1: Customer Loyalty: The Way to Many Happy Returns
There is a notion that customer loyalty no longer exists, generally on the part of businesses who have been so unsuccessful in winning customer loyalty that they have stopped even trying. Evidence that this notion is merely sour grapes is provided by companies that succeed: Southwest Airlines, Apple Computer, and others have fiercely loyal customers who stand by these companies, even in tough economic times.
Technology has expanded (not necessarily changed) the way in which companies pursue customer loyalty. The Internet and information technology have enabled companies to track a lot of data that enables them to better know their customers, to manage their customer relationships and customer communications on the individual level, and to provide a high level of anywhere/anytime service to their customers.
More importantly: customers have come to expect companies to take advantage of these advances, to provide a better customer experience, though it is often expressed on a more granular level (enable me to buy on the internet, don't send inappropriate marketing offers, etc.) Because the customer is aware of what is possible, they have a level of expectation that the companies that serve them will do so, and are disappointed when they fail to do so.
Since the mid 1990's, we have been in a period of unprecedented marking innovation: methods for collecting data and communicating have exploded, and the way in which companies and customers interact has been revolutionized. Companies are struggling to keep up, but are at the same time quite overwhelmed by it all, unable to detect with accuracy which technological solutions are valid, and which are just hype.
The best guidance for companies seeking to build strong customer loyalty is to make sure that programs and solutions are built an principles - which are very basic, and which have changed little in the face of technological progress. If a new technology supports these principles, it's worth consideration. If it does not, chances are it's not.
The Way to Many Happy Returns
In the 1980's and 1990's, the term "customer satisfaction" was at the forefront. The notion was that a customer who is satisfied with a given experience (generally, a purchase) is more likely to repurchase. The buzzwords of the day were customer service, service quality, and service excellence.
Most managers assume there is a positive correlation between satisfaction scores and buying behavior - but research and actual customer behavior do not support this belief.
- up to 40% of customers who were satisfied switched suppliers without hesitation
- 85% of customers who switched to a new customer reported being satisfied or "very satisfied" with their former one
- one research firm reported that a high level of satisfaction was "never" found to be a reliable predictor of repeat purchasing
- fewer than 2% of companies that ascribed to the notion that satisfaction leads to repeat business were able even to measure the success of their programs.
One reason for this disparity is that satisfaction is measured after the fact, a customer has already purchased a product, rather than the factors that will influence the next buying decision (many of which may be unknown). For example, a customer may be completely satisfied with a purchase they just made - but when it comes time to repurchase, they do not automatically go back to the same supplier, but may be influenced by other information they have received in the meantime (someone mentions another vendor, they get a mail promotion for a cheaper or more convenient source, etc.). Said another way, loyalty is not about whether the customer was satisfied by their last purchase, but whether they expect to be satisfied by a future purchase.
A second reason is that people respond to surveys in an inaccurate manner. It may be a matter of ego (if I respond that a low price motivates me, I will look like a cheapskate) or of expectations (if I respond that I was motivated by a low price, maybe the store will offer a discount in future). Research consistently shows that 70% of customers report that price was the factor that contributes most to their satisfaction with a past purchase, but only 10% claim it is the factor that is most important when considering a future purchase.
Its also noted that the metrics of satisfaction are themselves to blame. There are clear flaws in the way in which questions are phrased. Surveys are often conducted before the customer has time to use the product they have purchased. People who have just purchased something are likely to seek to defend the choice they have made by claiming satisfaction.
Given the inherent problems with satisfaction measurements, it's little wonder that a high satisfaction rating has very little to do with the desire of customers to repurchase - hence that a company with a high satisfaction score doesn't necessarily have a large body of loyal customers. An example is given of a frustrated CEO whose company had rising satisfaction scores and falling market share, four years running.
The solution to this problem is clear: companies should stop measuring factors that result in customer satisfaction in favor of measuring factors that will lead to customer loyalty.
The True Measurement: Customer Loyalty
Whereas satisfaction is a matter of attitude, loyalty is geared more toward behavior - specifically, the behavior of a future buying decision.
A loyal customer has a specific bias that will influence their future decisions - the purchase is a planned event: they already know what they will need to buy, when they will need to buy it, and who they intend to buy it from. They may also have a sense of what might change their mind when the decision is made (e.g., I intend to buy from this store, unless someone else offers me a better price, or unless I discover a vendor that is closer to my office.)
On the aggregate level, tow important considerations are customer retention and share of wallet. Retention considers the length of relationship with the customer (measured as the number of years a customer has been doing business with the firm) and share of wallet considers the amount of their business you have (measured as the percentage of purchases of a given product the customer makes with your firm, as opposed to a competing firm).
Both are important to measure, because it is not uncommon for customers to split their business among vendors, and the "length of relationship" may remain positive at a time when customers are actually doing less business with your firm.
Taken together, these factors are a good metric of customer loyalty. (EN: though my sense is that it is a historical measure of loyalty - a measure of the success of past efforts, rather than an assessment of the potential value of future efforts.)
