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Increasing customer value by improving customer loyalty

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18th Feb 2002
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Introduction:

There's nothing like a holiday for letting the brain bubble away at old and new problems, so I was pleased to find some new thoughts on improving customer value through increasing customer loyalty when I returned from my holiday. It was also rather handy because I was due to speak on this topic at a couple of seminars my first week back.

We've published the presentation I used at one of those seminars; it is entitled The role of the e-Community in customer-managed relationships for Business-Consumer organisations"

That presentation may well be helpful if looked at in conjunction with this editorial.

The two important words when thinking about customer loyalty are customer and loyalty. This week's editorial will focus on 'loyalty', and we plan to publish a further editorial (and a presentation) on 'customer' towards the end of February.

Let me start quite a long way away from customer loyalty to give you some background so we can see the key role that loyalty plays in building customer value.

Over the last quarter of 2001, the membership of the CRM-Forum explored a number of cliches associated with CRM which stimulated a vigorous debate. If you didn't catch those debates you might like to have a look at:
- Re-evaluating CRM cliches No 1: One-to-one marketing
- Re-evaluating CRM cliches No 2: A 360 degree view of customer
- Re-evaluating CRM cliches No 3: Customer Lifetime Value
- Re-evaluating CRM cliches No 4: Customer Relationship Management (CRM)

I'd like to add another CRM cliche that we should re-examine - the most overworked cliche of them all - and that is the Cornershop model of marketing. I am not at all sure that most customers want their relationships with major corporations to be the same as the relationship they have (or had) with a corner-shop. I've explored this a little in the presentation on e-Community in customer-managed relationships, so you can explore my reservations there.

What I found particularly interesting about all those debates was the level of agreement that most of those concepts had something to offer, but were by no means the complete picture when it comes to CRM. In fact, the most frequent issue discussed on the CRM-Forum tends to be 'What is CRM?' It might be a little disturbing to find that CRM practitioners spend so much time debating this but I believe it is for good reason.

Personally, I find the most useful model of CRM is to think of it as the automation of business processes which cross the organisational boundary from customer to supplier. Again you'll find a slide on this in the e-Community presentation. That slide highlights that the processes concerned are marketing, sales, service, and transactions.

If you buy into this model of CRM it becomes clear that the customer is the end-user of many CRM processes. Thirty years of system development experience tells me that systems are only implemented successfully if we take into account the requirements of the end-user, in this case the customer.

Customers don't yet know, due to limited exposure, what they want from CRM systems, but you can be sure of two things. They'll make sure they get what they want by voting for it with their wallets, and secondly, that their views on how they want CRM to be used will continue to develop over a considerable period of time - hence the need for iterative development of CRM systems. From the CRM implementations I've been involved with and have reviewed, I'm also pretty sure that most organisations do not involve the customer in those programmes nearly enough. How you build that involvement will be the subject of that other editorial at the end of February.

But this week's editorial isn't about customer, it's about the second of those two words, loyalty. If the debates on CRM cliches have shown that we're all finding it difficult to define what CRM is, perhaps we have less difficulty in defining what the objective of CRM is. I don't think many CRM practitioners will disagree that the objective of CRM is to build customer loyalty so as to increase the life-time value of
the customer. (Prove me wrong by commenting at the end of this editorial.)

If that's our objective, it might be worth while spending a little time thinking about that word loyalty, and what it means to most of us (I'm focusing on Business - Consumer in this editorial).

I suppose the ultimate test of loyalty is whether you're prepared to lay down your life for something. Speaking personally, I'm pretty sure there are circumstances when I'd be willing to lay down my life for my family, and I can imagine circumstances when I'd be willing to risk my life for my country. Here in the UK, I've seen supporters of football teams (particular Glasgow Rangers and Celtic) who look pretty willing to lay down their lives for their teams, and unfortunately sometimes do. I suspect you might see the same loyalty in the U.S. to baseball teams or American Football teams. It doesn't seem likely that people would be willing to lay down their life for the bank that they bank with.

O.K., perhaps that's a little cheap, but I think there's a serious point there. As I tried to say in the editorial on 1-1 marketing, we are social animals and our loyalty tends to go to the communities which we are members or supporters of.

