• February 1, 2008
  • By Marshall Lager, founder and managing principal, Third Idea Consulting; contributor, CRM magazine

The Loyalty Riddle

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Customer loyalty is one of the first things on executives' minds, and certainly first on their lips when asked about top business concerns. Studies indicate that customers will go to a competitor after just one or two bad experiences; there are few barriers to prevent customers switching; and social media have put the power of communication squarely in the hands of the consumer. Businesses are scrambling to come to terms with what look like new worlds of customer acquisition and retention. Despite the rise of the Internet and the mad rush of technology, the process of finding and keeping customers hasn't really changed from the days when brick-and-mortar stores were the only valid option. E-commerce requires just as much connection with the customer as any other venue; it's only the technology that's different. But how a company uses its technology will make all the difference. "Loyalty is based on relationships. What's interesting today is that relationships are now becoming virtual," says Jim Kane, partner and senior consultant at customer loyalty consulting firm The Brookeside Group. "The same elements that exist in human relationships now [also] exist in virtual relationships." Attempts to gauge loyalty are starting to appear, some (such as the Net Promoter Score, developed by Bain and Satmetrix) meeting with more success than others. It's still early, though, so even the best current ideas might need to give way. According to Kane, six factors predict loyalty:
  • Competency: Does the company do what I need?
  • Integrity: Is it fair and honest with me?
  • Recognition: Does it see an individual or just an account number?
  • Proactivity: Does it anticipate my needs?
  • Savvy: Does it understand why I want to be loyal?
  • Chemistry: Do I enjoy the experience of working with the company?
Of these, the first two are simple satisfaction, while the other four relate to the emotional component that creates loyalty. "People seek companies to be loyal to," Kane says. "It makes life easier when you don't have to evaluate every option in every purchase decision, and can trust one source." It's important to distinguish between loyalty and advocacy, says Paul Greenberg, chief customer officer with consultancy BPT Partners and author of CRM at the Speed of Light
. "Loyal customers can be passive. Advocates, by definition, must be active in promoting you." Advocacy is more significant than ever now that social media have taken hold. The most important conversations customers have about your brand aren't with you -- they're with a world full of their peers. (See "Power to the People," December 2007.) That's what makes firms so nervous, and it's the impetus for them to enter social media themselves. "Brand matters less than it used to. The burden is on the compan[ies] to build a relationship with the buyer," Kane says. "If they do, then the customer doesn't care as much about other opinions." Even with the burden on the company, it seems that the best way to cater to the customer is to step out of the way. "To create advocacy, you must give the customer a personal experience," Greenberg says. "Realistically, companies must provide customers with the tools to craft their own experiences; there's no way an individual in a company can create the perfect experience for me." Kane is quick to point out that this is not the same as a loyalty program. "Loyalty programs are hostage-taking, trying to change customer behavior," he says. "If your goal is to change customer behavior so that they will buy your products and become loyal, you will lose. You must change your own behavior and the customers will follow." And customers will follow only as long as you please them, despite any affection they have for your brand. "Companies don't understand loyalty," Greenberg says. "Loyalty means you get one free mistake -- it's a buffer, a get-out-of-jail-free card, for when you disappoint."
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