Is customer loyalty an outdated concept?

1st Aug 2008

The balance of power has shifted from companies to consumer and customer loyalty is waning. Now more than ever, organisations need to understand the mechanisms of customer loyalty to profit from it. As such, Jennifer Kirkby provides a trip through the history of customer loyalty and shows how we can learn from past mistakes and current thinking. Loyalty today is not what it was!!

Companies are not fair to us – that’s the view of almost half the UK adult population. In 1980 only 14% thought this way; now 44% do according to nVision from Future Foundation. Nearly two decades after loyalty theories radically changed the business world, average loyalty has declined, whilst consumers have strengthened their recommendation and switching muscles. That’s a dangerous situation for companies to be in, so let’s look at what’s happened to customer loyalty.

The original loyalty premise

“Companies that want to improve their service quality should take a cue from manufacturing and focus on their own kind of scrap heap: customers who won't come back.” So begins the seminal article on customer loyalty, Zero Defections: Quality Comes to Services, by Fred Reichheld and Earl Sassar in Harvard Business Review 1990.

Their claim that: “Reducing the defection rate(of customers) just 5% generates 85% more profits in one bank's branch system, 50% more in an insurance brokerage, and 30% more in an auto-service chain,” set the relationship marketing world alight: but few paid as much attention to the how. “Defection rates are not just a measure of service quality; they are also a guide for achieving it,” said the authors: the ‘voice of the customer’ had been born, but it slipped out unnoticed.

"The customer does not care how much you know about them, until they know how much you care."

The premise was: delivering value for money to customers will win their loyalty and encourage them to stay – superior profits come from cross-sales, lower acquisition costs, wider margins and customer recommendations. But the essential objective was an investment in human assets as a source of sustainable growth: measuring and understanding that loyalty investment was pivotal.

For executives versed in product marketing, managing customer loyalty was alien, but they liked the much-hyped profit forecasts, and wanted a piece of the action. "Retain customers and improve the bottom line" was their main ‘take away’. And so began ‘exit barrier’ initiatives to make customers ‘sticky’ - cross-selling, reward cards and incentives for repeat purchasing. The unfamiliar customer feedback, asset building part of the equation took a back seat; whilst loyalty measurement, hampered by a dearth of customer data, became a mix of customer satisfaction and product holding profitability.

To emphasis the internal system underpinning loyalty, Sasser et al published the Service Profit Chain in 1994 – stating that customer loyalty started with employee satisfaction. Following on, in 1996 Reichheld added staff and investor loyalty to the original premise in The Loyalty Effect. The book stressed that loyal customers were the result of loyal staff, encouraged by visionary leaders; whilst company stability required loyal investors – who tended to go where there were loyal customers. Only when all these stakeholders were loyal did you get results – but businesses were hemorrhaging all three groups at an alarming rate reducing profits by 20-50% a year. Would investment in any other company asset be treated so lightly?

CRM takes centre stage

By the mid-1990s the CRM movement via Peppers and Rogers was championing ‘one to one’ personalisation as the answer to loyalty (1993): Kevin Keller was winning awards for his research on brand loyalty (1993): Tesco was busy collecting customer data with its Clubcard loyalty programme (1994):and ex-Oracle salesman Tom Siebel stormed the market with his salesforce automation system (1996). Contact and emotional brand building were promoted as key loyalty leavers, whilst customer care flew a small backroom flag for complaint feedback. Customers, meanwhile, insisted they didn’t have relationships with companies; they just wanted value for money from organisations they trusted. For despite their protestations of price switching, the biggest accolade a firm could get was “expensive, but worth it”.

"The reason the link between loyalty and profits is weak is down to the crudeness of methods most companies currently use to decide whether or not to maintain their customer relationships."

But these efforts were too piecemeal, and the short-term product sales focus of companies did not fundamentally change – they were ‘paving cow paths’. By 2001, customer satisfaction, let alone loyalty, was declining; Gartner declared that 55% of CRM projects had not met executive expectations, and Weinartz and Kumar set hearts aflutter by declaring that the link between profitability and loyalty was weaker than had been though in The Mismanagement of Customer Loyalty (2002).

