3: Growing a Loyal Customer: The Seven Key Stages
The chapter opens with a case study: an entrepreneur (Frieda Caplan) attempted to de-commoditize produce supply. To grocery store shoppers, tomatoes are tomatoes, and even for grocery store buyers, there is little reason to be loyal to one supplier or another: they go with whomever has the product they need, in the quantity they need, at the best price.
In addition to going out of her way to get the customers the product they need (including driving out to farms in her personal vehicle to help pick, pack, and deliver hard-to-get items), Caplan offered extended assistance - free training to produce department managers, buyers, and personnel in selecting and handling product as well as tips for selling to their own customers; advertising in-season produce to pull through the supply chain; classes for chefs and restaurant owners in preparing unusual items. This not only drummed up demand, but created loyalty among buyers to her company, specifically.
Customer Defined
The author re-examines the notion of the word "customer," which shares etymological roots with words such as "customary" and "accustomed" - connoting that an action is performed repeatedly over time. In this sense, a person who purchases an item only once, or once in a while, isn't really a "customer" - but is merely a buyer.
To be a customer, a person must have a customary relationship with your firm, characterized by regular purchases across product and service lines, demonstrate a resistance to the overtures of the competition, and speaks well of your company to others.
(EN: My sense is that this is a bit ambitious - while a company would very much like to have a customer who is open to being sold other things and is willing to evangelize, it may be asking a bit too much, and a customer who is a repeat buyer of a single product can be alienated and driven away if the vendor attempts to take advantage of the relationship. Though this author doesn't seem to be suggesting as much, there are other sources that have advocated being more aggressive in the customer-supplier relationship, which seems to me a violation of trust that will create more disgruntled former customers than better customers for a firm. A firm that treats customers well will find that they will be interested in buying other products, and will provide word-of-mouth. A firm that tries to manipulate the customer into acting as if they had earned that level of regard, when the actually haven't, will alienate customers. A firm that thinks that it, rather than the customer, chooses the level of loyalty customers grant, will find that it is very much mistaken.)
Harley-Davidson: An American Loyalty Classic
The author examines customer loyalty toward the Harley Davidson brand - a company that was nearing extinction, and reinvented itself to gain a large and loyal customer base.
The author notes that, by 1980, every other American motorcycle company had folded, as the motorcycle had fallen out of favor as a vehicle for regular transportation, and the "biker" fad of the 1950's has faded. What's more, HD motorcycles were poorly-made and the name had become associated with tattooed, bearded, low-class individuals.
The author seems to skip the details of how the company turned around, and became popular with middle-aged, upper-middle class suburbanites, but focuses instead on the four points of customer loyalty:
- Repeat purchases. Customers go from not owning a motorcycle to having more than one in a short amount of time (an example given is a lawyer and his wife, who bought five within fifteen months). Typically, each member of the household gets their own bike, then there may be multiple bikes per rider (their starter bike, an upscale one, one for long tours, one dressed up for "show", etc.)
- Purchase across product lines. Not only do customers buy the motorcycle, but they buy upgrades and accessories with the HD brand (rather than generic accessories) and peripheral products (HD clothing and logo merchandise). The example is given of one customer who started with a $10K bike and invested an additional $28K in upgrades and accessories for it. Any new product or accessory is quickly adopted by loyal customers.
- Refers others. Ownership of a HD motorcycle is like membership in a club (the term "HOG" refers to Harley Owners Group), and riding is a social event. As such, a person who is dating or married to a customer, as well as close friends and acquaintances, are generally encouraged to buy a bike and join the club.
- Immunity to Competition. It's notable that HD owners are not merely disinterested in other brands of motorcycle, but are socially hostile toward those who buy other brands: a person who buys a foreign motorcycle, or even one of the me-too American brands, is not a part of their clique, and is perceived as being a member of a rival gang (though given that the demographic is middle-aged suburban professionals "gang warfare" isn't quite what the term might imply - but there is a social distance.)
The Profit Generator System
The author has developed a notion called the "profit generator" which is used in seminars and presentations. (EN: this should be taken as a warning - whenever an author trademarks a diagram, the discussion typically degenerates into patter.) The "generator" is depicted by a diagram like an industrial machine, into which "the public" is poured for grading, such that anyone who is not a high-potential prospect is filtered out and discarded.
The sooner an individual can be disqualified, the more efficient the system: wasting time and resources on a person who will not or cannot purchase is inefficient, and it's better to focus time and resources on the prospects who have the greatest potential to become customers (as well as customers, whom you wish to refine into repeat customers). Through this filtering process, each disqualification decreases the number of people, but increases the potential value of each person.
