• September 28, 2021
  • By R "Ray" Wang, founder, chairman, and principal analyst, Constellation Research

Long-Term Customer Loyalty Is Long Gone

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CUSTOMER LOYALTY has long been the Holy Grail of the business world, but nowadays, like the grail, it’s fanciful: Your customers will trade loyalty for other values, among them convenience and availability.

Consider Domino’s. The pizza giant managed an A-plus digital transformation in the 2010s, but the company now faces a new existential threat. The enemy is no longer Pizza Hut; it’s the new wave of food delivery companies, like Uber Eats. DoorDash, and Postmates, moving into its sector. Why? When restaurants moved to activate their digital channels from website ordering to mobile apps, they had not considered that these digital channels were not enough. To deliver the end-to-end order, they had to bridge the digital world with the physical world. Takeout orders were no longer enough. Customers expected delivery to the home. Restaurants that could not deliver lost their customers.

Prior to the pandemic, restaurants could ignore this challenge. But during the pandemic, restaurants rushed to sign up with food delivery apps in order to address the last mile. And during that process, the food delivery apps executed on customer account control disintermediation. That is, the restaurants literally gave their customers to the food delivery app companies. Moreover, customers happily gave up their contact details, payment information, browsing behaviors, and order history.

While these food delivery “aggregators” don’t own their own kitchens, they do own the customer experience. They can analyze tons of customer data on food preferences and price elasticity. They then partner with “ghost kitchens”—commercial facilities that prepare meals from different cuisines (such as Chinese, Thai, Indian, and pizza) from a single physical location and under different online brands to disrupt the restaurants themselves, which provided the initial introductions and referrals of their customers.

In Domino’s case, most folks probably order pizza once a week, maybe a few times a month. In the case of food delivery app vendors, customers order multiple times a week, and in some cases, multiple times a day. These food delivery app companies also provide hundreds of options, including pizza. Over time, convenience will trump loyalty as the food delivery app vendors gain mindshare. If you were looking for pizza, would you go first to the Domino’s app or to a food delivery app? In a rough poll of about 200 potential pizza customers, over 60 percent would start with the food delivery app, not Domino’s app, as they seek options.

Customer account control disintermediation happens across the board in other industries. For example, leisure travelers often start with Expedia, Hotels.com, Priceline, and Travelocity; business travelers will go to their preferred airlines, hotels, and car rentals based on a loyalty program. In the case of business travelers, they will usually stay loyal so long as the prices are within a 10 to 15 percent range of the cheapest price. So are these customers truly loyal? The answer is no. Most customer are not, as there are many other factors.

So what drives customer loyalty today? Customer loyalty professionals must consider and optimize for five factors:

• Convenience. Customers stay loyal when they have easy access to products and services. Brands and organizations must reduce friction in the buying process. Strategies such as preset account information, payment methods, and insight to previous order history improves convenience.

• Value. Value is the perception that a price for a good or service meets the buyer’s expectations. Companies should keep tabs on competitors’ prices as well as potential substitutes. After performing a pricing sensitivity analysis, brands and organizations can test for sensitivity by conducting A/B tests on pricing attributes.

• Availability. If a product is not available, customers will switch to another provider. Companies must keep tabs on supply chains and minimum inventory levels on high-volume and high-margins products. Staffing should be monitored for service capacity.

• Status. Today’s markets have massively bifurcated. Brands and organizations are either high-end status symbols or low-end, high-volume. The middle is a dangerous place. Once brand status has been established, it’s often very hard to change perceptions. Consequently, branding and brand management play a key role.

• Alignment with social causes. In many privileged demographics, social causes—from the environment to diversity, equity, and inclusion—may play a role in consumer preferences and loyalty. These markets are less value- and price-sensitive and more cause-driven. Organizations might need to adopt the latest trends to earn customers’ positive sentiment.

The world of loyalty remains a moving target, but smart customer-oriented executives have an opportunity to reframe loyalty as digital adoption increases. 

R “Ray” Wang is the author of the new book Everybody Wants to Rule the World: Surviving and Thriving in a World of Digital Giants (HarperCollins Leadership) and founder of Constellation Research.

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