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We talk a good deal about customer loyalty nowadays, but do we really understand it and know how to gain it?
The “1 to 1” gurus, Peppers & Rogers, define three sorts of Customer Loyalty:
- Emotional Loyalty – this is about how customers feel about your brand;
- Behavioural Loyalty – the way customers respond, and whether they actively seek to do business with you;
- Profitable Loyalty – those customers that help you to make money.
Emotional Loyalty was the first level of understanding of the concept of customer loyalty, with early marketing designed to appeal to the emotions and build a bond with customers in this way. However, it became apparent that while customers might feel emotionally close to your brand, that didn’t necessarily mean they would buy from you, or do so on a regular basis.
This led to the concept of Behavioural Loyalty where marketers sought to find ways of bringing the customer to them to do business, and do so regularly. Of course, in many cases Emotional Loyalty was ignored as the focus was on getting the customer to purchase from you.
More recently, with the advent of tools to analyse customer purchases and overall costs more accurately, companies are discovering that on average only around 20% of customers are profitable for a business, with 60% being around break-even and a further 20% losing the company money, so they then focused on trying to find ways to increase the percentage of profitable customers and either remove the unprofitable ones or make them profitable.
However, isn’t the key really to do the first two well and use this to leverage the third? It really is not about focusing on just one aspect of loyalty, but rather about understanding how all three interact and driving your business accordingly.
On the emotional level, you need to be clear about what your brand stands for and ensure that you deliver what you say you will do – never over-promise and under-deliver as that is the quickest way to kill your brand’s emotional loyalty.
To keep your customers coming back – and we all know that repeat customers are best – your marketing must understand their buying behaviour and ensure that you continue to interact with them to capture the maximum share of their wallets. The Lifetime Value concept is key here.
But, of course, you must ensure you do so profitably – and this is not just about margin, but about the total costs of doing business with each customer. A high margin customer can still result in a loss for you if, for example, they are consistently returning items for credit, needing expensive support resources, paying late, and so on, while a low-margin customer who pays cash and never needs support can be nicely profitable. Be clear about where the costs are for each customer.
A great example of a company that does all three well is Amazon: just look at the brand recognition, the fact that you know they it’s a reliable supplier of books, DVDs, etc., at good prices, with a no-quibble replacement policy, and then see how it constantly offers you new items based on your buying behaviour. Amazon’s systems are not only providing its marketing engine with ongoing offers tailored to your likes, but make purchasing easy, so its internal costs are low as there is minimal need for support.
But, after all, if you really think about it, isn’t this what business is all about anyway: getting customers who feel good about doing business with you as you provide a consistently great customer experience, coming back over and over again to make purchases that are profitable for you?
So, to answer the question as to whether there is a Right Kind of Customer Loyalty, the answer is clearly, “No.” To be successful you need to ensure you are focusing your business on all three – Emotional, Behavioural and Profitable. And, in the famous words of a song first made popular in the mid 60s, “Do What You Do, Do Well.”
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Interesting subject Guy. Chanel is a company that has succeeded when it comes to all three categories. Even though their collections have not been what it used to be the last few years, so they have lost out on that i.e. if they don’t get back to classical Chanel they may loose a lot of loyal customers – and money.
Banks, especially the last few years, are prime examples of how to lose customer loyalty and turning them into enemies. Would be interesting to see a list of people who will never again have anything to do with the major banks in this world. Millions of people. And all because of catering to profitability at the expense of loyalty. May turn out to be a mistake in the long run.
Thanks, Catarina – I think your comment on banks is spot on!
Thanks for a great synopsis of the article. It’s true that the goal is to try to do balance all three types of loyalty to get a completely loyal customer.
You can watch the 1to1 video, “Is There a Right Kind of Customer Loyalty” here:
http://www.1to1media.com/video/watch.aspx?v=wLbyc2uOY0c&playlist=New-Videos
Thanks for this – it was a great short video. Glad you found the synopsis worthwhile.
We got taught something very simple in business school: never sacrifice long term gains for short term profits.
Something many companies fail to do (even if they pay lip service to the idea), at their peril.
Thanks, Aimee – the schools teach that, but the companies pay for short-term gains only, which is why we got into the economic mess we did…
Hopefully we’ll have learnt our lesson from this!
In my opinion, too much emphasis is placed on defining what loyalty is and not enough is placed on how loyalty is achieved.
Two things to consider: who among your customers do you want to be loyalty, not all customers are equal, and what’s the basis of the loyalty. These are both important.
Heavy category users, who are the majority if not all of your best customers, have a very different perspective on what competing brands offer than the majority of customers. It’s important to understand this group’s needs and craft relationship marketing to appeal to them. Companies with a disproportionate share of heavy category users are category leaders. Without exception.
Each of the three forms or loyalty you describe are easily manipulated and measured but this doesn’t mean your best customers are, in fact, loyal.
I recently spoke with an executive who flies United. He hates the airline and is more than happy to say so. But he keeps flying with them because he has a gazinllion points. By the metric of behavior, and probably profitability, he is loyal. Is he?
A better goal is to focus on building relationship equity among best customers. Relationship equity is the equity that’s created when value is delivered that goes beyond functional benefits. It’s harder to understand and to measure but it has a huge impact on loyalty.
I write about this a lot on Hipkin’s Hip Shots and would be happy to explore this topic with you in more detail.
Thanks for your incisive comments, James.
I completely agree that building a strong relationship with your customers is key – it’s the core of much of the emotional loyalty aspect…
As far as your United example is concerned, United has no emotional loyalty with him and he would be an easy candidate to switch if, for example, a competing airline offered to replace the miles he would miss by moving. What one strives for in customers is a balance between all three aspects so as to have profitable advocates for your brand.
The purpose of this particular post was really to define the different aspects of loyalty, rather than to cover the subject in depth from all angles – something that would take too long for a blog post. I expect later posts will cover different aspects.
I’ll happily look at your site and look forward to further interaction.
Thanks again for your comments.