The author mentions a few caveats, such as competition and convenience. If you're the only supplier in town, chances are you will have an inflated sense of loyalty because it's too inconvenient for customers to drive to the competition. Should a competitor open shop across the street, customer loyalty will take a nosedive.
Pursuing Market Share Can Damage Loyalty
The notion of market share has been a driving factor for American companies since the 1970's, when competition for customers became a struggle between companies and the customer was merely a pawn in the game. The notion was that the company with the greatest share of market would have the greatest profit, and more emphasis was placed on stealing the other guy's customers rather than satisfying your own.
To this day, many product managers can quickly rattle off the exact number of new customers they have won in the past month, quarter, and year. It's highly unlikely that they can provide the same figures for the number of existing customers they have lost during the same time period. This demonstrates what they care about - and what they do not.
(EN: and to take it a step further, the metrics are often skewed to exaggerate success. If you lose a customer one month, and he comes back three months later, he's counted as a new customer. A manager whose performance is assessed by customer acquisition is thereby encouraged to create churn, and suffers no penalty for having driven away customers, if only for a short period of time.)
As such, a market-share strategy focuses a company's efforts on attracting potential customers, rather than keeping the ones it has, and can often lead to tactics that offend existing customers into seeking to switch to a competitor who will give them better treatment because they are a "new" customer.
(EN: A good example is the "introductory rates" offered on credit cards to new customers only - customers who have been loyal to the firm for years feel short-changed at being unable to get this rate, and then seek out a honeymoon deal from another company. I'm aware of a handful of people who bounced their balances around, getting a deal on a card and moving their balance over, then cancelling the card when the introductory rate expired and moving it to another firm with such a deal - sometimes even opening a "new" account with a company they had previously left. I imagine marketers at such firms were delighted with the constant flow of new customers these offers were bringing in.)
Attracting Price Shoppers, Not Loyalty Seekers
Another bad tactic of the market-share approach is the short-term marketing tool: a coupon, sales promotion, new customer discount, and so on. These are designed to bring over customers from the competition, and are predicated on the belief that a customer lured into buying once will become a repeat customer.
History proved this false - particularly, the coffee "wars" of the 1980's (EN: which is also tue of pizza, soda, and a handful of other consumer goods at the time), where companies used a combination of price incentives to attract customers. And as a result, many customers bought whatever was cheapest that week and had loyalty to no firm. This is a clear instance in which companies commoditized their own products and destroyed brand loyalty.
Ironically, this behavior on the part of leading brands created an opportunity for a small firm to enter the market, to sell a quality product at a premium price, and steal the market away from the major brands. This firm was Starbucks, which took control by avoiding price competition to offer a premium product and a total "customer experience."
(EN: Ironically, Starbucks is now in conflict with a few other "premium" brands, and has undermined its own customer experience by attempting to be ubiquitous and even competing on price - the "dollar coffee" deal - which itself is allegedly a response to customer satisfaction surveys.)
Regarding coupons specifically, they have been overused - to the point that customers will only buy a product if they have a coupon for it (delivery pizza is specifically mentioned) and, if they must buy the item without a coupon, the end up feeling "cheated" - which completely subverts the intention of couponing (customers don't feel they're getting a special deal because of a the coupon - they feel it's necessary to have a coupon to get a fair price, which creates a sense of resentment for the brand).
When Heterogeneous Customers Meet Homogeneous Products
(EN: the author seems to focus on consumer heterogeneity, but product homogeneity is a standing problem, begun in the industrial era, where mass-production meant the standardization of products for the sake of efficiency. Efficiency meant cheap goods in great supply, and customers were generally willing to compromise, to accept a product that is less than a perfect match for their desires simply to have it, or to pay a low price. But given choice in the marketplace, customers are becoming accustomed to being able to choose a product that's a better fit for their needs, and have come to expect further customization, and are as a result less likely to take whatever the supplier is willing to provide, but demand the provider customize their offerings to the individual needs and desires of the customer.)
Another problem with seeking market share is that, even if the tactics work, the new customers who are attracted to the company are significantly different (demographics, psychographics, lifestyles and attitudes) to the existing customer base. As a result, the company must now cater to an influx of customers with significantly different needs and interests to those they are accustomed to serving, and changes made to suit one group's preference will often be unwelcome by the other.
In the retail sector, customizing a store (location, design, product selection, etc.) to a specific market segment has long been a key to success. Stores that attempted to define a homogeneous experience, that would be "all things to all people," failed to attract a body of loyal customers. Those that specialized had a smaller consumer base overall, but greater customer loyalty.
Ultimately, it is better for a company to establish a small-but-specific customer base rather than attempting to win market share regardless of customer profile. In the long run, having a stable customer base and serving them well profits a company more than a large customer base that is constantly in flux, which requires constant expenditures to win "new" customers to replace the customers that are lost.
