Giving Up On Customer Loyalty Too Easily

The best business leaders go to work every day to focus their business on earning the loyalty of their customers. They understand that long-term sustainability and profitability requires earning and retaining customers. The goal is to get customers to love them, to need them, to get excited and emotional about them, and to want their companies to succeed and flourish. To do this, business leaders have to understand what their customer’s value in all aspects of the relationship, and deliver it. According to the business press, on-line shoe and clothing retailer Zappos is in this space today.

There are a number of legendary companies that have done this for their customers at one time or another, usually under the leadership and guidance of entrepreneurial visionaries. Some that come to mind are: Walt Disney and The Walt Disney Company; Akio Morita and Sony Corporation; Thomas J. Watson and IBM; Steve Jobs and Apple Computers; Jeff Bezos and amazon.com; Howard Schultz and Starbucks; Richard Branson and Virgin Group; Isadore Sharp and Four Seasons Hotels and Resorts; and Anita Roddick and The Body Shop. Of course, there are thousands of other private corporations and sole proprietors who have earned the loyalty and dedication of their customers because they have set customer loyalty as part of their guiding vision and business purpose. Bose Corporation and The Teaching Company are two that come immediately to mind.

Earning customer loyalty is among the most difficult of all business objectives and one of the highest achievements of any business. It requires relentless innovation, integration and coordination in the areas of: understanding the customer’s value-drivers; design of business strategies and processes; applied human knowledge and capabilities; financial management; and corporate culture. Managers must be ever vigilant and aware that as each of these components advance and change, the other components must be adjusted accordingly. A high degree of corporate vitality and operational flexibility within an overarching framework of well defined guiding aspirational and operational principles is required to ensure that fidelity to profitably fulfilling customer values remains the guiding purpose of corporate action. 

Certainly not all executives have the desire or ability to organize and operate in ways that achieve customer loyalty. For many I suspect the concept is too lofty and abstract. Instead they strive for a lesser and often contextually equally valid objective to run an effective business to maximize sales, serve customers in an appropriate and respectful manner through adequately trained and motivated staff, and earn a profit for owners to the best of their ability. But this is a lesser effort that will likely result in nothing better than competitive parity rather than competitive advantage. It is in these types of businesses that we most often find customer reward programs offered under the guise of “loyalty programs” being used as a marketing and behavioural modification tool to add some more value to the total business offering or ‘value proposition.’ 

There is nothing wrong with such programs. If run well, they can increase customer satisfaction and profits. But often the loyalty programs being offered to induce customer loyalty are zombie-like copycat programs that provide no additional loyalty, no competitive advantage, and no additional profit. When given the opportunity to join a program for free and earn a discount or future reward, many people will do so. They will join your program and they will join the competitor’s program. And in the end, customers will continue to shop across a spectrum of businesses and brands, their preferences based on a number of unknown and unmeasured variables. Usually such programs result in higher consumer prices or lower company profits, and customers who are indifferent with respect to the operation and value of the ‘loyalty’ programs to which they belong.

When the focus of management is on reward program participation – or worse yet, number of members – rather then earning customer loyalty, the business will never find out why customers prefer to shop across competing brands and participate in multiple loyalty/rewards programs. Management will focus on increasing the number of members and card usage because they are easily measured, and will speak in the boardroom as if their loyalty club members and cardholders are actually loyal customers.

Borders Books is reported to have had 40 million members in their loyalty program when they filed for bankruptcy in 2011, but they didn’t have 40 million loyal customers. Their “loyalty” members were buying most of their books elsewhere.

There is only one way to build a world-class business: focus on understanding the needs of customers to win their loyalty and build an integrated system that can deliver everything they desire in a manner better than any competitive alternative. Earning customer loyalty is amongst the highest moral achievements of a business because it requires the creation and delivery of human values through rational human action. This should be an aspirational goal of every executive and their staff. Yet too often marketing executives and managers continue to focus on signing up new loyalty program members, and offering them discounts and incentives for spending, and ignoring the really hard job of creating unique value for customers that results in increased loyalty.

Don't Confuse A Loyalty Program For Customer Loyalty

In its purest form, a Loyalty Program (LP) is a marketing tool used by companies to bond a small group of its most loyal customers through an exclusive reward or benefit. The concept is to identify one’s most loyal customers and offer them an incentive above and beyond excellent business processes and perceived value as a means of achieving a number of ends:

·      Personal recognition of a loyal customer’s value to the company through a reward

·      Increase sales to existing loyal customers

·      Reduce the risk of attrition of high value customers to competitors

·      Attract and convert high value customers from the competition through additional benefits to garner their loyalty to your brand.

The idea of rewarding loyalty is based on a number of research findings and general beliefs about loyal customers (which may or may not be true in any instance):

• Loyal customers are more profitable to a firm
• Loyal customers are less costly to service
• Loyal customers are less price sensitive
• Loyal customers spend more (80% of revenues come from 20% of customers)
• Loyal customers drive the majority of business profits
• Loyal customers act as consumer advocates to promote the business.

Originally, loyalty programs were developed to identify, personalize relations with, and reward, a small group of highly loyal and profitable customers. Over time, the scope of these programs has widened to influence the behaviour of consumers in general and reward their shopping behaviour. What started off with the requirement of first achieving customer loyalty followed by rewarding loyal customers, has now been transformed into a situation where customers who choose to participate in a rewards program are perceived by businesses as loyal customers.

