Profitable Loyalty

Most managers accept the importance of customer loyalty to the
long-term success of their businesses.  CEOs consistently rank it in
their top 5 business challenges.  And customer satisfaction and
retention rank 1 and 2 among the most important issues for marketers, with
brand loyalty coming it at number 4, making 3 of the top 5 directly
related to customer loyalty.

With all of this attention on customer loyalty, we would expect to see
a couple of things.  First, we would expect to see customer loyalty
levels increasing.  The reality, however, is quite the
opposite.  Customers have become less exclusively loyal to a brand
than they have ever been.  To say that brand loyalty has been on a
decline over the past two decades is at the very least an
understatement.

Second, we would expect that those firms that have embarked on
strategies focused on improving customer loyalty would have seen
tremendous financial gains.  While we’ve all heard an
occasional turnaround story, the reality is that most firms do not realize
the expected gains from their efforts. 

The solution to this problem isn’t nearly as straightforward as
many pundits would have us believe.  While we can agree that a
continuous decline in customer loyalty isn’t a good thing, the
answer isn’t as simple as improving customer loyalty heals all ills
either. 

Without question, loyalty is important. Loyal customers hang on for
years, devote a larger share of their wallet to the company, and recommend
the company to their friends. Customer loyalty, in short, helps drive
profits.

But what too many companies fail to understand is this: Loyalty does
not always equal profits. As a result, many companies don’t know how
to recognize—and thus encourage—the kind of customer loyalty
that’s really worth having.

Instead asking whether you have enough loyal customers in your customer
base, you need to ask yourself three more complex questions: 1) which
loyal customers are good for the business, 2) how do we hang onto them,
and 3) how do we get more customers like them.

The place to begin any loyalty strategy is to determine which loyal
customers are profitable and which are not. A closer examination of these
two types of customers always reveals very different reasons for their
loyalty. Unprofitable loyal customers tend to be loyal for one of two
reasons: 1) they are driven by unprofitable pricing or exchange policies,
or 2) they demand an excessive amount of service that they are not willing
to pay fairly to receive.

Profitable Loyals (our term for customers who rate highly on their
attitude and behavior toward the company, and on their value to the
company) on the other hand are almost always driven by differentiating
aspects of our product or service offering. While not every customer has
the potential to be a Profitable Loyal, it is important to remember that
they are the ideal customers of the firm—they feel an attachment to
the firm/brand, have a high share of category spend, and contribute
profits to the firm. 

Therefore, strategies aimed at improving customer loyalty should focus
on understanding what differentiates our offer from competitors to
Profitable Loyals.  Once we know this, we need to work continuously
to strengthen this competitive advantage.

October 5, 2009