Hardware vs. software: where does loyalty lie?

When it comes to earning customer loyalty, computer software providers fare much better than hardware providers, according to the new '2005 Walker Loyalty Report for Software and Hardware' from Walker Information. But why is this the case?

The report examined customer attitudes, experiences, and perceptions of software and hardware companies in the USA and Europe, including assessments of IT companies across eight sectors. It found that 56% of US software customers are truly loyal to their provider, while hardware customer loyalty lagged at 50%. In Europe the findings were similar (although more marginal in difference), with software companies earning a truly loyal score of 42% compared to 40% for hardware.

For the purposes of the study, Walker defined "truly loyal customers" as being those who not only intend to continue relationships with their existing provider in the future, but also those that have a positive attitude toward their provider.

Ongoing innovation
According to Jeff Marr, Walker Information's vice president of consulting services, the software companies that survive in the current industry climate are the innovators. "Their success often hinges on their ability to continually bring new and unique offerings to the marketplace. These conditions certainly contribute to software's capability to gain and keep more loyal customers. Also, certain software companies enjoy a more captive customer base - those who choose to remain because the obstacles to switching to another company, if there is one, are far too great."

Smarter customers
Kathy Quirk, research manager for Nucleus Research and a member of an expert panel that reviewed Walker's study findings, said software companies' higher loyalty scores may in fact reflect customers' increased sophistication and knowledge in choosing software solutions that best meet specific business needs.

According to Quirk, "Software is a strategic asset and a significant investment for companies, so it's very important for IT decision makers to choose wisely and well. Software isn't something you buy and then walk away from; it requires an ongoing relationship between company and customer, which if all goes well, can impact loyalty."

Channel partner loyalty
Apart from first-time data from four European countries (namely France, the United Kingdom, Spain, and Germany), the study also uncovered data about the loyalty of customers to channel partners. In the USA, 47% of survey respondents had some type of relationship with a channel partner. Of those, 66% had pre-sales experience with a channel partner, and 72% worked with partners post-sale.

Channel partners scored much lower on customer loyalty than IT companies. For channel partners, the percentage of truly loyal customers was only 44%, compared to 52% of IT companies. Sonya McAllister, Walker Information's senior vice president, noted: "This suggests a strong emphasis on brand. Customers are much more loyal to the brand than to the company that is providing pre- or post-sales support."

Loyalty by sector
The report's survey asked IT decision makers from corporations, non-profit organisations, and governments to evaluate their software and hardware companies in the following eight sector categories:

• CRM software
• Desktop software
• Enterprise software
• Infrastructure software
• Mass storage hardware
• Networked storage hardware
• Networking equipment
• Servers and workstations

Loyalty leaders
Out of all the major software and hardware companies evaluated, only 12 emerged as 'loyalty leaders'. Earning high percentages, these companies naturally had relatively low percentages of customers in the 'high-risk' category (those at risk of defection). The twelve loyalty leaders were:

1. Adobe
2. Apple
3. Cisco Systems
4. Dell
5. EMC2
6. Hewlett-Packard (HP)
7. IBM
8. Microsoft
9. Oracle
10. SAP
11. Sun Microsystems
12. Symantec

In terms of loyalty leadership in each industry sector, mass storage hardware was the only sector that failed to yield even one leader. In the software industry, the enterprise software sector had the most loyalty leaders (six companies), and the hardware industry was led by networked storage (four companies).

Financial loyalty link
The report showed a definite link between customer loyalty levels and overall financial performance. The loyalty leaders identified by the survey have, on average, operating margins of 13% - compared to only 2% for loyalty laggards (those companies earning both low percentages of truly loyal customers and having high percentages of high-risk customers). Additionally, over the past three years, Walker's nominated loyalty leaders have outperformed its loyalty laggards in terms of stock performance by some 23 percentage points.

Phil Bounsall, Walker Information executive vice president, said: "This study supports the intuitive theory that companies with more loyal customers perform better financially. For today's suppliers, these findings show that managing the loyalty of customers is vital to fulfilling an organisation's fiduciary responsibilities to shareholders."

Loyalty drivers
In both the USA and Europe, brand and customer focus were the top drivers of loyalty when examining customers' intentions and attitudes about their software and hardware companies. When surveying customers on their experiences with IT companies, however, Europeans placed more value on servicing, consulting, and account management than their US counterparts.

Jeff Marr concluded: "Our findings suggest that solid relationship building is a priority for European IT customers. Although product and technology are important, Europeans appreciate a focus on the customer, and those characteristics that make establishing and maintaining a mutually beneficial relationship possible."