There is also a point at which prospects are sorted by type. For example, a hotel may have vacationers, regular travelers, business travelers, those who come for events, etc. and each audience will need to be handled differently (an executive come to attend a seminar has different needs and interests than a family on vacation).
The "generator" is meant to depict a lifetime relationship - the process does not end after the purchase is made, as existing customers can be worked into repeat customers, then to regular customers, then to advocates. However, it's noted that these tasks are also quite distinct: just as you must handle the corporate and vacation travelers differently, so must you take a different approach to communicating with a prospect versus a regular customer.
Growing a Loyal Customer
Loyal customers aren't gained; they must be grown, and it tends to be a long process. The author describes seven "stages" of customer development:
- Suspect - Anyone whom you think might possibly buy the product or service. At this point, it's very loosely defined.
- Prospect - After conducting further research, you recognize that a person has an actual need for your product. Meanwhile, that person has probably heard something about your brand but hasn't purchased
- Qualified Prospect - The individual recognizes that your product meets their needs, and has the ability to buy (includes not only financial wherewithal, but also odd things like they are of an age and in a location where your product is legal, they may own other products that are necessary to the use of yours, etc.)
- First-time buyer. The individual has purchased your product for the first time. This includes individuals who have purchased the product before, but from other sources.
- Repeat customers. The customer has purchase the product for the second time, or has bought two different products on different occasions.
- Client. A "client" buys products in more than one category Ideally,, he buys every item in your product line that he can possibly use, repurchases regularly, and purchases from you more than he does from other suppliers.
- Advocate. The advocate stage involves encouraging others to buy from you.
The author also defines a role of a "lost customer" - not as a step in the growth of a customer, but a status of a customer who has defected. It's noted that the customer's defection may be temporary, and they can pick up with you later, but will not necessarily resume the same level of loyalty.
(EN: I've seen similar schemas in other sources, which add an important note about lost customers: the further along they are in the process, the less likely they will be to leave - but the harder they will be to win back if they do leave. If you lose an advocate or a client, it's because you have disappointed and/or offended them in a major way, and they feel a sense of betrayal that will make it hard to win back their trust.)
The author also mentions that, in the online channel, there are a few added stages because you can measure "visitors" to the Web site - people who come to the site but do not buy.
(EN: I'd be careful of such an assumption, because unlike a brick-and-mortar store, people may come to the Web site who are never going to become customers. If they are to be measured at all, I would suggest that they are various grades of "suspects" who have not yet been qualified.)
Stages of Customer Evolution
While the next chapters are devoted to refining the customer relationship, the author provides a brief overview of the steps in the process:
The first phase consists of winnowing down the list of all people whom you suspect might be inclined purchase to include only those who have a clear need and the capacity to purchase (prospects), preferably in the near future. This has typically been handled better in the B2B realm than the B2C realm, as the former involved more costly resources to pursue a customer. It's also noted that statistics suggest companies are getting worse at this over time, and are now spending more on reaching people who are not prospects than in previous years.
(EN: The statistic that backs this is that the cost of sales increased by 50% from 1979 to 1991, but my sense is writing all of this off as "bad marketing" might be a little misleading. That's not to say that poor identification of prospects isn't' a problem - but merely that it's not likely the only problem.)
The second phase, converting a prospect into a buyer, has long been the focus of sales and marketing - the pressure being to get the customer to give up the money and take the product, whatever it takes to do that, and however he might feel about it afterward, has done much to damage public sentiment toward salesmen and marketers, as well as the companies they work for. At yet, it is a critical transition, and one that merits attention, though the focus should be adjusted to take into account the potential for a "hard sell" to drive customers away, before or after the purchase, as a poor first-time-buyer experience is a major handicap to moving to a long-term relationship.
The third step, getting a one-time buyer to become a repeat customer, is called" the fastest and easiest way to higher profits" because you're dealing with people who are already aware of your firm and its products, communication is established, and you can expand on their initial experience. Relationships are not improved by continuing to bombard the subject with mass-market messaging - you must instead seek top engage in a direct and personal dialogue, and the subject must have the sense that the company "knows" them as an individual, not merely a face in the crowd.
