaurants, recommend you, come back, and feel passionate about you and your brand?
2. Do You Know How Your Customers Segment Based on Engagement?
It is important to know your overall level of engagement, but to also uncover the proportion of customers who are: fully engaged, engaged, on the fence, and actively disengaged. Those in the lowest segment can spread viral word-of-mouth affecting your brand strength and reputation. Those sitting on the fence represent an opportunity for movement and an increase in engagement scores.
3. Do You Know What Drives Customer Engagement for Your Unique Customer Base?
While the above findings are useful and provide insight for all casual dining establishments, customer engagement drivers may differ for your customers versus those of a competitor establishment. The drivers may be built off your unique position and brand promise and, as such, need to be customized to your organization. Conducting your own driver analysis will give you a well-rounded assessment of factors with the highest impact of engagement within your organization.
4. Do You Currently Collect and Respond to Real-Time Feedback from Your Customers?
Gone are the days of having to wait several months to receive results from a customer satisfaction or loyalty study. With technology and the Internet, companies can collect real-time feedback from guests. This feedback can be shared with the organization through real-time alerts that immediately communicate positive and negative customer feedback. Positive feedback should be used to recognize and reinforce the right behaviors from the internal team. Negative feedback can be used to inform improvement efforts and attempt a "win-back" opportunity with a customer.
5. Do You Know How the Engagement of Your Employees Impacts the Engagement of Your Guests?
There is strong evidence in our research, as well as other academic and business publications, that engaged employees help to create engaged customers. The "magical moments" by which a loyal, passionate customer is created are dependent upon the people in your organization. Furthermore, customers have told us through this research that their views of a restaurant are impacted by how much fun their server is having. This "fun" experience only occurs through engaged, dedicated, and passionate employees. If you aren't already doing so, you should understand the levels of employee engagement in your workforce and what drives employees to go above and beyond for customers. Ultimately, if you collect both sets of data, you will be able to calculate the PeopleMetric for your company. This single metric will help you assess the health of your most important people assets; by focusing on the functional and emotional elements of employee and customer engagement, you can create a high performing organization that consistently delivers "magical moments."
