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 EXAMPLE

MBNA lowered their defection rate to 5% - MBNA lowered their defection rate to 5% - half the industry averagehalf the industry average

Their ranking went from 38Their ranking went from 38thth to 4 to 4thth over an over an 8 year period8 year period

(Did Not mention how large the customer (Did Not mention how large the customer base grew during this period to improve base grew during this period to improve position – only mentioned that they did not position – only mentioned that they did not grow through acquisitions)grow through acquisitions)

Loyalty-based ManagementLoyalty-based Management

Frederick F. ReichheldFrederick F. Reichheld

Preparation QuestionsPreparation Questions

What does the author mean by the assertion that What does the author mean by the assertion that “building a highly loyal customer base cannot be “building a highly loyal customer base cannot be done as an add-on.”done as an add-on.”

What is the fallacy behind using pricing/price What is the fallacy behind using pricing/price promotions as a means of recruiting newpromotions as a means of recruiting newcustomers.customers.

If, as the authors suggest, it is a better strategy If, as the authors suggest, it is a better strategy to stick with existing customers rather than to stick with existing customers rather than recruiting new ones, why do more companies recruiting new ones, why do more companies not do this? not do this?

““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.”

Increased pay boosts employee moraleIncreased pay boosts employee morale

Employees stay with the company longerEmployees stay with the company longer

Productivity rises and training costs fallProductivity rises and training costs fall

Job satisfaction increasesJob satisfaction increases

Knowledge 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

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

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

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

The Mismanagement of The Mismanagement of Customer LoyaltyCustomer Loyalty

Werner Reinartz and V. KumarWerner Reinartz and V. Kumar

Preparation QuestionsPreparation Questions

The authors of this article present assertions The authors of this article present assertions about the nature of customer loyalty and about the nature of customer loyalty and profitability that seem to be in direct contrast with profitability that seem to be in direct contrast with those of the first article. Can you resolve this those of the first article. Can you resolve this conflict? conflict?

What are the two factors that are considered to What are the two factors that are considered to arrive at four different types of customers? arrive at four different types of customers?

What are the four types of customers? Can you What are the four types of customers? Can you think of examples where you personally fit into think of examples where you personally fit into each category? each category?

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 a company with Previous approaches compared a company with the highest level of retention to companies that the highest level of retention to companies that had average levels of such factors as revenue, had average levels of such factors as revenue, costs, and profit per customer.costs, and profit per customer.

Previous approaches also compared before and Previous approaches also compared before and after performance of companies adopting loyalty after performance of companies adopting loyalty strategies. strategies.

This article examines any old company in This article examines any old company in isolation comparing the loyal customers with the isolation comparing the loyal customers with the non-loyal customers. 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