10: How to Develop a Loyalty-Driven Culture
Companies do not attract loyal customers by happenstance: it is the result of a corporate culture that values customer loyalty and prioritizes it. There's an extended case-study of a company that has great loyalty, and it's largely philosophical: it requires a long-term perspective rather than short-term. Specifically, it is realizing that the long-term relationships with customers will sustain a firm, even if it conflicts with short-term desire to profit from them. And moreover, that the commitment to serving customers well isn't a short-term fad that can be done when the company can easily afford the extra cost - it is a long-term strategy that must be done in order to build and retain a stable and reliable customer base.
Preparing to Build Your Loyalty System
The author lists a number of key metrics for loyalty:
- Customer base. The total number of active customers and clients, subdivided into groups by frequency: first-time customers, repeat customers, and loyal customers. Keep a list of inactive customers, but do not include them in the total.
- Average purchase frequency. The number of products sold in a given time divided by the number of customers. Often expressed as a 'times per year" ratio.
- Average purchase amount. Ditto, only this considers dollars rather than sales, which is significant if you offer multiple options
- New Customers Per Month. Exactly what the name implies, though "a month" is arbitrary and a different time frame may be better for some businesses.
- Retention Rate. Measures the number of customers who make an additional purchase within a specified period of time (the interval differs according to product and market segment) - e.g., if a customer has not purchased in three months, or six, they should be considered "lost"
- Attrition rate. This can be derived from the retention rate - it is, in fact, the inverse of it, and represents customers who leave (or become inactive) over a period of time.
- Share of customer. The percentage of a customer's total purchase in a particular category that is spent with your company. (E.g., if an average person buys gas three times a month, and buys twice from you, you have a 66% share of customer). Calculate it over a long enough time span to get a good average.
(EN: My sense is the author has left out a few key metrics, such as customer tenure, and is also largely focusing on customers as an undifferentiated mass. It would be more meaningful to segment this better - an increase in attrition of new customers should not be as alarming as an attrition of long-term ones - and, in fact, some actions that will improve the overall figures may be beneficial to one segment and detrimental to another.)
A company should use the variables above to measure and monitor customer loyalty, and use them as a method for evaluating performance. Evaluate and review these figures at least monthly, and make the results available to all levels of the organization. Market the notion of loyally internally.
Challenge employees on all levels to consider loyalty, and to gear their thinking toward improving customer loyally rather than counterproductive behaviors focused on more short-term goals. For example, if you challenge salesmen to increase sales, they may act aggressively and alienate customers; but if you task them with improving customer loyalty, they will focus on bringing on new customers who become repeat customers.
Additionally, challenge employees to identify, the "loyalty breakers" they encounter in their work, and to propose solutions. Provide rewards and recognitions to encourage employees to be mindful of loyalty.
Developing a Loyalty Plan
Customers can become loyal all on their own, but companies should not rely on chance and coincidence to establish a reliable customer base - some effort is needed to cultivate customer loyalty.
When seeking to increase customer loyalty, a single plan will not be suitable for all market segments or levels of loyalty, so the author suggests a matrix approach - listing each of your market segments in rows, and the seven "stages" of loyalty in columns (prospect, new customer, repeat customer, regular customer, advocate, and inactive). While it would be ideal to have a plan for every market segment and stage, it's likely that resources are limited, and you may need to determine which segments/stages have the greatest long-term ROI for addressing.
The author points to some advice, by loyalty stage:
- Prospects must overcome their reluctance to buy. The vendor must present an appealing image, address buyer concerns, and give the impression that they are a good vendor to choose.
- First-time customers have a single encounter with a firm, and are evaluating whether the experience is better than their "usual' supplier, or better than what another firm might offer. The vendor must exceed their expectations, and "sell" them on the benefit of making future visits - perhaps provide an incentive to return.
- Repeat customers have had multiple purchases, but have not made the company their primary supplier. The vendor must continue to provide value, but increase the benefit to these customers to capture their majority of their business
- The loyal customer makes the majority of purchases, if not all purchases, with the company. The company cannot merely take their continued business for granted, but must maintain their level of confidence to ensure they remain loyal. (EN: what's lacking here is advice to "upgrade" to advocacy - this is merely how to maintain their business)
- The advocate is not merely a buyer, but also a promoter of your product. This is the highest level of vendor-customer relationship, and the goal of the vendor is to encourage their continued advocacy by providing incentives and rewards.
- The "lost customer" category includes customers who have decreased their involvement with the company (fewer purchases) and has disengaged completely. The vendor should put in place measures to detect decreased contact frequency and respond proactively, or seek out the defector to determine what can be done to win them back.
It's also noted that a loyalty plan, unlike traditional sales campaigns, involves more than just the marketing department, but should be addressed by anyone whose work impacts the customer experience, directly or indirectly. This may also involve third parties in your supply chain: your product may rely upon goods and services purchased from vendors (the quality of the batteries installed in an item, their encounter with the people who deliver and install your product), or it may be a mode l in which your product reaches the customer only through an intermediary (common in the franchise business model), their cooperation is essential.
The Importance of Employees
Employees are critical in sustaining customer loyalty. The behavior of low-level employees such as store clerks, cashiers, etc. is critical to ensuring he customer is satisfied with the service they receive. An encounter with a rude waiter can damage a customer's satisfaction with a restaurant, even if everything else is flawless.
A few egregious examples are provided: a bank teller who insisted a customer pass through the maze of ropes and wait to be called, even though there were no other customers in line; a hotel clerk who refused to honor a coupon and turned away a customer even though many rooms were available; etc.
Largely, this is a matter of attitude: the employee focuses on the menial tasks they are required to perform and the rituals and procedures involved, and overlook the impact of their service to the customer. Moreover, low-level employees are often trained to perform tasks, and held responsible for metrics related to them, but there is no training or guidance on interacting with the customer.
It's also noted that the "front line" is poorly conceived. It includes everyone with whom the customer might have contact - and at any stage in the process of ownership. For example, many auto dealerships fail on service - the negative experience when the customer interacts with the service technicians discourages them from purchasing their next auto from the same dealership, in spite of the fact that the sales experience was carefully orchestrated.
Keeping Customers Loyal
The continued patronage of a loyal customer cannot be taken for granted. Even if you do nothing "wrong," the needs of a customer will change over time; the market will change over time, with new competitors entering and older ones changing tactics; environmental and cultural change is constant. As such, you must remain vigilant and active to ensure that your products and services remain valuable to customers, even as their perception of value changes.
An example is provided from the food industry - specifically, frozen dinners. To retain the loyalty of customers over the years, companies have had to change their product to accommodate microwave ovens, changing tastes in food, the demand to be low-calorie, then the demand to be more nutritious, then the desire for packaging to be more environmentally friendly. Each market shift represents an opportunity for a competitor to steal customers if the market leader is complacent or slow to respond to changes.