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 MBNA lowered their defection rate to 5% - half the industry average Their ranking went from 38 th to 4 th over an 8 year period (Did Not mention how large the customer base grew during this period to improve position – only mentioned that they did not grow through acquisitions)

Loyalty-based Management Frederick F. Reichheld

Preparation Questions What does the author mean by the assertion that “building a highly loyal customer base cannot be done as an add-on.” What is the fallacy behind using pricing/price promotions as a means of recruiting new customers. If, as the authors suggest, it is a better strategy to stick with existing customers rather than recruiting new ones, why do more companies not do this?

“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.”

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

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

Preparation Questions The authors of this article present assertions about the nature of customer loyalty and profitability that seem to be in direct contrast with those of the first article. Can you resolve this conflict? What are the two factors that are considered to arrive at four different types of customers? What are the four types of customers? Can you think of examples where you personally fit into each category?

One explanation… Previous approaches compared a company with the highest level of retention to companies that had average levels of 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