Module 9 Loyalty

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

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

Loyalty-based Management Frederick F. Reichheld

“Building a highly loyal customer base cannot be done as an add-on.” “Business leaders intuitively know that when customer loyalty goes up, profits do too. Yet few companies have systematically revamped their operations with customer 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 morale Employees stay with the company longer Productivity rises and training costs fall Job satisfaction increases Knowledge and experience increases Better economies mean the company can pay workers better, which sets off a whole chain of events

RESULT Retained employees are higher quality and more capable of providing customer value. Customers become more inclined to stay loyal Best customers and employees become part of the loyalty-based system Competitors are left with less desirable customers 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 Customers People who buy because of a personal referral tend to be more loyal than those who buy because of an advertisement Those who buy at standard price are more loyal than those who buy on price promotion

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

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

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

The Mismanagement of Customer Loyalty Werner Reinartz and V. Kumar

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

Loyal 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 FriendsProfitable & 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. BarnaclesUnprofitable 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 To Grow Frederick Reichheld

The Gist Most measures and tools for managing customer loyalty are complex and inaccurate. They do not link survey responses with real customer behavior (repeat purchase or referral). They do not provide an accurate prediction of profitability and growth. The most accurate CL tool for these objectives is a simple one-question survey: How likely is it that you would recommend [Company X] to a friend or colleague?

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

How is Loyalty Operationalized? Defection rates/retention rates Customer stays for X number of years Conventional satisfaction measures Recency, frequency, monetary value Share of purchases in a category Intent to repurchase Intent to recommend

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

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

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

Is Loyalty King? Reichheld (2003, cont.) Intent to Recommend LoyaltyProfitability