An extended example is given of an entrepreneur who purchased a resort and attempted to attract customers from other properties by offering lower prices (decreased revenue) and a greater variety of services (higher costs) - which lead to five years of hard work and poor results. Most notably, he had few repeat visitors (presumably, a person was attracted by a special offer to try the resort, but went back to their "regular" vacation spot the following year).
The following year, he abandoned the notion of trying to serve a wide variety of interests and became purely a "skiing" resort, focusing a smaller number of staff exclusively on the one activity, and catering to the needs of novice skiers. The first year, the business barely broke even. But the second year, it paid off: 75% of his bookings were return visitors, revenues tripled, and pre-tax profits quadrupled. Today, some 20 years later, the business has ballooned into a word-class ski destination operating nine resorts nationwide.
This is the value of loyalty: a business with a solid base of "regular" customers is far more stable, and far more profitable, than a firm that has to constantly adjust its operations and market aggressively in search of new customers.
The Longer the Loyalty, the Bigger the Rewards
The rewards of customer loyalty are long-term and cumulative, as loyal customers increase the amount of business they are willing to do with a firm over time. Research has shown that the longer a customer remains with a company, the more profit that customer generates for the company. As an example, the profit generated by a fourth-year customer of an auto service company are triple those generated by the same customer in their first year (a combination of increased revenue and decreased expenses associated to that customer). Across various industries (auto service, banking, insurance, laundry, software, etc.) similar comparisons suggest that a 5% reducing in defections boosts profits by 25% to 85%.
The author concedes that these figures seem exaggerated, but are entirely reasonable. Consider just six of the areas in which a "regular" customer represents increased profit or cost-savings:
- Reduced marketing costs and increased response rate
- Lower transaction costs and support costs
- Reduced customer turnover expenses (setting up and closing down accounts)
- Increased share-of wallet
- Positive word of mouth
- Reduced failure costs (warranty claims, rework)
A specific example is provided from the credit card industry it costs an average $51 to install a new customer (marketing, account setup, issue a card), and the customer generally uses the card "slowly" in their first year. In the second year, the customer uses the card more often, there is no additional cost to keep the account open (they already have the card and it's set up in the system), and there are fewer calls to support and billing departments.
Anecdotal evidence is also provided to underscore the value of keeping regular customers: they tend to increase the amount they buy from you over time, they are increasingly less likely to switch to a competitor, they are easy to reach and respond well to advertising, they provide word-of-mouth to attract other customers, they are less price-sensitive, they are more likely to adopt new products.
However, it's implied that in order to be successful, you should not merely pocket the savings on customer acquisition, but reinvest it into improving the product or service and supporting yoru regular customers to ensure their future loyalty.
The Loyal-Customer, Loyal-Employee Connection
There is a strong correlation between customer loyalty and employee loyalty - firms that are good at one are generally good at the other as well.
As a rule, customers are likely to be loyal to the company if they develop a relationship with salespeople: the customer who regularly buys from a same person relies on that person's help in making the next purchasing decision, and salesmen who work with regular customers learn their preferences, can expedite service, and can quickly detect and react to signs of dissatisfaction.
(EN: In other sources, it's noted that the employees who serve a customer are the face of the company - a customer who has a favorite bartender, waiter, or mechanic comes back to the same shop to deal with the same person, and is often be more loyal to the person than the shop. I recall an example where a salon fired n employee, and the employees followed the employee to a competitor's salon rather than stay at the same salon and be served by someone else.)
Statistically, it seems to work the other way as well. One automotive service chain implemented a retention program that reduced defection by 7% found that employee turnover fell to "a fraction of the former level"
(EN: same source as before suggested the correlation as well, but offered a better explanation: not only does an employee feel gratified by their relationship with customers, but if they are empowered to provide good service, it becomes a matter of pride and self-esteem. Simply stated, a server wants to please his customer, and if the company empowers him to do so, he is happier in his job.)
In addition to improving the customer experience, loyal employees help the bottom line: if employees remain longer, recruiting and training costs are cut, and experienced employees are more efficient.
The author's suggestion: use the cost savings to pay employees better. Higher wages make for happier and more committed employees, whose higher earnings will make it more difficult for competitors to buy them away.
(EN: while I wouldn't disagree, compensation is only one factor that improves loyalty - but higher wages aren't all that needs to be done to increase employee satisfaction and loyalty. There's much more to it than that - but is probably beyond the scope of the present book to examin in more detail.)
The Cost of Losing a Customer
Aside of the savings in marketing to replace a customer and set up accounts for a few one, there are some direct costs that result from the defection of a customer, even if that customer is not replaced.
Primarily, there is the cost of loss sales the company could have booked had the customer been retained. Also, there is the cost of close out accounts and recovering and deactivating artifacts issued to the customer and purge customer data from information systems (or pay to retain it, even though it produces no profit). There is also the 'wasted" cost of marketing to customers who have left the company and are less likely to return than any neutral prospect. And finally, there is the negative word-of-mouth that the customer will spread as a result of their dissatisfaction, which will dissuade others from doing business with you.