The fourth step seeks to shift a repeat buyer into becoming a regular buyer, or a client. Your company is the primary source for the subject, who gives you the greatest share-of-wallet and buys products across multiple product lines. Ideally, he makes every purchase with you, and buys from you every product he can reasonable use. This generally occurs when the customer sees the vendor as an ally or partner, who is not merely selling product, but earnestly seeking to serve the customer's needs - and as such, the relationship is as important, or more important, than the actual products.
The fifth step is advocacy: getting the regular customer or client to recommend your company to others. This is the most valued and sought-after form of bonding, because it is the best form of advertising: customers, without compensation, use their influence in their personal connections to advocate your products. This has greater power in the marketplace than any advertisement you could buy.
There is also a note about "lost and inactive customers" who have either stopped using the product, or have switched to a competitor. Research shows that customers who have previously done business with you are twice as likely to respond to advertising messages. It also takes a lot less effort to renew a relationship with someone who's done business with you in the past than to establish one with an entirely new customer.
(EN: I think this assumes much - primarily, that the reason the person left were that someone else made them a better offer, not that you drove them away. Winning back a customer you burned is much more difficult than approaching a fresh victim - though it's noted that "comeback" customers can be fiercely loyal if you do enough to make amends.)
The Importance of the Big Picture
The author gives the example of a delivery pizza franchise, in which it was found that the average customer was worth $5,000 in revenue over a ten-year period, and asserts that it was "effective" in communicating to employees the value of the customer. (EN: This is weak sauce - what changes were seen in employee behavior, and what effect did it have on the customers themselves, is not disclosed.)
Another example is of the Ford Motor Company, which suggested the potential lifetime value of a single customer to be $142,000 and suggested it would be helpful to employees in dealing with customers who were late on payments - considering the value you may lose if you treat them roughly in the short run. (EN: again, this sounds good, but it is speculative.)
(EN: the rest of this section is more of the same, so I'm stopping. I don't disagree with the author's assertion that considering the long-term value of customers makes a business handle customers better and, as a result, retain their loyalty - but claims and speculation that lacks any evidence make the assertion seem less creditable rather than more).
How a Database Can Increase Customer Loyalty
The author notes that customer service for a small business (e.g., a clothing boutique) is fairly simple because there are a small number of employees and a small number of customers, and human memory is sufficient to know the regular customers and their purchasing habits. When a company has thousands of employees and millions of customers, the amount of information about customers is dispersed and difficult to manage.
Database technology becomes necessary to collect information from various sources and make it available where and when it is needed. It also makes it possible to do more specific marketing - by analyzing customer buying habits, information can be presented in a more focused manner (e.g., to send an announcement only to those customers whose buying habits suggest they might be interested). This decreases marketing costs, increases its effectiveness, and gives the customer the sense that your business "knows" their specific, individual needs.
(EN: What follows are a few examples of companies that have used databases to identify key customers, spot buying patterns, and market accordingly. It's very anecdotal and too superficial to be of much use, except to support the notion that a database can be a useful tool.)
The Thrill of the Chase and Other Misconceptions
The traditional approach to marketing involves forever chasing after new customers, predicated on the notion that more is better - and that the only way for a company to grow is to constantly increase the number of customers it serves. However, it is possible to achieve growth without increasing the number of customers served, if you can get more purchases per customer - in terms of the frequency, the amount, or both. This is the goal of relationship marketing. Not only is it less profitable to be constantly chasing new customers, but it also means that the company will prioritize the less-profitable new customer over a more profitable established customer.
A few more statistics: the probability of selling an item to a prospect ranges between 5% and 20%, whereas the probability of selling an item to an established customer is around 60% to 70%.
A bit of evidence is presented from a case at an apparel maker: On average, customers spent only 22% of their budget on that company's product an the company had an attrition rate of 12% per year. But looking at the marketing budget, the vast majority was spent on finding new customers and "almost nothing" was spent on cultivating existing accounts.
Building a Loyal Clientele One Step at a Time
There is also the misconception that a company can, in one fell swoop, acquire a customer who will remain loyal to them forever - that the customer, once acquired, will remain in the habit of rebuying from the same supplier with no additional effort on the part of the company.
While it can be observed that buyers will eventually fall into habitual buying patterns, it doesn't happen at the first sale, or the second, or the third - and for many items, habituation is not automatic at all, you must "sell" the customer every time they are in the market to buy, and there are a constant stream of opportunities for the customer to consider buying from a competitor instead.
Said another way, customers cannot be taken for granted - and while a current customer is more likely than a prospect to buy from you, it is not an automatic decision, and constant vigilance and effort is necessary to ensure a constant stream of purchases from existing customers.