Does “Loyal” Mean The Same Thing As “Profitable”?

When a C-level manager talks to us about “loyalty marketing,” most often he or she is actually talking about how to gain and retain more of the most “valuable” customers in terms of profits.  But is the most loyal customer always the same as the most profitable customer?  And how do customers define loyalty?

Not surprisingly, the way a customer defines loyalty is often completely different from the company’s point of view.  Customers define their own loyalty based on how long they have been buying a particular brand, or their preferences for one particular brand over another.  In short, customers see loyalty as being any factor that makes them stick to a brand despite all the temptations to switch. This causes marketers a problem in that even low profit customers can consider themselves to be among a brand’s most loyal patrons, and they expect the brand to recognize them for having stayed faithful for so long.

So, unless marketers can recognize those customers who not only have been faithful to the brand for a long time, but are also actually profitable, the company may well be incenting the reduction of margins – or even losing money.  They may be even more surprised by the sheer impact that these customers can have, given the age of instant communication.  It takes only the click of a mouse to spread the word, and refermore marginal business your way.

Marketers need to look at the issue from the view of what is the most sustainable strategy in terms of building market share over time with acceptable margins.

For starters, that usually includes the following:

1. Recognize that “loyalty” is not the sole criteria for judging the profitability of a customer.

2. Build customer metrics based on several aspects of customer behavior.  For example, frequency of buying, depth and breadth of involvement with the brand over time, value of each transaction as well as lifetime value of the relationship.

3. Develop benefits that build and nurture relationships across the spectrum, incenting the low to the medium value customer to become a high value customer.  While it is obvious that you can’t spend the same amount of money on low value customers as you can on a higher value customer, loyalty is not directly proportional to the money you spend – it is dependent on the care and attention you show to each customer in areas that matter to them, and that actually may not take much money at all.  Simply ask yourself how you can make the valued customer’s overall experience better, and the answer will give you a range of loyalty-building tools.

4. Understand that loyalty is not just about rewards points and birthday greetings. It is the company’s burning desire – its passion – to ensure that customers get the best value for their money. And if you can translate that into the right behavior of employees and the true value technology can offer them (not just you – think telephone customer service that can’t speak English), so that your valued customer has the greatest experience possible every time she or he does business with you; then you have the makings for a real Win-Win solution that builds the most sustainable value – without giving away the store.

Posted by John Harden  June 12th, 2009

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