15: Loyalty, Anyone?

Satisfied customers are generally pleased with the service they received on a given occasion, but loyal customers are pleased with the ongoing relationship with the company that serves them. The latter are far more valuable: they will be more forgiving should things go awry, they will be more accepting of change, and they will be more difficult for your competition to wean away. The loyal customer is emotionally invested in a relationship with your company.

However, many companies are obsessed with customer satisfaction - it's easier to measure, and easier to achieve, than customer loyalty. The metrics of satisfaction are very easy to observe because they happen over short amounts of time - but loyalty is more meaningful in the long run. Does the customer come back? Do they come back to you every time?

As a result, changing your operations to improve customer satisfaction will seek to ensure people who currently buy from you are happy with the experience. But if you seek to improve customer loyalty, the customers will not only be happy with their current experience, but will come back.

Value of Loyalty

The author refers to a study done in the insurance industry, which found that most customers would need to save 20% or more before they would be willing to change companies. But 15% claimed they wouldn't switch "for any reason."

The author refers to loyal customers as being "bullet proof," in that they will not be motivated to switch on price alone - you could even raise prices, and not many would leave, meaning you can serve fewer customers at a higher margin, and probably make a better profit. Or conversely, that lowering price won't attract many new customers, and at some point lowering the price to attract more customers becomes counterproductive to your bottom line.

From a marketing perspective, consider whether it makes economic sense to chase price-sensitive customers, and consider the impact of price-cutting on your loyal customer base. Companies that offer a special discount "for new customers only" send a clear message to their loyal customers: you are not important to us - or at the very least, we take your business for granted.

Retaining loyal customers costs less than acquiring new ones, but they're not to be taken for granted. A person who is a "regular" expects special treatment in return for their loyalty - just as a customer who places an unusually large order expects some discount on the price.

At the far extreme is the customer who is overly demanding. The author tells a story about a firm that he did business with that he won by pitching a low bid to get in the door. The problem was that this set an expectation that his service would always be cheap, and while the company was loyal, he didn't make a profit on their business and sometimes took a loss. When the customer demanded even further price concessions, he had to give up the business - and their profits went up afterward. The moral: a customer who uses you because you're cheap is not the same as a customer who is loyal to you because he appreciates the value of your service.

Resisting Commoditization

One of the greatest threats to service, and business in general, is commoditization: the customer sees all options from all providers as being essentially the same, and the only difference is price. In such instances, the biggest players tend to win, due to their economies of scale. The key to competing successfully with the industry giants is to differentiate - and to differentiate in ways that make the customer reluctant to accept a commodity substitute.

Price can be a differentiating factor - if it's high (rather than low). For many goods, especially fashion merchandise, there is no appreciable difference in quality, and the fact that it's expensive makes it more desirable to those who wish to conspicuously consume it as a demonstration of their wealth. In fact, if the price were lowered, the item would lose its appeal.

Convenience is another differentiating factor. If it's a little more expensive, but buying or using it is easier, then customers will be willing to pay the premium. If it's the same price, but more convenient, the attraction is natural. The author provides the example of Southwest Airlines online boarding pass, which was a great idea, but too easy for others to imitate.

Product excellence is another loyalty advantage, though the product must excel in a way that the customer values, If you have a better product, and the customer doesn't know it, or doesn't agree that it's better, then you have no advantage. Computers are a good example of this: for a time, there was a race to have the fastest computer, and customers would flock to the computer with the highest megahertz (though few understood what that meant) - but after a while, things progressed to the point that computers were fast enough, and it was no longer an advantage.

Operational excellence can lead to competitive advantage. This is different from operational efficiency, which is a means to being able to offer a lower price per unit, which isa tactic in commodity goods. Operational excellence pertains to consistent product quality, speed of service. The example the author uses is the amount of time it takes to get to a real person on the phone - between the labyrinth of answering systems, being bounced from one department to another, and being put on hold, calling a customer service line is a negative experience for most customers.

Customer intimacy is another source of competitive advantage - this means knowing the customer's individual preferences and serving them, often without being asked. This is common in the food industry: the bartender who knows your favorite drink or the waitress who knows your usual order. Customers are almost universally impressed when you remember them so well.

