Module 9Module 9

LoyaltyLoyalty

ObjectivesObjectives

Be able to define/operationalize “loyalty” in Be able to define/operationalize “loyalty” in various ways and understand the various ways and understand the strengths and weaknesses of each.strengths and weaknesses of each.Identify different classifications of Identify different classifications of customers with respect to loyalty. customers with respect to loyalty. Understand different perspectives on the Understand different perspectives on the role that loyalty plays in company role that loyalty plays in company profitability and growth. How has this profitability and growth. How has this evolved? evolved?

MBNA EXAMPLEMBNA EXAMPLE1982 – 300 employees and lots of 1982 – 300 employees and lots of complaint letters from customers.complaint letters from customers.President set objective to satisfy and keep President set objective to satisfy and keep every customer. every customer. Gathered and acted on information from Gathered and acted on information from defecting customers.defecting customers.Within 8 years, MBNA lowered their Within 8 years, MBNA lowered their defection rate to 5% - half the industry defection rate to 5% - half the industry average.average.Their ranking went from 38Their ranking went from 38thth to 4 to 4thth..Profits increased by 16 times. Profits increased by 16 times.

Loyalty-based ManagementLoyalty-based Management

Frederick F. ReichheldFrederick F. Reichheld

““Building a highly loyal customer base Building a highly loyal customer base cannot be done as an add-on.”cannot be done as an add-on.”

““Business leaders intuitively know that when Business leaders intuitively know that when customer loyalty goes up, profits do too. customer loyalty goes up, profits do too. Yet few companies have Yet few companies have systematicallysystematically

revamped their operations with customer revamped their operations with customer loyalty in mind.”loyalty in mind.”

Company employs retention strategy

Cost of serving customers and acquiring

customers goes down

Customers spend more and give positive word-

of-mouth

Profits are reinvested into expanding the retention strategy,

acquiring and retaining more customers

Company pays workers better, focus on

building loyalty and retention of employees

Company experiences increased profits

Increased pay boosts employee moraleIncreased pay boosts employee moraleEmployees stay with the company longerEmployees stay with the company longerProductivity rises and training costs fallProductivity rises and training costs fallJob satisfaction increasesJob satisfaction increasesKnowledge and experience increasesKnowledge and experience increases

Better economies mean the company Better economies mean the company can pay workers better, which sets can pay workers better, which sets

off a whole chain of eventsoff a whole chain of events

RESULTRESULT

Retained employees are higher quality and more Retained employees are higher quality and more capable of providing customer value. capable of providing customer value.

Customers become more inclined to stay loyalCustomers become more inclined to stay loyal

Best customers and employees become part of Best customers and employees become part of the loyalty-based systemthe loyalty-based system

Competitors are left with less desirable Competitors are left with less desirable customers and less talented employeescustomers and less talented employees

Company employs retention strategy

Cost of serving customers and acquiring

customers goes down

Customers spend more and give positive word-

of-mouth

Profits are reinvested into expanding the retention strategy,

acquiring and retaining more customers

Company pays workers better, focus on

building loyalty and retention of employees

Company experiences increased profits

The Right CustomersThe Right Customers

People who buy because of a personal People who buy because of a personal referral tend to be more loyal than those referral tend to be more loyal than those who buy because of an advertisementwho buy because of an advertisement

Those who buy at standard price are more Those who buy at standard price are more loyal than those who buy on price loyal than those who buy on price promotionpromotion

““Companies typically use pricing as a Companies typically use pricing as a blunt instrument to bring customers blunt instrument to bring customers in indiscriminately, when instead in indiscriminately, when instead they should be pricing to filter out they should be pricing to filter out precisely the customers unlikely to precisely the customers unlikely to be loyal”be loyal”

““Although it is tempting to use new Although it is tempting to use new products to win whole new markets, products to win whole new markets, it almost always makes better it almost always makes better sense to stick with existing sense to stick with existing customer segments.”customer segments.”

““Customers build trust with a Customers build trust with a company’s employees, not the company’s employees, not the

company itself.”company itself.”

The Mismanagement of The Mismanagement of Customer LoyaltyCustomer Loyalty

Werner Reinartz and V. KumarWerner Reinartz and V. Kumar

Cost of Keeping Customers On

-5

0

5

10

15

20

1 3 5 7 9 11 13 15 17 19 21 23 25

Months

Prof

it in

thou

sand

s

Profit in thousands

One explanation…One explanation…

Previous approaches compared Previous approaches compared companies with the varying levels of companies with the varying levels of retention on such factors as revenue, retention on such factors as revenue, costs, and profit per customer.costs, and profit per customer.Previous approaches also compared Previous approaches also compared before and after performance of before and after performance of companies adopting loyalty strategies. companies adopting loyalty strategies. This article examines any old company in This article examines any old company in isolation comparing the loyal customers isolation comparing the loyal customers with the non-loyal customers. with the non-loyal customers.

