Are Customer Loyalty Initiatives Worth the Investment?
What are the loyalty rules? Have managers been led too far afield with customer loyalty management programs?
This month's column presented two views of the importance of customer loyalty management, one challenging its feasibility and long-term impact (Michael Treacy, Double Digit Growth) and one concluding that it is one of the most important drivers of profitability and growth (Frederick Reichheld, The Loyalty Effect).
Instead of joining a debate, many respondents decried the misuse of the term "customer loyalty management" and superficial attempts to manage the phenomenon. In the view of Theresa Quintanilla, "It's a pity that 'loyalty' has become synonymous with gimmicks to let customers acquire points or miles or any loot unconnected to the product they are using . . . It's about customers and suppliers caring for each other's success." As Alan de Winter put it, "A consistently well-delivered product or service at good value goes much farther in retaining customers than programs that focus on retaining customers but add cost to the product or service."
Others tended to regard Treacy's and Reichheld's views as complementary. "I don't see a conflict," said Jack Flanagan. "The confusion or conflict occurs when we assume that a customer loyalty management initiative, in and of itself, will overcome basic shortfalls in product/service delivering in a competitive situation." Robin Clark pointed out that: "Neither view is completely right or wrong. I think that it would be wrong to base all your efforts on trying to keep customers loyal . . . However, a customer base high in 'loyals' is a good indicator that you're doing something right." In Scott Bailey's opinion, "It seems to me that the positions . . . are really not at odds with one another . . . Treacy is suggesting that firms focus not on the program, but on whether or not the program is providing significant value to the segment for which it is intended."
A third line of thought concerned the impact of rising customer expectations on loyalty initiatives. As Wendy Jameson said, "Loyalty initiatives have become the baseline standard. To compete with truly 'sticky' customer service, you're going to need to get creative . . ." Jim Coyle suggests that this may involve putting in place effective service recovery programs that "fix problems when they are brought forth."
Have we witnessed just the first phase of customer loyalty management initiatives? What directions should customer loyalty management take in the future? Is it really worth the money invested in it? What do you think?
How many times have you heard that it costs several times more to attract a new customer than keep an existing one? Or that satisfied, loyal customers become more and more profitable over their lifetime as they purchase new products, updates on old ones, supplies, and services, all the while recruiting others to do the same? In fact, that customer loyalty is the single most important driver of growth and profitability? When several of us first began researching these relationships, findings such as these were news. Today we take them for granted.
Fred Reichheld, among others, has fashioned a career as a consultant around his work on loyalty, which then led to a best-selling book, The Loyalty Effect. He concludes that even though many customer loyalty initiatives are poorly thought out or implemented: 1) "Some customers are inherently predictable and loyal, no matter what company they're doing business with. They simply prefer stable, long-term relationships," and 2) "Consistently high [customer] retention can create a tremendous competitive advantage, boost employee morale, produce unexpected bonuses in productivity and growth, even reduce the cost of capital."
Now comes Michael Treacy, writing in his book, Double-Digit Growth, that we should "forget loyalty... The quest for loyal customers is largely wasted effort ... Companies that have committed to complicated schemes for customer loyalty management (such as Lexus, Staples, and American Airlines) don't have much to show for it... Consultants peddling customer lifetime value (LTV) analysis and loyalty segmentation schemes haven't fared much better." Instead, Treacy advises us to keep our eye on the goal of delivering product or service value as a means to retain our customer base rather than emphasizing loyalty schemes that utilize special incentives for existing customers to purchase again. To do this, we should make our services "sticky," tailor offerings to the needs of desired customers, detect and preempt customer defections through special deals, and "bond" with customers through an understanding of their needs for products, services, and brand affiliations.
Who or what should we believe? Have we, as managers, been led down the garden path of the efficacy of customer loyalty management efforts? Would we, in fact, be better off concentrating our efforts on other initiatives? Is Treacy exaggerating for the sake of impact when he concludes that we should forget loyalty because the customer who "never" switches products or brands is impossible to find? In fact, does he contradict himself when he talks, in the same book, about ways to detect and preempt customer defections with deals? What do your experiences tell you? What do you think?