What is a satisfied customer worth to you? Probably not as much as you think, states a recent Harvard Business Review article. According to author Frederick Reichheld, companies often don't realize there is no straight line between customer satisfaction and cash flow. Measuring customer satisfaction to determine the health of your business can sidetrack you into confusing loyalty with satisfaction. Customer loyalty is priceless. Customer satisfaction is next to useless.

In numerous businesses where customer loyalty has been studied, 60 to 80% of customers who eventually defected indicated they were satisfied or very satisfied just prior to defecting. In a recent automotive study, approximately 90% of customers said they were satisfied, but only 40% came back as repeat buyers.

Although satisfied customers are not always loyal, customers who experience problems at key Moments of Truth often defect. The Tip of the Iceberg diagram from TARP, a company that measures customer loyalty, shows results related to customer complaints. The findings are from a variety of industries.

Approximately 25% of customers who encounter a problem don't complain to a company employee. As we will see, this is a “silent killer” of customer loyalty.

In business-to-business environments such as agriculture, about 70% of customers will complain to a frontline person such as a sales agronomist or floater operator. The chances are high the problem is never reported to management.

Only 1 to 5% of customers escalate their complaints to management.

Complaint rates are closely tied to the type of problem experienced by the customer. Out-of-pocket losses result in the highest level of complaints (50 to 75%), while quality, inconvenience or incompetence problems result in complaint rates of 5 to 30% to a frontline rep.

On average, twice as many people are told about a bad experience as are told about a good experience. TARP found that customers of a U.S. auto manufacturer told eight people about a good auto repair experience, but told 16 people about a bad experience.

How many of your customers with problems will buy from you again?

In past columns, I suggested the Share of Inputs a retailer receives from his customers depends on the quality of their experiences at key Moments of Truth. Study after study has confirmed as many as one in four customers will experience problems. If you believe your customers are not experiencing problems with your business, you are wrong. The Tip of the Iceberg shows that almost certainly your customers experience more problems with your products and services than you are aware of. This is not a cynical or pessimistic outlook; rather, it is human nature for many of us to avoid confrontation. We would rather reduce or take our business elsewhere than complain. The Tip of the Iceberg shows that at least 25% of customers encountering problems don't complain to someone in the company…they tell other customers.

What do customers do when they have problems and complain? The answer depends on what you, the retailer, do.

A second TARP report for the U.S. Department of Consumer Affairs looked at the percentage of customers who repurchased after they had a problem. The researchers found that how quickly and effectively the customer perceives his problem is resolved is a strong determinant of future purchases. The worst case for repurchases is when customers have a major problem (defined as a loss over $100) and don't complain. The researchers found that only 9% of these customers repurchase. Only 19% of customers with a major problem who complain, but whose complaints are not resolved, repurchase. At the other end of the scale, 82% of customers with a major problem repurchase if their problem is quickly resolved — that is, if their complaint is resolved on first contact.

In 2001 AgKnowlogy examined the data from more than 10,000 growers in our database to determine the percentage of customers who repurchased from a retailer after “dropping” one or more categories (i.e., chemicals, fertilizer, seed, etc.) the previous year. The customers who dropped the most categories were the least likely to reactivate their accounts. Among customers who defected in just one category, only 22% increased their sales in the second year, and the percentage continued to decline from there. I suspect many of these customers who dropped categories and did not repurchase had an unresolved problem with their retailer.

Developing a company-wide process to get in front of customer problems is an ongoing commitment, because customer Moments of Truth occur all year round. If you cannot quantify the voice of your customer and his problems, your business is vulnerable. Increasingly, successful retailers will understand the key drivers of loyalty for their best customers and identify problems these customers may experience. With today's fierce competition and reduced margin opportunities, customer loyalty is more strategic than ever. Remember, working hard is not a business plan, and hope is not a strategy.

Bill Keogh is the owner of AgKnowlogy Inc., a company that helps retailers use customer information to improve their business results. If you have a success story to share or an idea for a future column, e-mail Bill at info@agknowlogy.com, call 905/868-9953, or visit www.agknowlogy.com.

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