7: Turning Repeat Customers into Loyal Clients
The author opens with a profile of a small European supermarket chain that has managed to retain loyal customers, even in the face of large and aggressive competitors who attempted to move into his area. His watchword is "humility" - realizing that customers are not "convenient cash machines" who will accept mediocre service from a company that sees them only as a means to profit.
Then, a few random facts and opinions: most business earn a profit on long-term customers and actually lose money on new customers, as a result of the higher cost to attract and orient new customers. Yet businesses put much more emphasis on attracting new customers and tend to be complacent about "churn."
Customers seek value. While the traditional consideration of "price versus quality" remains valid, customers have a broader notion of "value" that includes such factors as reliability, convenience, and after-the-sale service.
Three Types of Value
The author distills "value" into three categories: operational excellence, customer intimacy, and product leadership.
Operational excellence embraces the price-value paradigm (giving customers a product of sufficient quality, given the price charged), but also includes the convenience of obtaining the product. The example given is Dell computer: their efficient operations enables customers to get a highly-customized product at a very low price, delivered to their home or office (as soon as next-day in some instances).
The second factor, customer intimacy, is delivered by a firm that seeks to understand the needs of its customers and deliver a product that serves their needs (rather than a "standard" solution the customer can take or leave). The example provided here is Home Depot, a hardware chain that hires knowledgeable salespeople who will take the time to discuss projects with customers to help them identify what they need, will sell supplies and equipment to do it yourself or arrange to have a crew do the work, and offers value-added services such as free product demonstrations and seminars.
Finally, there is product leadership, which has to do with making a product that is inherently so much better than the competition that a customer will make functional sacrifices by buying a competing product. Apple's iPod product is an example: while there are cheaper MP3 players, the customer must put greater effort into obtaining music and loading it to their device if they purchase a different brand.
Not all companies can deliver on all three kinds of value, but choose to focus on one more than the others. This decision is driven by consumer preferences, competitors' positions, and internal capabilities. (EN: I'd agree with the first assertion, but the second seems a bit passive to me - a company can analyze the situation and take the easiest path to success, but my sense is that the easy solution may not be the best - a bolder strategic maneuver may be called for.)
Researching Your Customer
Market research generally focuses on opinions and attitudes, which may be an indicator of loyalty, but are not entirely analogous. Loyalty is not measured based on what a customer thinks or says, but by their behavior. A customer may have the strongest possible positive impression of your firm - but if he does not purchase from you in future, he is not "loyal."
Of primary importance is identifying the historical value of a customer, as determined by the past purchases (dollars and time). This can be expressed as a ratio (dollars per month) or a whole number (total lifetime revenue). Keep in mind that revenue is only one factor and should, where possible, be offset by the cost of service.
Generally, the customers in the top third of the list represent the source of your profits (even though this considered only revenue, it generally holds that customers whose orders are steady also have lower cost to serve). Analyzing the top third can also be enlightening - your market research may suggest one target market, but the people ho actually buy your product may belong to an entirely different group, and refocusing your efforts on those similar to your actual customers will generally have better results.
Another important factor is determining the reasons your customers purchase. In this instance, the author suggests market research to determine what factors led the customer to purchase. A few examples are presented of companies that were surprised by the list of priorities customers expressed - they were not what the company expected - or by the way that customers discovered them (word-of-mouth brought in the most business, whereas the company was spending a lot on advertising).
(EN: I'm a bit leery of this section in general - while there is value in analyzing historical information, it has previously been asserted that loyalty is differentiated from satisfaction by virtue of being forward-looking.
From Repeat Customer to Loyal Client
The author provides a list of suggestions for "moving a repeat customer into a deeper loyalty zone"
First, guard against competitive attack. Keep in mind that your best customers are your competitor's best prospects, and their gain is your loss. A loyal customer is not merely a one-time sale, but a stream of future revenue, and you can't take for granted that they will come back after being convinced to try a competitor - some portion will, some won't - so it's necessary to be proactive, especially when new firms enter a market.
Second, not all customers are equal - and you should put the greatest effort into defending your "top spenders" rather than consolidating all customers into a single mass. As noted previously, you can afford to lose "bad" customers (those who cost more than they contribute) to competitors, but should vigorously defend the customers who contribute the most to your bottom line.
Third, seek allies within your supply chain. (EN: the author's examples are a bit oblique, and suggest ways in which SCM has made processes more efficient, enabled greater ability to tailor products to the customer, offer lower pricing, etc. All good points, but more in the nature of operational excellence than customer retention.)
Fourth, consider a "frequent buyer" program. The author provides the case-study of Harrah's casinos, which led the industry in establishing a computerized "rating card" program to track the play of patrons whom most casinos didn't pay attention to (low bet amounts, but high frequency) and offer comps, perks, and promotions to gain and defend a high share-of-customer for the casual gambler.
However, it's noted that a "frequent buyer" program does not work for all products, and is not an automatic success. The product must be something with a frequent and regular purchase cycle; it must be simple to track or measure purchases by individual consumers; the product cannot be regarded as a commodity; the rewards must be valued by the customers; the cost of rewards must be affordable to the company; and the company must make a long-term commitment to the program.
Fifth is the creation of exit barriers, which make it difficult for a customer to leave you. There are certain aspects of a relationship that inherently make it easier to keep doing business with the same firm rather than to switch (some of which have to do with the difficulty of starting business with a competitor, such as setting up a credit account). Also, good customer service is a key exit barrier - if you firm does more than competitors are willing to do, the customer will lose the value-added services (or face additional cost to replace them).
(EN: The author doesn't mention this, but it's important to note that customers can be sensitive to artificial exit barriers. If it is apparent that you are doing something to compel them to continue to do business with you, it is likely they will discourage others from doing business with you, will seek an opportunity to leave, and are highly unlikely ever to return. In some instances, an artificial exit barrier can constitute an "unfair trade practice.")
Sixth, demonstrate that you know your customer. In addition to a tactical advantage of being able to identify and be proactive in serving needs that arise before competitors can intervene, customers have a positive impression of businesses that pay attention to them and seek to be of service. The author touches on the notion of personalization, and indicates that it's no longer a value-add, but a customer expectation for a company to recognize them and know their purchasing history.
Seventh, seek to develop loyalty in employees. Generally speaking, companies that cannot retain their employees also have difficulty retaining their customers. While hiring and training are important, it's also important to empower the employees and provide incentives that are geared toward long-term goals rather than short-term performance. Recognize that many of the performance metrics that are commonly used encourage behaviors that are detrimental to customer service (reducing the time spent with each customer, pushing specific products, etc.) and thus to customer loyalty.
The author provides a case-study of an auto company, which has an extensive training program for all employees (not just salesmen - noting that customers often have more frequent contact with the receptionist and the service desk clerk than with sales staff). They also provide higher compensation (to prevent trained employees from being cheaply bought off by competitors). It's also noted that the main reason for losing a good employee is setting a high standard for performance without giving the employee the resources and authority to deliver. It's acknowledge that doing these things is very costly, but has a significant impact on the top-line revenue.
Eighth, motivate your staff to build customer loyalty. The author acknowledges that the modern employee is often "hyped out" - there seems to be a pep rally about everything, which makes it difficult for employees to know what deserves the greatest focus (EN: I heard of one case in which a company had a highly elaborate motivational campaign for reducing office supply costs that was more invigorating and exciting than the presentation of the company's strategic plan for the next fiscal year - and as a result, employees were more familiar with and interested in conserving typing paper than accomplishing the core organizational goals.)