The first mistake? Thinking that loyalty is all about improving customer satisfaction.
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The loyal customer is perhaps the most elusive subject in all of management science. In fact, one recent customer-loyalty study suggests that the psychology at the heart of customer buying patterns and preferences is far more complex than previously thought.
What makes customer loyalty such a vexing matter? Some loyalty challenges are inherent in the current market. For example, customers are harder to reach and impress than they used to be. Many traditional marketing channels have been weakened as consumers pursue various "market of one" activities: iPods, video games, movies on demand, and personal video recorders that allow commercial skipping. In the hypercompetitive Internet age, customers also have more pricing information and buying options than ever before.
But a number of misconceptions about loyalty have also led companies to make misguided investments in customer management programs.
The notion that loyalty is all about improving customer satisfaction is perhaps the most common mistake. The frustrating truth is that what customers say about being satisfied turns out to be a poor indicator of loyalty. In fact, a consistent finding from customer research is that 60 percent to 80 percent of lost customers across all industry segments reported on surveys just prior to defecting that they were "very satisfied" or "satisfied."
Another misstep is thinking that a loyalty program is the only thing a company can do to improve customer loyalty. Loyalty programs are one part of an overall loyalty strategy, but they lack the nuance that gives companies the ability to target the most profitable segments.
To attract and retain the most loyal and profitable customers, a firm must first understand the true drivers of loyalty -- the customer attitudes that drive the different types of behaviors that must be understood and nurtured.
Our own research and client experience, coupled with leading academic studies, has helped us to develop a model that enables better analysis of loyalty drivers. At the heart of the model is a better delineation of the different types of loyalty exhibited by customers. These types can be understood as spectrums of attitude and behavior along three dimensions:
By analyzing the behavior and attitude indicators of this model, different loyalty segments emerge, each with its own distinct loyalty drivers. Companies that recognize these nascent segments can improve their market focus and position by identifying previously unseen markets within markets. Taking this approach can help companies better understand what their customers are thinking and what motivates their purchasing decisions -- and can help retain the most profitable customers.
- Involvement with the Product or Service Category: How interested are customers in the category's products and services? Are they active and engaged participants in loyalty programs? Are they heavy users of the category and enthusiastic about the category in general?
- Commitment to the Brand: How passionate are customers about the brands they buy? Do they identify themselves with a brand and develop deep ties to it? Are they willing to pay a premium for that brand? Are they advocates for the brand within their family and social networks? Just as educators have discovered that teaching a subject helps a person understand the content more deeply, leading companies have discovered that the very process of advocating a brand to others creates deeper loyalty to that brand.
- Likelihood to Reevaluate: How prone are customers to reevaluate their current buying choices? What are the most important shopping triggers? What barriers exist or might be erected against switching brands? For example, do changes in circumstances, such as income level or moving to a new home, trigger a reevaluation of alternatives?
Woody Driggs is the global managing partner responsible for the CRM service line at Accenture, a global management consulting, technology services, and outsourcing company.
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