However, what the paper actually said was that loyalty could only be managed by understanding what drove it – it wasn’t the quick ‘leaky bucket’ fix executives had taken it for. And, by this time, market leading companies were demonstrating the ways in which loyalty did work - Amazon (service), First Direct (word of mouth) and Tesco (loyalty card), whilst Marks & Spencer’s risible performance demonstrated what happened when you switched from trusted brand to chasing shareholder value. To cap it all research by Accenture showed that the profits of customer-centric companies were 60% -100% higher than product centric rivals: it was time for some soul searching.

Advocates want experiences

Ironically it was ‘the voice of the customer’ that kickstarted the next phase. Customers had changed from the late 1980s. Products with after-sales service no longer sufficed, they wanted better experiences with suppliers and had started to use the internet to advise each other on which companies to use: three-quarters of consumers would recommend their favourite company to others.

So attention turned to Pine and Gilmore’s Experience Economy (1999), where loyalty and advocacy were engendered by repeated emotional’ feel good’ experiences – rather than measured by repeat buying. At the same time branding experts stressed the need for brand personalities customers could relate too. Loyalty needed the ‘personal touch’, and company ears opened to customer feedback.

Nevertheless, the unsatisfactory customer satisfaction measure of loyalty persisted; and although data for customer profitability had improved, working out the net present value of customer lifetime value remained arduous.

Then onto the stage stepped Mr Reichheld again with The Ultimate Question in 2003: “How likely is it that you would recommend us to a colleague or friend?” The resulting Net Promoter Score, arrived at by subtracting detractors from advocates, was claimed to be the key to managing loyalty. But as critics rightly pointed out, you still needed to understand the mechanics of loyalty to manage it.

Loyalty is two-way

In 2008, the ultimate question is not the retention focussed ‘how do we stop customers going to competitors’, but ‘how do we get customers to prefer us’: engagement is the new process. Attention has turned to gauging the loyalty points customers give companies, and improving staff satisfaction – the penny has dropped, loyalty is two-way commitment.

Meanwhile, loyalty programmes derided as costly discounting schemes have proved valuable as a means to learn about customers for tailored offering, as tokens of identification and belonging, and as a means of thanking customers with relevant rewards. But still, when asked recently, only 30% of customers would switch suppliers for a reward programme, whilst nearly double would switch for better service.

"A poor customer experience is a step on the path to customer defection; a good one encourages loyalty."

Measurement and management is still an issue and the idea of customers as assets, outlined in books such as Peppers and Rogers’ Return on Customer (2005), remains elusive to boardroom discussions – although financial analysts are beginning to take note.

In the meantime new opportunities for 21st century conversational loyalty building are offered by:

  • Mobile phones for anytime, anywhere, two way dialogues.
  • Customer communities for deeper involvement and engagement.
  • CSR for emotional values and trust.

Customer loyalty is no longer for individuals, but for crowds; where are the value networks, and who are the influencers? Conversely, there are many more ways to lose loyalty points, and brand terrorism is a growing threat as corporate activists and opportunists set up ‘hate sites’ such as Shameway and Starbucked to trash the likes of Safeway’s Starbucks.

Bottom line

If customers today think that companies are more unfair to them than in the past then companies must accept they are not delivering value for money, that customers to not trust them to be ‘on their side’, and that their brand values need to be inspiring – not internal.

As the original loyalty theory said, feedback is the guiding voice for a systematic approach to building human assets. Loyalty is more relevant today than ever, 80% of customers will continue with a company to whom they feel loyal, especially the over 40’s and more educated, but understanding the ‘best customers’ to invest in is still the key. No one will ever achieve 100% loyalty, and not every customer is capable of it.

Back in the ‘way back when’, there used to be a little mantra about building loyalty, it still applies as a good engagement process, but we now have more tools to achieve it.

  • Recognise me (but don’t force me to remember complex passwords!).
  • Know me (but don’t be too familiar until I deem it OK).
  • Act accordingly (by making life easier and solving my problems).
  • Communicate (and listen).
  • Respect and involve me (but don’t waste my time, understand my goals).
  • Anticipate my needs (because you know things I don’t, that’s your value).
  • Show you care (about me, and about society).
  • Appreciate me (thank me for my business and involvement).

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