Customer loyalty is dead - long live CRM

16th Sep 2002

Today's consumers are notorious for being fair-weather friends. But that doesn't mean companies can't form relationships with them.

In previous articles I referred to 'the death of loyalty' as a structural challenge. We now need to explore whether this simply means loyalty has become irrelevant or a call-to-arms to do something differently. I believe it is the latter.

Broadly speaking, those now older than about 35 are classified as being of the 'baby-boomer' generation with a tendency to traditional values, loyalty, brand dependence and 'conservatism' in its widest sense. (Fearful typecasting, but sufficient for our purpose.) Those aged 18-35 are loosely labelled Generation X and characterised by being followers of fashion (often very transiently) but otherwise disloyal to a fault. They are willing to chase down a bargain, use the Internet to find the current best advice, and fundamentally distrust corporate marketing. They are more prone to rely on word of mouth and peer group endorsement than to trust even apparently independent sources of advice such as the Consumers' Association. They are in a hurry and want to take 'the waiting out of wanting' - time poor, increasingly cash rich and technically literate.

The contrast with the post-war boomers is already very marked. The so-called Generation Y (under 18 today) is Generation X plus extreme technical literacy, even less brand-dependent and well informed, using e-communications to find a peer group to support their decision-making. Generation Y blurs into 'Millennium Child', who uses computers before they can read, and the great hope for the concepts underpinning Microsoft's X-box - an e-gateway to entertainment, information and education - and similar IP access devices.

The world of CRM and eCRM came from the logical argument that 'loyalty pays' and, importantly, it suited boomers who 'value being valued'. The idea that once a customer became a client (some evidence of dependency), conditions would be ripe for up-sell, cross-sell and re-sell. Using MORI's often quoted mantra 'familiarity and favourability are highly correlated', the obvious thing for CRM practitioners was to stay in touch with customers, learning more and more about them and, increasingly, personalising communications with them. No organisation has done this so well for so long as Reader's Digest - rigorously and ceaselessly seeking to develop ever richer profiles of their boomer customer base and, using complex research and regression techniques, identifying high-propensity extension sales segments in their customer database. It worked so well some significant segments buy virtually everything Reader's Digest offers them - the ultimate Midas touch! But the Reader's Digest customer profile is ageing and brand loyal by nature.

Saga, the holiday and services business, understands that marketing to the over 50s is all about CRM - operating a community approach to brand development and extension. Centrica plc, now with the AA on board, is going down the same path. Providing there is a need for billing and service (i.e. meeting the needs implicit in 'dependency') they will provide it. We can expect Centrica to continually diversify into dependency services and I would not be surprised to see them in health care at some point, for that reason.

What then is the case for CRM and eCRM when dealing with Gen X, Gen Y and the Millennium Child? Aren't they characterised by disloyalty and vulnerability to ephemera? For them the grass is eternally greener on the other side.

So why bother spending some of today's hard-won money on CRM campaigns designed to bring in marginal sales and profit some time in the future? Aren't we simply throwing good money after bad? I would argue yes if what we mean by CRM/eCRM is a belief that an existing Gen X customer has realistic potential for cross-sell, up-sell or re-sell. That is a wholly unsafe assumption. As a 'tribe' they move on seeking the new and better.

If, however, we mean the intelligent anticipation of their needs by developing rich profiles and, even more important, fast and reliable infrastructure for order execution, then we should go for it in a big way. The argument runs like this. If Gen X and Y people are essentially 'vagabond' by nature they will experience a much higher range of competitive offers than the 'boomers' (who change only when massively disaffected) and remember suppliers who significantly out-performed the pack. Whatever the average performance in the market, Gen X and Y have a much higher probability of finding and staying with an above average supplier. In many ways this phenomenon of the roving quality-seeker meets the objective of what Professor Gary Lovegrove (Harvard) seeks to inculcate in his students - 'unreasonable dissatisfaction' with suppliers. He encourages them to complain and complain hard so the vendor community is forced to raise its game. That is what Gen X and Y do all the time.

The lesson is clear for the rising generations, especially the time poor, cash rich. The emphasis has to be on two things:

Exemplary quality of service; right first time every time (a form of six sigma that raised Japanese electronics manufacturers to world class level)

Capture of intelligence about the customer at initial point of contact, so when that customer returns 'recognition' is instantaneous and the learning is harnessed to build the nucleus of long-run brand dependency. It is a mystery that almost no hotel group in the world can recognise one as a repeat purchaser. This is a fatal flaw in facing the task of securing a good NPV for customer segments made up of Gen X and Y!

Organisations investing in extremely expensive CRM infrastructure for an apparently effective 'one size fits all' way of delivering customer value management may well be wasting large sums on a hopeless case. If their segmentation is increasingly dependent on Gen X and Y (assuming habits formed in youth do not age into boomer characteristics over time), then the emphasis should be less on 'campaigning' and customer profiling, and much more on ensuring quality of service is the top management priority. High quality brand experience is the key determinant of sustainable shareholder value. Campaign focused CRM is unlikely to offer sustainable benefit other than to businesses targeting old market segments.

Of course, this is a considerable simplification of a much more complex problem. But the irreducible point is that intelligence in the customer interface would be best directed at knowing whether your customers are just 'roosting' while it suits them, or want to become golden egg-laying battery hens. It's a simple distinction which means a world of difference in deciding what approach to adopt. Just ask yourself: Would I make more money by not investing in CRM? A sobering challenge.

by Gavin Barrett


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