BrandLoop #13, March 2002

The Paradox of Loyalty

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?