Customer ‘Loyalty’ — It’s Never a Sure Thing

As “Data,” “CRM” and the “Customer Database” continue the march toward the center of the marketing organization in tens of thousands of businesses, not surprisingly another “classic” marketing concept is rather “new” again — customer loyalty.

This all requires that we know who is really loyal. Here’s a shortcut to finding out:

Using RFM Scoring we can slice the customer base by recency of spending, frequency of spending and monetary value. We can slice that frequency and monetary value by time.

We can then take what we call the most valuable buyers from the universe and define them as those who have the greatest frequency (they buy the brand often) and the greatest monetary value (they spend a lot with the brand). It’s hardly rocket science, to this point.

Going further, slice the monetary value by time period, in quarters or years, and segment out buyers whose spending is increasing with time. Why? Because when you keep customers for a long time, they tend to spend more. On average, good customers tend to make more money, buy more expensive cars and have greater discretionary income, over time. If these top customers are satisfied and continue to buy from you during a long period of time, they tend to increase their spending with your brand.

Here are just a few things that we know about loyal customers across clients and categories that may be helpful as a starting point.

  • Married customers were more loyal than singles
  • Renters tended to be less loyal than owners
  • Income affects loyalty — those without it have a harder time being loyal
  • Customers in certain geographies, especially rural customers, tended to be more loyal
  • Customers in the Northeast and urban customers tended to be less loyal (note, I’m from New York)

As we often will maintain, success is not just how many customers you have, how many you acquired, or how much they spend today or recently (though high spend and recency helps). It’s the quality of the customer on a meaningful set of measures that’s the “X-Factor,” or multiplier, in determining how loyal a customer can be.

In “The Loyalty Effect” (Reichheld, 1996), a concept called the “Loyalty Coefficient” is discussed. The bottom line being: Increases in retention (loyalty) are driven not entirely by how you engage with your customers (points, rewards certificates or loyalty cards) — although treating customers well is important — but from finding the right customers in the first place.

In our work, we’ve consistently found there is no more powerful force in improving the value and profitability of a business than acquiring highvalue buyers in the first place. (See “The Most Important CRM Metric You Might Be Missing.”)

Defining that “right customer” is rarely a matter of attaching a modeled variable (income range, for example) to broadcast online advertising. There are invariably multiple variables that tend to produce a more loyal customer — regardless of how unique the service quality might be.

Many organizations with organizational strength in operations produce a good product and service quality for all customers, and diminishing returns come with the “black card” approach some have pursued. But getting the customer right is a game-changer, regardless of how over-the-top our service level might be.

Consider the Example of Lexus vs. Infiniti:

Lexus targets former Mercedes and Cadillac owners. These are older, wealthier and demographically tend to be more loyal customers. Infiniti on the other hand, seeks younger people who were BMW and Jaguar owners. These brands are building their targets around more edgy or fashionable trends, and power. The Lexus owner naturally skews older, and values quality, reliability and resale value.

Not surprisingly, the Lexus loyalty buyer rate was more than 60 percent for two years in a row, while Infiniti rates were far from that mark at 42 percent. Lexus didn’t markedly change the quality of the product. The brand is consistently reliable (manufactured by Toyota), has solid resale value and hasn’t changed its always-consistent service levels materially.

Author: Mike Ferranti

Mike Ferranti is the founder and CEO at Endai Worldwide in New York City. In this blog, he plans to offer ideas and perspective that energize, stimulate and motivate performance through the lens of his nearly 20 years of data, technology and marketing experience. Mike draws upon the logical, cultural and subject matter expertise in digital and data-driven marketing—with an occasional parallel between business performance and athletic performance.

One thought on “Customer ‘Loyalty’ — It’s Never a Sure Thing”

  1. Great article Mike! Really good thoughts to consider for us right now as we set up our own Customer Loyalty program. Looking forward to future articles.

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