Module 9 Loyalty

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Module 9Loyalty
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Objectives

• Be able to define/operationalize loyalty in
  various ways and understand the strengths and
  weaknesses of each.
• Identify different classifications of customers
  with respect to loyalty.
• Understand different perspectives on the role
  that loyalty plays in company profitability and
  growth. How has this evolved?

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MBNA EXAMPLE

• 1982 300 employees and lots of complaint
  letters from customers.
• President set objective to satisfy and keep every
  customer.
• Gathered and acted on information from defecting
  customers.
• Within 8 years, MBNA lowered their defection rate
  to 5 - half the industry average.
• Their ranking went from 38th to 4th.
• Profits increased by 16 times.

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Loyalty-based Management

• Frederick F. Reichheld

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• Building a highly loyal customer base cannot be
  done as an add-on.
• Business leaders intuitively know that when
  customer loyalty goes up, profits do too. Yet
  few companies have systematically revamped their
  operations with customer loyalty in mind.

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Company employs retention strategy
Company pays workers better, focus on building
loyalty and retention of employees
Cost of serving customers and acquiring customers
goes down
Profits are reinvested into expanding the
retention strategy, acquiring and retaining more
customers
Customers spend more and give positive
word-of-mouth
Company experiences increased profits
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Better economies mean the company can pay workers
better, which sets off a whole chain of events

• Increased pay boosts employee morale
• Employees stay with the company longer
• Productivity rises and training costs fall
• Job satisfaction increases
• Knowledge and experience increases

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RESULT

• Retained employees are higher quality and more
  capable of providing customer value.
• Customers become more inclined to stay loyal
• Best customers and employees become part of the
  loyalty-based system
• Competitors are left with less desirable
  customers and less talented employees

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Company employs retention strategy
Company pays workers better, focus on building
loyalty and retention of employees
Cost of serving customers and acquiring customers
goes down
Profits are reinvested into expanding the
retention strategy, acquiring and retaining more
customers
Customers spend more and give positive
word-of-mouth
Company experiences increased profits
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The Right Customers

• People who buy because of a personal referral
  tend to be more loyal than those who buy because
  of an advertisement
• Those who buy at standard price are more loyal
  than those who buy on price promotion

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• Companies typically use pricing as a blunt
  instrument to bring customers in
  indiscriminately, when instead they should be
  pricing to filter out precisely the customers
  unlikely to be loyal

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• Although it is tempting to use new products to
  win whole new markets, it almost always makes
  better sense to stick with existing customer
  segments.

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• Customers build trust with a companys
  employees, not the company itself.

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The Mismanagement of Customer Loyalty

• Werner Reinartz and V. Kumar

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One explanation

• Previous approaches compared companies with the
  varying levels of retention on such factors as
  revenue, costs, and profit per customer.
• Previous approaches also compared before and
  after performance of companies adopting loyalty
  strategies.
• This article examines any old company in
  isolation comparing the loyal customers with the
  non-loyal customers.

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Loyal Customers and WOM

• Correlation between customer marketing and
  loyalty not strong.
• Customers with attitudinal and behavioral
  loyalty more likely to spread companys
  reputation (up to 54) than customers who are
  only behaviorally loyal.

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Chooseing a Loyalty Strategy
Category Profitability/Loyalty
Loyalty Strategy

• Approach softly.
• Dont over communicate.
• Reward loyalty

True Friends

• Profitable loyal
• Buy regularly but
• not intensively

• Milk them with short-term
• hard sell offers.
• Stop investing after their
• purchases drop off.

• Profitable but
• disloyal

Butterflies
Barnacles

• Unprofitable but
• very loyal

• If they have money to spend,
• offer them products related to
• those already bought.

• Neither profitable
• nor loyal

• Identify early.
• Invest nothing.

Strangers
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The One Number You Need To Grow

• Frederick Reichheld

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The Gist

• Most measures and tools for managing customer
  loyalty are complex and inaccurate.
• They do not link survey responses with real
  customer behavior (repeat purchase or referral).
  
• They do not provide an accurate prediction of
  profitability and growth.
• The most accurate CL tool for these objectives is
  a simple one-question survey
• How likely is it that you would recommend
  Company X to a friend or colleague?

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Small Group Discussion

• From the three readings for this module, make a
  list of the different ways that loyalty can be
  operationalized in terms of measurement.
• For each of these methods, are there any known
  advantages or disadvantages? Can you think of
  any?
• Based on the three readings for this module,
  identify the distinctions between each that
  establish whether or not loyalty is king.

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How is Loyalty Operationalized?

• Defection rates/retention rates
• Customer stays for X number of years
• Conventional satisfaction measures
• Recency, frequency, monetary value
• Share of purchases in a category
• Intent to repurchase
• Intent to recommend

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Is Loyalty King?

• Reichheld (1993)
• Loyalty (defection/retention) is a strong
  predictor of profitability and growth.
• Brief mention of focusing on the right
  customers
• Overall, try to keep customers as long as
  possible and they will only get more and more
  profitable.

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Is Loyalty King?

• Reinartz and Kumar (2002)
• Retention at all costs is not good.
• Must consider the 2 x 2 of loyalty and
  profitability.
• Different strategies for each group.
• Many loyal customers are unprofitable and many
  profitable customers are not loyal.

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Is Loyalty King?

• Reichheld (2003)
• Defines loyal as much more than someone who
  simply continues to purchase.
• Loyal customers are those who really care for
  the company, want a win-win, etc.
• Congruent with Reinartzs take that all repeat
  buyers are not good for the company.
• Reichheld never says that there is the need to
  measure profitability. Rather, he indicates that
  loyalty is a driver of profitability. The one
  question, in turn, is a solid indicator of
  loyalty.

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Is Loyalty King?

• Reichheld (2003, cont.)

Intent to Recommend
Loyalty
Profitability