Who pays more attention to innovations?
Customer loyalty and perceived innovativeness – some observations
Who will be the first to notice any changes in a firms’ market offering or business model? Will it be the enthusiastic, highly committed, always returning customers or the more rational, variety seeking customers that will recognize any changes? The question is highly relevant to CEOs or CMOs who is debating who to listen to when evaluating the effects of innovations.
In our research at Center for Service Innovation (CSI) at the Norwegian school of Economics we find that managers traditionally listen more to employees, engineers, or innovators, rather than their customers. By introducing the Norwegian Innovation Index (NII), we capture the many voices of firms’ customers, i.e. their perception of firms’ innovativeness. Some examples of service elements customers pay attention to during their customer journey, i.e. their use of the firm’s service offering, include;
- “The whole experience of shopping or using XYZ’s online services” (male 30),
- “XYZ’s new app is quite useful” (male 47)
- “XYZ’s customer service” (female 56)
- “Nothing. my wife forced me to go” (male 34)
In our research and by interviewing numerous consumers, we have identified that companies can innovate in four different areas or touchpoints on the customer journey, i.e.
- core service (for example a hotel room)
- the service delivery (for example online booking, check in)
- in customer relationships (for example incentives to make you a returning customer)
- or in the environment surrounding the product or service (for example décor and layout of reception and rooms).
The NII-model holds that while firms innovate by allocating resources to one or several of the four main areas, customers must cognitively register or perceive a change before they can make a judgement about the change, i.e. how significant the change was and what valor it has. Our theory predicts that higher scores in perceived innovativeness make the firm more attractive in the eyes of the customer, than their competitors. Increased relative attractiveness will ultimately lead to increased customer loyalty as more customers will return to the provider. The long-term effects of micro changes in consumer behavior, i.e. increased loyalty, for the firm is higher retention rate, increased customer lifetime value, customer equity, and firm value. Or is it too good to be true?
Two relevant and critical questions have been raised in discussions related to the NII findings:
“Could it be that the respondents have to be (truly) loyal to be able to see and recognize any changes or innovations to begin with?
And, if yes: “Would there be differences in how customers rate companies’ innovativeness depending on their degree of loyalty?”
To shed light upon these two questions, we will first look at concept of customer loyalty then look at data from the NII survey 2017 including the response of 16950 customers of 75 companies in 19 different industries.
Customer loyalty consists of both a psychological and a behavioral component. Loyal customers intend to continue their relationship with the provider no matter what, they are emotionally committed, great advocates and speak favorably of their favorite providers. As demonstrated by a somewhat frustrated respondent in the NII survey “the customer service representative did not take care of me, a VERY loyal customer” (male, 39),loyal customers stay for worse as well.
To reflect the true spirit of customer loyalty, three questions are included in the NII survey, i.e. “how likely it is that you would; continue as a customer of XYZ”, “recommend XYZ to others that seek your advice” and “that you would speak favorably of XYZ”.
When looking at the responses on the loyalty questions we did indeed find different groups of customers varying by their degree of loyalty. Of these respondents, approximately 13 percent scored on average 2.45 (low) on the 7-point loyalty scale while 38 percent scored on average 4.45 (medium) and 49 percent scored on average 6.25 (high).
But, do these three groups differ with regard to how much change they see on their customer journey? The answer is yes they do. More specifically, the less loyal customers seem to recognize changes in the core service, the service delivery, the customer relationship and service environment to a lesser extent than customers that are moderately or highly committed and loyal to the provider. The change in the service delivery received the highest score (4.5) followed by the core service (4.0), the service environment (3.9) and the customer relationship (3.6). While in the less loyal group the order was the same just lower, i.e. service delivery (3.0), core service (2.7), service environment (2.8) and customer relationship (2.7).
These findings indicate that whether or not a customer recognize a firm’s changes might depend on their loyalty. Loyal customers might see more and pay closer attention to any change the firm implements. But why is it that loyal customers recognize the changes more? What are their characteristics, their story and frequency of use? Looking at typical demographic variables do not add much information, but looking at loyalty behavior does.
Customers that report lower scores on customer loyalty tend to have shorter relationships with the provider to look back at than customers with stronger loyalty commitments, see the relationship graph below. The fact that loyal customers with longer relationships seem to recognize changes and innovations more, indicates that these customers have more experience, knowledge and expertise and are thus more capable of recognizing what is new. While the less loyal customer has a poorer understanding and less previous experience to compare with. As illustrated by this respondent “I became a customer this year and does not have much to compare with” (male 38).
Interestingly, the frequency of use of the provider e.g. visits to the store, the bank, etcetera is not differing to a great extent between the three loyalty groups indicating that customers reporting lower loyalty also might be returning ones. Thus, visiting frequently is not sufficient to recognize changes, the customer also needs to be psychologically involved and engaged in the process at least to a certain extent to be able to identify innovations in the experience. As illustrated by the comments by these two respondents “The pharmacy, I do not really know which one I shop at ” (female 47) and “The stores, I do not really care about them and would not discover any changes” (male 51).
Furthermore, when we look at how the low loyalty group responds to the three different loyalty questions, we can conclude that they do not exclude continuing the relationship, but recommending it to others that seek their advice or contributing to a positive word-of-mouth seem to be out of the question.
Luckily, most customers score in the higher end of the loyalty scale and should then be able to acknowledge the firms’ innovation efforts. There are however two important points to be made in this respect;
- firms score relatively low on changes in both the high and low loyalty groups indicating an overall low degree of innovativeness and
- the customer base is a leaking bucket. Even happy customers might leave. Having a plan B on how to convince the less loyal ones, if they are profitable that is and to attract new customers is critical.
Results from the Norwegian Innovation Index do indeed indicate that there is a strong positive relationship between a firm’s perceived innovativeness and how attractive the firm appears to the customer compared to other similar providers. Ultimately, this strengthen customer loyalty in turn loyal customers appear to be better able to recognize the firm’s innovation efforts.
However, to convince less loyal, but profitable customers and attract new ones, boosting the firm’s innovation efforts with proper communication campaigns might be necessary, the question then becomes what should be communicated first – the chicken or the app?