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Balancing Customer Loyalty Programs With Customer Advocacy

This article by our customer loyalty expert, Michael Lowenstein, explores customer loyalty programs in the United States.

It's evident that companies are beginning to understand both the necessity and the bottom-line advantage of broadening...

and deepening their customer focus. There is definitely more attention being paid to creating experiences for, and relationships with, their customers that will produce higher levels of loyalty. In many industries, however, there is a lot more talk about this than genuine, innovative action. Just the other day, for example, I was contacted by the internal executive search group of a major United States banking organization. Parenthetically, they are also a client. They called because they were looking for a senior manager to head up a new customer relationship initiative at the bank, one that would emphasize a fully integrated approach - staff training, marketing, communication, service, quality management, etc. - to retention and loyalty, rather than acquisition. During our conversation, I suggested someone I knew at a rival bank who was heading up just such a program. That wasn't acceptable. They were really seeking someone from outside the banking industry, indeed completely outside of financial services, who could bring innovative thinking to their need for a leading-edge loyalty program.

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As our conversation moved along, it became clear that the bank's idea of creating customer loyalty, despite all the rhetoric about 'experience' and 'relationships', was much, much more about frequency programming. There's no question that frequency programs and customer relationship management (CRM) are - or ought to be - joined at the hip. But unlike what my example bank, and many others, think, CRM is not a frequency marketing program nor is a frequency marketing program CRM.

In the United States, like the United Kingdom, many of the supermarket chains have quickly gone to clubs, bonus schemes, and reward points programs. Almost one-third of all American supermarkets now accept loyalty cards. They are so numerous, it's not necessary to profile them. When this began a few years ago, it was like seeing the first kernel of corn pop. It was special, unique and gave the first supermarket chain a tactical advantage over others. Very soon, however, many kernels had popped, and the uniqueness all but disappeared. The kernels have become largely 'commoditized', one among many. While there are exceptions, there's very little differentiation in these schemes, and little resulting contribution to value for customers. Many supermarket shoppers in the U.S. will regularly go to two, three, or four different chains, all the while using their loyalty cards for purchase. Often, loyalty programs just reward the already loyal.

As reported in last November's Customer Loyalty Today, the same situation is beginning to occur in the U.K. A Claritas survey among 65,000 supermarket loyalty program cardholders showed that 40 percent have more than one card and over 8 percent have three or more cards. Claritas management was very encouraged that the level of chain promiscuity was so low, but this is quite likely to increase over time.

Research by A.C. Nielsen, and others, has shown that about two-thirds of U.S. households now participate in one, or more, frequency shopping program. But, again, frequency marketing tends to be a somewhat more tactically-oriented approach by retailers and service providers; and the Retail Strategy Center has noted that the level of penetration, particularly in the supermarket retailing sector, has begun to level off. Since the supermarket industry was the first to initiate these programs, the same result will probably soon be seen in other retailing and service industries.

Dr. Martha Rogers, noted customer loyalty consultant and co-author of the ground-breaking book 'The One-to-One Future: Building Relationships One Customer At A Time', has stated that the real goal of frequency marketing programs is not to create higher loyalty levels but to obtain and contribute customer data that can be used for programs and processes that lead to higher loyalty. Brian Woolf of the Retail Strategy Center concurs. He has said: "The growth in loyalty marketing is slowing. The emphasis is changing from launching and mastering a program to effectively using the information."

Dr. Rogers has defined a company's customers as MVC's (Most Valuable Customers), MGC's (Most Growable Customers), 'Migrators', i.e. customers whose value is unknown, but who can move up or down and who are not particularly loyal, and BZ's (Below Zero's), those customers who actually detract from the bottom line. The most valuable customers, those who spend more time and money with a retailer or service provider anyway, are also those more likely to use their loyalty cards or otherwise participate in loyalty/frequent shopper schemes. Migrators are likely to go where the best offer resides. Below Zero's are the occasional or infrequent buyers who don't see any real value in what they're getting, and so provide little reward or payoff for a company's frequency-building efforts. For every household spending additional money with a retailer as the result of a loyalty promotion or program, there are several times more for whom the same retailer invests marketing and/or communication funds with non-commensurate, even negative, return. Companies involved in loyalty and continuity programs seem much more concerned, and impressed, with top tier results than in looking at the overall picture.

Companies really interested in making frequency schemes part of the overall customer relationship management, or strategic loyalty, program should first look at their customer base with fresh eyes. These fickle and bottom tiers of customers should receive less, or no, investment. Some might even have to be discarded if the company is to concentrate its resources on retaining profitable customers.