Loyal Customers and WOMLoyal Customers and WOM

Correlation between ‘customer marketing’ and loyalty “not strong”.

Customers with attitudinal and behavioral loyalty more likely to spread company’s reputation (up to 54%) than customers who are only behaviorally loyal.

Category Profitability/Loyalty Loyalty Strategy

True Friends •Profitable & loyal•Buy regularly but not intensively

•Approach softly.•Don’t over communicate.•Reward loyalty

Butterflies •Profitable but disloyal

•Milk them with short-term hard sell offers.•Stop investing after their purchases drop off.

Barnacles •Unprofitable but very loyal

•If they have money to spend, offer them products related to those already bought.

Strangers •Neither profitable nor loyal

•Identify early.•Invest nothing.

Chooseing a Loyalty Strategy

The One Number You Need The One Number You Need To GrowTo Grow

Frederick ReichheldFrederick Reichheld

The Gist The Gist

Most measures and tools for managing customer loyalty Most measures and tools for managing customer loyalty are complex and inaccurate. are complex and inaccurate. They do not link survey responses with real customer They do not link survey responses with real customer behavior (repeat purchase or referral). behavior (repeat purchase or referral). They do not provide an accurate prediction of profitability They do not provide an accurate prediction of profitability and growth. and growth. The most accurate CL tool for these objectives is a The most accurate CL tool for these objectives is a simple one-question survey: simple one-question survey:

How likely is it that you would recommend How likely is it that you would recommend [Company X] to a friend or colleague? [Company X] to a friend or colleague?

Small Group Discussion Small Group Discussion

From the three readings for this module, make a From the three readings for this module, make a list of the different ways that “loyalty” can be list of the different ways that “loyalty” can be operationalized in terms of measurement. operationalized in terms of measurement. For each of these methods, are there any known For each of these methods, are there any known advantages or disadvantages? Can you think of advantages or disadvantages? Can you think of any? any? Based on the three readings for this module, Based on the three readings for this module, identify the distinctions between each that identify the distinctions between each that establish whether or not “loyalty” is king. establish whether or not “loyalty” is king.

How is Loyalty Operationalized? How is Loyalty Operationalized?

Defection rates/retention rates Defection rates/retention rates

Customer stays for X number of years Customer stays for X number of years

Conventional satisfaction measures Conventional satisfaction measures

Recency, frequency, monetary value Recency, frequency, monetary value

Share of purchases in a category Share of purchases in a category

Intent to repurchase Intent to repurchase

Intent to recommendIntent to recommend

Is Loyalty King? Is Loyalty King?

Reichheld (1993) Reichheld (1993) Loyalty (defection/retention) is a strong Loyalty (defection/retention) is a strong predictor of profitability and growth. predictor of profitability and growth. Brief mention of focusing on the “right” Brief mention of focusing on the “right” customerscustomersOverall, try to keep customers as long as Overall, try to keep customers as long as possible and they will only get more and possible and they will only get more and more profitable. more profitable.

Is Loyalty King? Is Loyalty King?

Reinartz and Kumar (2002) Reinartz and Kumar (2002) Retention at all costs is not good. Retention at all costs is not good. Must consider the 2 x 2 of loyalty and Must consider the 2 x 2 of loyalty and profitability. profitability. Different strategies for each group. Different strategies for each group. Many “loyal” customers are unprofitable Many “loyal” customers are unprofitable and many profitable customers are not and many profitable customers are not “loyal”. “loyal”.

Is Loyalty King? Is Loyalty King?

Reichheld (2003) – Reichheld (2003) – Defines “loyal” as much more than someone Defines “loyal” as much more than someone who simply continues to purchase. who simply continues to purchase. ““Loyal” customers are those who really care for Loyal” customers are those who really care for the company, want a win-win, etc. the company, want a win-win, etc. Congruent with Reinartz’s take that all “repeat Congruent with Reinartz’s take that all “repeat buyers” are not good for the company. buyers” are not good for the company. Reichheld never says that there is the need to Reichheld never says that there is the need to measure profitability. Rather, he indicates that measure profitability. Rather, he indicates that loyalty is a driver of profitability. The “one loyalty is a driver of profitability. The “one question”, in turn, is a solid indicator of loyalty. question”, in turn, is a solid indicator of loyalty.

Is Loyalty King? Is Loyalty King?

Reichheld (2003, cont.)Reichheld (2003, cont.)

Intent to Recommend Loyalty Profitability