The Truth About Loyalty Programs

It's easy to understand why organizations want to invest in building a loyal customer base. Loyal customers behave in ways that drive desirable business results. They resist offers from the competition, provide referrals, and are even more tolerant of service breakdowns than merely satisfied customers. When loyal customers complain, they're often trying to help a business improve. Over the years loyalty programs have grown increasingly popular as a means to attract and retain customers. Grocery stores offer club cards, airlines provide benefits for frequent fliers, and coffee shops offer a free beverage after a certain number of purchases. Properly designed services like these can be powerful attractors, but they don't build true loyalty. Loyalty means that customers prefer you rather than what would appear to be an otherwise equal alternative. The typical loyalty program is often just one more form of price competition, e.g., customers buying on a repeat basis just to earn that one free latte. A short-term solution Purchasing loyalty, whether via rebates, discounts, or other special services, works only in the short term. These customers can't give worthwhile referrals because their preference is based on perks their friends may not be eligible to receive. And what happens when a loyalty program ends--or the customer no longer qualifies? Once the special status disappears or changes, or if a competitor counters with a better program, what will compel customers to stay? Not only will customers miss the services, but they may also begin to resent the company, and lacking key differentiators to keep them loyal, punish the company by switching to competitors. And let's not forget that today's disappointed or angry customers wield considerable power--"word of mouse" via email or blogs can influence thousands. Thus, companies need to consider whether the "loyalty" earned--or the backlash when the loyalty program ends--is worth the initial short-term gains, and whether these programs are the best strategy for building long-term customer loyalty. The payoff of real loyalty When customers are truly loyal to an organization, they provide payoff in the following forms:

Retention--Repeat customers provide a solid base for success. The most loyal customers should cost the least to service because they are not as susceptible to competitive pressures.

Referrals--Loyal customers encourage others to choose the company over its competitors, thereby reducing new customer acquisition costs.

Reputation--Loyal customers can generate positive interest from investors, suppliers, future employees, the media and even regulatory bodies.

Revenue--Loyal customers give their providers of choice a larger share of their business. Indeed, cross- and upselling to existing customers is an important growth strategy for many organizations. Building loyalty that lasts So how can companies inspire customer loyalty? Successful organizations consistently provide positive, memorable service experiences that influence the way customers feel and, by extension, behave. Companies earn loyalty by the way they make customers feel. It's these feelings that guide customer behavior, and it's those behaviors that can make or break a business. Ninety-one percent of unhappy customers won't buy again from a company that displeased them, and on average, dissatisfied customers tell up to 15 people about their negative service experiences. The opportunity to inspire customer loyalty comes at defining moments--any time at which the customer judges the service provided. Every customer experience is a series of defining moments, such as when a shopper is greeted by a cashier, asks a question, receives an answer, or waits in line. Customers evaluate these moments against their expectations for the quality and effectiveness of service. When these expectations are exceeded, true loyalty is built. And with true loyalty, a company doesn't have to offer the lowest price or the other services typical of loyalty programs. Service versus services "Loyalty programs" and other services might be how to get customers, but exceeding expectations with stellar customer service is how to retain customers. Providing the type of service that encourages loyalty behaviors is a more sustainable competitive advantage than loyalty programs or other offers of services, because its unique human component is more difficult for a competitor to match or exceed. Further, positive defining moments fall within the purview of every employee in an organization. While a company won't likely empower frontline staff to change interest rates to attract or retain a customer, everyone can create positive defining moments: remembering the name of a frequent visitor to your hotel, suggesting a few restaurants nearby, or simply smiling as a guest approaches the front desk. Successful organizations understand that by elevating the customer experience, they can earn long-term loyalty, differentiate themselves from their competitors, and emerge as leaders in the marketplace. About the Author Todd Beck is senior product manager, service portfolio, for AchieveGlobal, an international provider of skills training and consulting services in customer service, sales performance, and leadership. He earned a BA in advertising copywriting and an MBA in marketing from Brigham Young University. Please visit www.achieveglobal.com

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