Here's an example. An American retail hardware chain was planning its regular quarterly catalog promotion. The company has a database of 1.5 million buyers, but the top 200,000 account for half of their sales and almost all of their profits. These customers are also the cream of their frequent buyer program. The next 500,000 represent the Most Growable Customers, those who are new and fit the active buyer profile or who buy enough to still make them profitable. The next 500,000 could be considered Migrators, only buying when a sale is extremely attractive. The remaining 300,000 are Below Zero's, who have purchased once or who have spent little.

In the past, the chain would have sent its expensive, full-color quarterly catalog to just about their entire base of customers. Now, dealing with their customers more strategically, only the first 700,000 received the catalog. The top 200,000 received a special promotional insert as a reward for previous purchases and an incentive to remain loyal. The 500,000 Migrators were sent a flyer with the most attractive and best-margin products, along with a postcard insert which they could return if they wished to receive the full catalog. The 300,000 Below Zeros were just sent the postcard.

As they proceeded with this revamped approach, the chain also added some strategic newer technology to the array of traditional customer contact approaches. Within their customer database, which contained purchase histories, and lifestyle and household characteristics migrated from external data sources, they also stored e-mail addresses for a substantial proportion of their customers. The addresses had been generated from the promotional activity they?d done over the past few years. Similar to the manner in which advertising and promotion were targeted, the chain also began to manage online customer relationships on a tiered basis.

They developed an e-mail newsletter, weekly promotions, and a sweepstakes program designed to coincide with their historical media activities. Their contact with customers was not only extended and deepened as a result of this, the chain found that the combination of regular mail and e-mail was significantly more cost-effective over time. This integrated, strategic approach to customers enabled the chain to be much more efficient and retention-oriented.

New approaches to customers and frequency marketing programs, though, will only be part of what creates true customer loyalty and advocacy for leading-edge companies. These companies are committed to customers. Their cultures are totally customer-focused. Customer information is both extensive and continually updated, and systems are designed for their staffs to readily share knowledge. Their leaders live the organization's mission. In the United States, such companies as MBNA, State Farm Insurance, Federal Express, Saturn Corporation, Dell, Wegman?s Markets, Southwest Airlines, Rosenbluth International, Servicemaster, and Ritz-Carlton Hotels, to cite just a few, exemplify this commitment. Everything they do is completely customer-centric.

We believe there are twelve common attributes of commitment-based companies:

Culture
- Total company involvement in customer retention and loyalty
- Active internal communication, cross-functionalism, and cross-training
- Staff proaction and continuous learning
- Visible and involved senior management

Information
- Customer data mining, one-to-one understanding and insight
- Hands-on research, communication skills training
- Regular direct customer contact by all levels
- Customer partnership and sharing of information
- Formal, and frequent, customer research
- Full inventory complaint gathering, evaluation, and response

Action
- Customer and competitive data used as a foundation for improvement
- Internal and external customer teams

The CREDO Special Issue of Customer Loyalty Today led with an article saying that many companies were finding barriers to the full implementation of customer relationship management: culture, time, senior management commitment, integration issues, and technology. Most of the delegates were challenged to prove that customer loyalty would lead to increased profitability, puzzling because the proof for this has been general knowledge for close to a decade. Perhaps the explanation is that, given a choice of relationship-building devices to implement immediately, the most frequently selected first choice by CREDO delegates was a customer loyalty program. This is precisely the type of fuzzy, convoluted thinking I got in my conversation with the bank's recruitment staff.

In a recent study of the Chartered Institute of Marketing (C.I.M.) in the U.K., results among 1,000 adults showed that only eight percent believed that regular contact with suppliers is more beneficial to themselves, while fifty percent thought that such ongoing relationship benefited the suppliers. Worse, only nine percent of these respondents felt wanted that contact to be driven by the supplier. These are alarming numbers, and they strongly suggest that consumers are rejecting common customer relationship practices.

To succeed at customer relationship management, the cold reality is that frequency programs are not enough. Great product is not enough. Exceptional service and customer-sensitive staff are not enough. Use of new communication technologies and multiple channels is not enough. Tight, efficient operational processes, though essential to sustaining customer loyalty are, also, not enough. What works is the company-wide commitment to customers, the ongoing creation of customer-perceived value and 'barriers to exit' which leads to loyalty and advocacy.

Success will be defined by three outcomes: the highest share of customer possible, optimal lifetime customer value generation, and the lowest voluntary churn. This requires both discipline and commitment. It's not easy, and nobody promises it will be; but it is elegantly simple.
 

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