These communities include family, country, school, teams, schools, clubs, cultures, etc. We have very strong relationships with such communities, either positive or negative.

How do these communities command our loyalty (or our rejection)? They provide an image and culture that we identify with; they provide members with a variety of roles in which they can find meaning and respect from the other members; they allow members to build a network of relationships with each other; they allow members to support each other and influence the direction of the community.

Contrast this with the way organisations try to build loyalty with their customers. Conventional CRM builds loyalty by making relevant offers to customers based on their value to the organisation; they communicate with the customer through the customer's preferred channel; they recognise the customer and the customer's needs, and they offer good service.

There's a couple of points worth making about this comparison:

  • Which do you think is the most powerful loyalty-builder?
  • It's worth noting that the means used by conventional CRM can be replicated by competitors by building the same (or better) capability. Community loyalty is far harder to attack, because it is based on the interactions of all the members of the community. That inertia becomes sustainable competitive edge.

We need to make one more point about the communities outlined above. They are primarily geographic communities (with some exceptions - Manchester United have a global fan-club which seems to command huge loyalty). Corporations tend not to be limited to a small geographic area that might be associated with a community. There's one obvious exception, and that's the corner-shop and similar businesses, and perhaps that is their attraction - they play a role wider than their commercial purpose in a local community.

Does this mean that community can play no role in CRM for major organisations? Not necessarily, because ever since the availability of low-cost modems and PCs, people have been linking their PCs together via those modems to build communities of interest on Compuserve, via Fidonet, and now, of course, primarily through the Internet.

Communities of interest (rather than geographic communities) are springing up all over the place. The CRM-Forum is a community of interest focused on CRM practitioners, and most professionals have similar communities, but that is only the start. You can find communities supporting user groups, loyalty schemes, employee communities, hobbyists, trade unions, customer unions, etc, etc, etc.

Are there commercial organisations using such communities as part of their CRM programme? Yes indeed. Dell, as always it seems, is a good example of this with the technical support they offer their customers; Apple provide similar support to their customers; and CNET supports PC and PDA software purchase through community facilities. In the B-B world BT support corporate customers through their community Insight Interactive, and collaborative commerce is frequently helped through community software linking company staff working on joint projects. There are large numbers of examples through-out the commercial world.

So should you be thinking of such e-Community projects as part of your CRM environment? Well don't take my word for it. At one of the seminars I spoke on this subject recently, I was pleased to see Jennifer Kirkby, CRM Research Director at Gartner giving a very supportive, thought-through presentation on this very subject. If you have a relationship with Gartner, try and get hold of Jennifer's presentation entitled 'Accessing Value Groups through on-line communities'.

This presentation sees e-Community as a CRM evolutionary step on from Cooperation - Collaboration - Community. To quote Jennifer, 'Online communities are a tool to consider in generating more collaboration, trust and loyalty - the goal of CRM.' Jennifer also highlights some of the dangers of e-Community projects. As always, you need to have a well thought through business case if you are going to achieve the potential benefits; you need to make sure that you have the resource not just to build them, but also to maintain them as living, vibrant meeting-places; the e-community doesn't replace other channels, it complements them, and they need to be integrated; and they can be a double-edged sword - they make the organisation much more transparent to customers, and there is a risk of a 'customer union' evolving out of a customer community. Of course, there's an even bigger risk of a customer union evolving if you don't provide a customer community (see www.aolwatch.com aka www.aolsucks.org).

Despite these sensible words of caution, Gartner also sees e-Community as an important developing aspect of CRM, recommending that you start by running a pilot, and then provide a simple service and grow.

Our own view is clear. Customers are becoming more demanding (more on this in our coming editorial on 'Customer' and you can find some details in the E-Community presentation).

Conventional CRM is usually too focused on internal processes to meet those customers' demands. Given equivalent products, demanding customers will choose suppliers based on high value-added services rather than price differences. Competitive edge comes from loyalty, not replicable customer service. The e-community channel has a key role to play in building that loyalty and providing value-added services, so meeting evolving customers' needs at low cost in B-C and B-B companies' CRM environments.

If you aren't looking at the e-community channel yet, perhaps you should be.

As always, we welcome comment from our members (and others) stimulated by these editorials. If you want to do so, either add a comment to this editorial, or email me.

Best regards,
Richard Forsyth

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