The Paradox of
Loyalty
By Martin
Payne, Through the Loop
Customer loyalty has been one of the
most discussed and most misunderstood marketing concepts of recent
years. Marketers have rushed to develop so-called loyalty schemes but
do not always appear to have considered the key elements of why
consumers remain loyal to a brand. Some schemes have been dropped,
research claims that consumers are using their cards less but new
schemes are still being developed. It is clearly a good time revisit
the concept of customer or consumer loyalty.
Firstly, a loyal customer and a
satisfied customer are not necessarily the same thing. Customers may
remain loyal for a number of reasons and may not even be happy with
the product or service. A lack of customer defections does not
necessarily indicate satisfied consumers.
- The cost of switching to an
alternative supplier may be prohibitive or there may be a penalty
clause.
- Switching supplier may be
inconvenient.
- The alternatives may not be
attractive.
Secondly, there are many reasons why a
consumer may be loyal to a product, service or brand. These can
include convenience (ease of access in the case of a retailer) or
price. Genuine satisfaction with the product or service is a key
reason for remaining loyal. It is not about the marketer operating a
defined loyalty scheme although this does have the potential to offer
benefits in the area of improved consumer understanding and the data
mining or merchandising opportunities that flow from this.
Increasing satisfaction with each
transaction
A satisfied customer will return time
and time again, ensuring that one good experience becomes a lasting
relationship between the customer and the marketer. The key to this is
being able to learn from the transaction. At the very least the
marketer knows about the customer's preferences, measurements, etc.
The next time the customer is looking for a similar product or
service, he or she is able to save time by buying from the same place.
The marketer is able to improve the customer experience with the
second transaction through the learning already gained. Thus the
second experience is better or easier than the first. This continues
with each added transaction. In the longer term it makes it
increasingly difficult for a competitor to attract this customer as it
will have a significant disadvantage in the area of customer
knowledge.
Examples of this approach may be seen
in Levi's Personal Pair where jeans are customised to individuals'
measurements. The customer will choose to return as Levi's already has
the details on file and the jeans fit better than other pairs. An
added benefit for Levi's is that they are able to charge a premium
price for the product and have repeat purchase.
On-line retailers are able to store
vast amounts of customer data. One benefit of this is that when making
a purchase, the customer does not have to fill out personal details
such as name and address and even credit card number for every
transaction. Amazon has further improved the time-saving element by
offering "one click" purchasing.
Any business that maintains records of
its customers has the opportunity to benefit from this increasing
customer satisfaction. Hotels can recognise returning guests and be
instantly aware of their requirements, prevent any problems occurring
and, generally, ensure that each stay is better than the previous
one.
Who are your loyal consumers?
At the heart of all of this is the fact
that it is easier and cheaper to gain business from an existing
customer than to attract a new one. Too often, it seems, greater focus
is placed upon acquisition of new customers than satisfying existing
ones. This is ultimately expensive and the lack of current consumer
focus inherent in the approach means that opportunities for increasing
share of wallet from existing customers through cross-selling and
upgrading products and services is lost.
Furthermore, this approach may
frequently mean that companies are spending heavily to attract
disloyal consumers and ignoring those who generate the most revenue
and profits. An example could be in financial services such as credit
cards where new users are attracted through short-term low interest
rates while loyal, longer-term consumers pay much higher rates. These
disloyal consumers have the opportunity to switch suppliers as soon as
the low interest period is finished effectively meaning no benefit at
all for the marketer but a high level of costs.
A further issue within the Paradox of
Loyalty is that the less valuable customers may be given better
service than those who are loyal and, importantly, more profitable.
Supermarkets offer quick checkouts for those with just a few items or
paying cash only while those undertake major shopping trips have to
wait in long queues. The least expensive airline seats tend to be
occupied by those who travel infrequently, book late or buy purely on
price. In both cases, the "loyal" customer is receiving a
worse or more expensive service.
Recognise the loyal consumer
One of the ways in which the
consumer-focused strategy can be implemented is to recognise them as
soon as they enter your store or Web site. Technology makes this
relatively easy on the Web with amazon.com, for example, providing
tailored recommendations to its customers as soon as they revisit the
site. In a store environment this is somewhat more difficult although
the use of point-of-sale kiosks at store entrances has the potential
to deliver personalised messages and offers to customers before they
start shopping if they have the store's loyalty card. This provides
opportunities for marketers to reach specific consumers and groups of
consumers although there is a limit to how much the offer can be
tailored. It is difficult under this scenario to alter pricing to suit
individual consumers. However, the use of card-based loyalty schemes
by retailers such as Tesco and Sainsbury's in the UK has enabled the
stores to have an intimate understanding of their customers' buying
patterns, produce individually targeted marketing communications and
improve their in-store mechandising.
On the Web it is much easier to develop
an offer that is specific to individual customers. The store
immediately knows who is using the Web site if they have logged in and
can also link the visit to purchases made in stores as well as through
the Web site. This provides considerable potential to develop tailored
offers for consumers or even a pricing plan that is specific to that
consumer. After all, pricing elasticity and the concept of value is
something that varies across consumers and is not constant for the
market as a whole. On a simpler level there is the potential to
deliver recommendations or even just advertising banners that reflect
the Web site user as an individual and that are, therefore, highly
appropriate. This also means that tailored messages can be delivered
through other channels such as e-mail, encouraging consumers to
revisit the store or Web site. A further benefit is that the
effectiveness of the marketing communications can be directly tracked
and adjusted.
Implications
The ability to generate and maintain
customer loyalty is really about increasing revenue or adding
additional profit rather than giving away margin. Many retailers have
opted for Every Day Low Pricing (EDLP) as an alternative to targeted
low prices generated by data mining customer data. However, does not
encourage consumers to trade up to higher profit items and does not
enable intimate customer understanding.
The key to customer satisfaction,
loyalty and thereby ensuring repeat purchase operates on a number of
levels and ultimately requires fulfilling the customers' requirements.
This needs an in-depth understanding of customers and consumers that
comes from analysing buying behaviour, brand preferences as well as
other issues such as frequency of purchase, time of purchase, brand
repertoire, mood & mindset, etc. Marketers have much to learn from
customers and this should all lead to improving the customer
experience and, consequently, the sales and profits of the
organisation. Through the Loop has undertaken work that has helped to
show how marketers are considering the loyalty aspect as part of their
communications programmes. This includes understanding how different
loyalty schemes work and how they look to generate repeat visits and
purchases.
Loyalty is a two-way issue. If
marketers want to generate loyalty then they must expect to be loyal
as well to their consumers. This means providing clear benefits to
loyal customers, not to those who are disloyal or promiscuous.
Action points
- How can you identify genuinely loyal
consumers?
- How can you prevent consumer
defections through providing a higher level of satisfaction?
- Is your marketing focused on loyal
or disloyal consumers?
- How are loyal customers rewarded?