For the majority of companies with rewards programs, the hard work of earning customer loyalty is no longer on their radar. Instead, the goal is to maximize card holders, which is much easier to measure. Executives often falsely believe and promote the idea that program members are loyal customers. They need to remember that loyalty denotes advocacy and commitment through emotional engagement, not a desire to earn points.

A focus on maximizing customers may in fact be a profit-inhibiting strategy, according to loyalty expert Frederick Reichheld. In his ground-breaking HBR article “Loyalty-Based Management” he argues the case that the road to maximizing profitability includes an understanding of the economics of customer loyalty and the strategy of identifying the benefits and costs of serving different customer segments.

Reichheld identifies and describes four components he sees as foundational to building a loyalty system.

1. Identify the right customers, the loyal customers, who are likely to have long tenure and will be profitable over the longer-term because of personal referrals or willingness to buy at standard prices.
2. Expand offerings to existing customer segments you know well by adding new products and services that anticipate and meet their evolving needs and ensure their retention.
3. Retain the right employees and partners through incentives because they know your customers the best and have build existing bonds of trust and expectations within their relationships.
4. Develop business systems to ensure and understand the long-term economic consequences of changing customer loyalty and the quality of feedback loops that are the foundation of organizational learning and adaptation.

He expounds on the logic of the system as follows:

"The primary mission of a loyalty-based company is to deliver superior value to customers. Success or failure in this mission can be clearly measured by customer loyalty (best quantified by retention rate or share of purchases or both). Customer loyalty has three second-order effects: (1) revenue grows as a result of repeat purchases and referrals, (2) costs decline as a result of lower acquisition expenses and from the efficiencies of serving experienced customers, and (3) employee retention increases because job pride and satisfaction increase, in turn creating a loop that reinforces customer loyalty and further reducing costs as hiring and training costs shrink and productivity rises.

"As costs go down and revenues go up, profits (the third-order effect) increase. Unless managers measure and monitor all of these economic relationships, they will default to their short-term, profit-oriented accounting systems, which tend to focus on only the second- and third-order effects. Focusing on these symptoms––instead of on the primary mission of delivering superior value to customers––often leads to decisions that will eventually reduce value and loyalty."

The loyalty research by Frederick Reichheld supports the old adage that businesses can't be all things to all people. Reichheld's insights into the economics of loyalty mechanisms is a further articulation of Peter Drucker's adage that "the purpose of a business is to create and keep a customer." This is still true,  but the most conscientious executives should focus on the idea that "the purpose of a business is to create a keep loyal customers."

Business Leaders Should Aspire to Create Loyal Customers

At its most basic level, it is the purpose of a business to create customers by offering them a solution that they want based on the values they hold. That's why the most successful businesses understand what their customers value and figure out how to fulfill those values.

In times of scarcity – usually early in the product life-cycle – consumers are willing to accept a basic product or service and are willing to bear numerous “costs” or inconveniences of doing business. These costs are often perceived as negatives, such as high price, limited availability, long waiting times, limited options, poor instructions, buggy software, design flaws, poor customer support, etc.

Over time, consumer expectations change, and through a combination of rising consumer expectations and producer innovation to win market share, the definition of what is an acceptable basic product changes. A lot of inconveniences or oversights that were tolerated at the initial product launch are no longer acceptable to consumers.

As product quality and prices from competing suppliers converge in relative terms over time, consumers bring secondary considerations into their decision-making process based on the degree to which businesses (or brands) can satisfy their emotional needs. Different segments value different things, but the components of service quality excellence rank high on the list after product quality and reliability.

Businesses succeed in earning customer loyalty to the degree that they incorporate the customer’s hierarchy of needs into the total business processes, and remove all manner of dissatisfiers to fully serve the materialistic and emotional needs of customers. As Jesper Kunde writes in his book “Unique: Now or Never,” the best companies have figured out how to stand out in the market by offering something so individually attractive and so valued that it transcends being merely a product. These brands have found a formula for offering customers a unique value experience in the market place that transcends the product and the brand, and through careful attention to multiple dimensions of value creation, earn customer loyalty. Such companies or brands become indispensable to their customer base by offering and delivering unique value. Kunde calls this ‘value positioning.’

True customer loyalty is earned when a business offers an integrated bundle of values that serve every aspect of the customer’s desires and for which the customer actively supports, contributes to, and perceives to be unique in the market place. This goes beyond product satisfaction and brand preference, to personal emotional engagement, commitment, enthusiasm, and advocacy.

Very few leading executives possess the commitment and drive to achieve this level of loyalty from their customers. These executives have to be committed to serving customers as if it was their religion. That is why real customer loyalty is so rare. Very few entrepreneurs and executives have the commitment, passion and drive to create such rare and monumental organizations. Walt Disney and Steve Jobs are two entrepreneurial geniuses that come to mind as examples to study and follow.

I encourage you to read Jesper Kunde's two books, Corporate Religion, and Unique Now... or Never. There is an interview with Mr. Kunde at Tom Peters' site: http://www.tompeters.com/cool_friends/content.php?note=005901.php