Defection barriers can be an advantage. In some instances, there are costs and inconveniences to switching suppliers, which generally arise from the nature of the service - the customer must learn a new system or start from scratch working with a new order department. (EN: The author doesn't mention this, but some companies attempt to create artificial defection barriers, such as term contracts with penalties for switching early. These tend to alienate customers.)

Community among customers can be an advantage. Social groups of people tend to have similar buying habits - they shop and dine at the same places, wear the same fashions, go to the same bar, because doing so is necessary to being part of a group of people who do so. To switch brands or stores is to break away from the group, to be "different," and people are reluctant to stand out.

Trust is another competitive advantage. The example provided is of an auto mechanic who tells a customer that they don't need a repair, or need a less expensive repair than they might have expected. While the mechanic lost the opportunity to make an immediate profit, he's gained a customer for the long-run, who is unlikely to take their business elsewhere.

Value-added services are another advantage. The appliance store that offers delivery and installation is preferred over the one that's cash-and-carry. The auto dealership that offers customers free courses in how to change a tire or replace a wiper blade is more valued by their customers than one that doesn't.

Customer-Defined Service

Companies feel they know their products well, and they know better than the customer what the customer ought to want. They're very wrong about that. Simply stated: it doesn't matter what you think customers should want - it matters what they really do want.

For example, hospitals tend to focus on the skills of their nursing staff, and invest a great deal of cash into technical training. But in truth, the "customer" in a hospital simply wants someone who "cares," regardless of their level of training. Another example: when it comes to auto repair service, the most important thing to the customer is having the vehicle ready when promised.

The point is simple: unless you ask the customer what is important, you will spend a lot of time and money on things that don't matter at all.

At the same time, you have to be conscious of unspoken customer expectations, which are higher now than they have been in the past. There are many things that the customer takes for granted - they may not mention that they think it's important, but they will certainly react if they notice it's not there. Think of the salt and pepper on a restaurant table - no customer would ever say this is an important part of the experience - but if they're not available, the customers will notice.

Customer feedback can also be helpful in retaining customers. If you get negative feedback, act on it. The cost of addressing a problem and retaining a customer is generally less than the cost of having to advertise to replace them.

A loose statistic: companies that measure customer loyalty and have programs in place to retain customers are 60% more profitable than others in the same industries who do not.

Another note: if unhappy customers aren't talking to you, then they're talking to someone else. A bit of research by a consumer affairs group indicated that 58% of people who call a company's consumer affairs hotline about a problem have usually told three or more others about it before placing the call.

It's also worth taking the perspective that a customer who complains is a customer who cares. Customers who don't care will not complain to you, they'll just switch to a competitor. In effect, they are saying "I want to remain your customer, and here's how to keep me." And if you do, you can turn a critic into an evangelist.

The author mentions that customer feedback in the age of the Internet is fast and cheap to collect, but carries with it an expectation of a response. If you are not prepared to respond promptly and intelligently, it's better that you don't bother to ask.

Cultural Impact

The attitudes of employees and customers are strongly impacted by the cultural climate. A few generations ago, people sought to work for one company for life, and a person who changed jobs was looked down upon. Nowadays, job-hopping is typical, and the person who stays with one company for a long period of time is looked upon with suspicion.

Largely, this is the result of downsizing: during the financial crisis of the 1980's companies laid off loyal workers by the tens of thousands, and it became clear that companies didn't value loyal workers - and loyalty to one's employer seemed foolish. It will take many years for companies to overcome that perception ... or it would, if they cared to. Most clearly don't.

The author wraps with the story of a credit card customer who, after 13 years of doing business with a credit card company, missed a payment and they jacked up her rate. She called to ask for her old rate to be restored, but the operator was unable to help, then spoke to a manager, who offered her a slightly lower rate. She pointed out a lower rate being offered, but it was for new customers only. She explained the situation, and her longevity of business with the firm - but even that got no traction. And so, she opened an account with another firm and transferred her balance over.