2: A Closer Look at Loyalty
It's noted that customers have become more discerning over the past few decades. A few examples are provided: a customer who shops "boutique" stores to find products, then uses an online service to buy the item at a significantly lower price (roughly a 40% savings); a corporation that slashed travel costs by enabling employees to search for fares and encouraging them to shift travel to cheaper flights; a shopper who realized that if she could save money waited a few months after a new gadget came out.
The question is, how do vendors win the loyalty of this "new kind of buyer"?
(EN: All three examples show customers compromising on quality to get a better price - if you're willing to forego immediate possession, travel at odd hours, and avoid the rush to be the first to have something new, you can save money. The author calls this a "new kind of buyer" - but there's nothing new about this behavior and I don't think these anecdotes are proof that "compromise" shopping is becoming an popular trend - and if anything, underscore the notion that some customers are motivated more by price than by loyalty to a vendor and are willing to compromise service for a discount. My sense is that there's not much to be done, and attempting to accommodate the bargain shopper will alienate those, still in the majority, who are willing to pay a premium for quality or convenience.)
Loyalty and the Purchase Cycle
The author describes the buying process as a "cycle" with an onramp: the customer becomes aware of the product, decides to purchase it, then makes the buy. They then conduct a post-purchase evaluation and, if that succeeds, will move into a cycle of repurchasing the product (decision to repurchase, purchase, evaluate satisfaction).
(EN: This seems to contradict the earlier point - that satisfaction with a past purchase is not a reliable indicator that the individual will decide to repurchase in future. My sense is that most people, being creatures of habit, will fall into this pattern, but it's not entirely automatic: if the evaluation is unsatisfactory, they will seek an alternate solution, or if they become aware of other options during the decision process, they may not automatically repurchase.)
- Awareness. The first step of the process is for the customer to become aware of your product, which is accomplished by advertising (traditional and unconventional) to inform the customer your product exists, and what needs it might serve, so that they may consider it as an option. At this point, there is no attachment, and the customer is vulnerable to information from competitors.
- Initial Purchase. The initial purchase is a crucial step for creating satisfaction. The goal is to make the process of purchasing the item as convenient and comfortable as possible once they have decided to buy. There is still some vulnerability here, and the potential for a company to lose the sale - a negative experience can cause them to reconsider.
- Post-purchase evaluation. After the purchase is made, the buyer will use it. For products, this is often out of the seller's realm of influence, though providing follow-on support may be valuable to ensure that the tem is used properly and effectively. Provided that works out, an association is made in the customer's mind that the given product is (or is not) a good solution.
- Decision to Repurpose. When the need arises again, the customer will reflect on how well the product suited their needs, and how they feel about the process of purchasing it and any after-purchase support they received. If all went well, the decision to repurchase the same item is virtually automatic. If anything was less than perfect, the customer will weight advantages and disadvantages to determine whether to repurchase. Any information they receive from a competitor could cause them to choose other options, and contact with the original supplier may reinforce or undermine the decision to repurchase.
- Repurchase. This is considered the final step in the cycle, but is largely a repeat of the second step, with the key difference being that the customer will have certain expectations based upon their previous experience with the vendor. IF the repurchase process is the same as or better than the original purchase, the customer will stay "on the rails" and have a positive lasting impression of the vendor.
Attachment: A Prerequisite to Loyalty
Attachment does not apply to all products and all customers, but is the result of two factors: whether the customer perceives products as being differentiated, and whether the customer has a preference for one product over another. (EN: My sense is that customer preference is really the driving factor - and the differentiation is merely an underlying reason for or cause of that preference).
The value of attachment is that the customer will be willing to pay a higher price and/or undertake greater effort to obtain the product they prefer. There are a myriad of examples of this behavior: people in the suburbs who will drive into the city rather than dine in a local restaurant that offers the same cuisine; people who will pay a premium for name-brand items stocked side-by-side with cheaper generic alternatives, etc.
It's also noted that people may have a hierarchy of preferences: if the store is out of Pepsi, they may buy Coke, and if that's out too, they might try the store brand (or they might prefer to do without and have a different beverage instead); or they may have a set of preferences (either Pepsi or Coke will do, whatever's cheapest, but won't buy the generic cola).
