Profitable Loyalty: Turning More of Your Current Customers into Your Ideal Ones
What does it take to turn more of your current customers into your ideal customers? What are the key components that connect loyalty to profitability? We have an approach to measuring profitable loyalty--a robust methodology that gives a three-dimensional view and a comprehensive understanding of your customers' loyalty and its impact on your business. Curt Carlson from Ipsos Loyalty discusses our new product, C3 - Customers in Three Dimensions.
There are four elements behind profitable loyalty. Tell us about these elements.
The first element is attitudinal loyalty. We have to start by recognizing that satisfaction is not enough. We find routinely that 50% or more of a company's highly satisfied customers are not strongly loyal. Is satisfaction necessary for loyalty? Yes it is. But satisfaction does not equal loyalty. Attitudinal loyalty is about wanting to do business with your company. It is not about mere satisfaction, though satisfaction has a role. It is critical, operationally, that companies understand the customer's take away - their assessment of how well you did when they engage you in different touch points. These are particularly important in retail, hospitality, customer service centres, and places where front line staff do their best to serve the customer according to company's standards. The question is - are they doing it well? Does the customer perceive `following the standard' as being acceptable; is it satisfactory enough to support a loyal relationship? Indeed, we agree that satisfaction has a place, but it is all about your operations and the customer's perception of them. In other words, do they want to be loyal with you? That is attitudinal loyalty and is a measure of their wanting to do business with you.
What is the second element?
The second element is behavioral loyalty. Research shows that when customers have a choice in the market where they give you a share of their business and somebody else another share - how much they spend with you relative to other companies is critical to business performance. In fact there are several studies that identify it as a key indicator of business success and business performance. Behavioral loyalty then goes beyond just wanting to do business with you. It's literally about them spending more money with your company relative to what they spend with others for similar products and services.
The third element is customer value. What does that means?
Not all customers are equal. It's commonly accepted that most company's profit comes from about 20% of their customers. And if that's true, another 40-60% are break-even customers, with the remaining 20-30% actually costing you money. That is why loyalty efforts need to be directed to your most profitable customers. At this point, there is very strong interest and a great acceptance to the notion that when you talk about what is an optimal level of loyalty, or a maximum level of loyalty a company should strive for, the answer is it depends on profitability and retaining profitable loyal customers.
Can you explain the fourth element, and how it is critical to focusing on profitable loyals?
The last element that's necessary in terms of measuring and managing customer loyalty, is actionability. What makes this element critical is making sure you take into account the different segments that lie within your customer base. Most programs only help you understand major segments as a whole. When we talk to clients about how they want to segment their customer base, they talk about small, medium and large customers. They talk about regions. They talk about elements that are organized or profile characteristics that they're used to thinking about when they describe different types of customers. When you do your analysis and you get data back and you're doing key driver work on those, you are trying to optimize the findings across a fairly large heterogeneous group of customers and that limits the ability to which you can really drive improvement.
Can you provide some examples on how companies can use this information to drive and manage growth?
First we have to realize that customers can be high on behavioral loyalty and low on attitudinal loyalty, and vice versa. It is not unusual to find differences and that might be because the person who makes the decision is not the person who actually engages with you and have no choice even though they prefer to use somebody else - company policy, another executive order, and so on. By first charting attitudinal and behavioral drivers, and then adding a third dimension - customer value in terms of profitably loyalty - companies can begin to get a clear picture of their most profitable customers. In fact, we call this approach C3 - Customers in Three Dimensions. These are customers who want to do business with you. They give you more than your share of business, and they're profitable.
If you think about it, the percentage of customers that fall into that space reflect the one number you need to measure and manage, because as that grows, as you turn more of your current customers into these ideal customers, you will see your business grow.
How do you move the customer from these other areas into becoming the ideal customer?
We need to be able to address the needs of identifiable customer segments. In other words, here's where we need to take it to the segment level in terms of identifying the drivers. When we talk about customer segments, let's first set the stage by saying there are different segmentation schemes available. You have your own segmentation. Most companies do have their own segmentation for their customers. What we have to ask is - are they useful? Are they addressable? Is management happy with them? Because to the degree those apply, then you really don't want two different segmentation schemes coming in.
We recommend that companies get some data driven segmentation at least in comparison. It doesn't need to be shared with the organization. But when you have data driven segmentation that's developed to differentiate in an addressable way customer segments within the broader segments that are used today, then you have the ability to act upon it and you get tremendous actionability.
Simply put, this approach really can help researchers take their satisfaction and loyalty programs to the next level, while also supplying management with the one number they need to monitor in order to achieve business growth.