(EN: The author is scratching at the surface of brand identity and brand preference here, and the factors that lead a person to develop a preference are more elaborate and complex than the author suggests. The key point is that the customer must perceive there to be a difference in order to have a preference, and the level of preference determines the additional cost/effort they will put into obtaining their preferred brand.)
Four Types of Loyalty
The author matrixes the level of attachment against the frequency of purchase to arrive at four "types" of loyalty.
- No loyalty (low attachment, low frequency) - The individual rarely buys the item, doesn't have any brand preferences, and will pick up whatever is cheapest and most convenient. This customer might be upgraded, but it will take significant effort.
- Inertia loyalty (low attachment, high frequency) - This level of loyalty is typical of routine purchases, such as most grocery items. The customer buys the brand he usually buys, for no other reason than it's what he's "always" bought. There is a level of satisfaction, but the customer is vulnerable to competitors who might offer a discount to get them to try something new.
- Latent loyalty (high attachment, low frequency) - Latent loyalty is characteristic of infrequent purchases. A good example of this is motor oil: a driver might insist on using Pennzoil when it's time for an oil change, to the exclusion of other brands, but even though his loyalty is strong, he will not buy the product more often.
- Premium loyalty (high attachment, high frequency) - This is the sort of loyalty that is demonstrated by "regular" customers. This sort of customer buys the same item, every time, as a matter of conscious choice, and is unlikely to accept substitutes.
(EN: I've paraphrased the author a bit here, as I think the original text doesn't quite get inertia and latent loyalty right, and describes them in terms that would lead the reader to underestimate their value or mishandle loyal customers with a goal to encourage them to have premium loyalty, which simply isn't possible for all products. Many of the brands to which customers are most fiercely loyal fall into the "latent" category as well as the "premium" category.)
Loyalty Management: How it Can Work
The author provides an example of loyalty management in B2B sales: a company that sold belts to department stores and found its customers didn't have any particular preference of vendors. To address this, the company owner equipped sales reps with laptop computers, and enabled salesmen to demonstrate to retail buyers which styles, colors, and sizes were popular in a given season.
As a result, they were able to help shop owners stock items that would move better, generating more profit for their customers and more sales than themselves, and the shop owners were no longer indifferent to which salesman they bought from. Company revenues increased steadily, and the company quintupled its business over five years.
(EN: While the story is credible, it strikes me as a bit of a "cheat" to use a B2B example - the factors that drive customer loyalty are very obvious, demand is derived, and the sales and marketing models are entirely different from consumer marketing. The principle is good, but it may be a stretch to apply this concept to retail consumers in other channels.)
Going Multichannel to Win More Loyalty
A case study is presented from 1999 of a brick-and-mortar retailer who added phone and Internet channels, which found that there was some channel switching. While 40% of shoppers remained store-only, 20% abandoned the store for the newer channels, and the remaining 40% used a combination of the three.
But beyond merely splitting out sales to the various media, it was found that the revenue-per customer increased between 20% and 60% for multi-channel customers, and between 60% and 125% for customers who used all three. The attrition rate was lower for customers who used multiple channels, and they purchased a greater breadth and variety of products from the retailer. An office supply store indicated similar returns: a store customer who migrated to a second channel was found to spend about 250% as much as a store-only shopper, and a customer who uses three or more channels spends 450% as much.
(EN: These numbers seem high, but are consistent with other sources. However, there is also a rebuttal: the availability of multiple channels merely sorts the customer based but does not increase total revenue - i.e., the customers who use multiple channels are already high-volume customers who do repeat business, and the store-only figure is averaged down by the convenience shoppers. Such criticism is fair, as the total revenue of retailers who launch Web sites does not skyrocket - through there is an overall increase in revenue, it's much more modest than the per-shopper figures would seem to suggest. So in the end, opening a Web site does not generate a lot of business - but those who already do a lot of business with a firm will avail themselves of other channels for buying the same amount of goods, or perhaps slightly more)