A Loyalty Program Doesn’t Loyalty Make – Repeat Business Is NOT The Grand Prize
For clients with whom I have helped create loyalty programs, I am quick to make a somewhat unpopular set of distinctions between repeat business and customer loyalty.
Given the confusion that abounds between loyalty and repeat business, I thought I would share a couple of nuances that I hope will prove conceptually helpful.
It Starts With Understanding Customer Value
One of my favorite business metrics – one that is too often overlooked or underutilized is customer lifetime value (abbreviated at least four ways CLV, CLTV, LVC or LTV).
However you abbreviate it, customer lifetime value is a calculation with varying levels of rigor (some businesses roughly guess the number others use specific customer inputs to project it).
While I often work with complex models to determine customer lifetime value, at a macro level the most basic calculation looks at average monthly customer spend multiplied by gross margin divided by monthly churn.
For example, if average monthly customer spend is $60, your gross margin is 30%, and your customer churn is 5% – your overall customer lifetime value is $360. Kissmetrics has a solid infographic demonstrating the calculation of lifetime value in the context of Starbucks.
In future blogs, I intend to talk more in-depth about customer churn because customer defection is multifactorial with different business implications. For example, voluntary and involuntary churn need to be handled differently, and there is a very positive side to negative churn – but I digress.
Insights from Calculating Customer Lifetime Value
From my perspective, some of the most important benefits of calculating customer lifetime value are the insights gained concerning the impact of churn rates (percentage of customers who leave your business over a given time frame) and retention costs (money spent to keep customers). Therein, come lessons for distinguishing between what I view as differentiated retention and loyalty strategies.
To make this maximally clear, let me provide several examples of retention strategies that are only posing as loyalty strategies.
When it comes to airlines, I have no loyalty. I fly mostly based on who flies where I need to travel when I need to go there. That said, some of the retention strategies used by the airline industry (which they call loyalty programs) do influence my decision-making.
In essence, if all things are equal, I will choose an airline on which I have earned or seek to earn status benefits. Those benefits are retention costs the airlines use to induce increased customer value from me.
Beyond overtly incentivizing repeat purchase behavior, some brands attempt to bundle products and services in a way that makes it difficult for you to extract yourself from your relationship with them.
Recently, Wells Fargo Bank’s sales and cross-selling incentives resulted in lawsuits, fines, and consumer distrust. Despite those scandals, Wells Fargo is seeking to retain customers in part by communicating a commitment to lapsed trustworthiness dating back to a time when the company carried gold across the United States by stagecoach.
Assuredly, most of Wells Fargo’s customers are staying with the bank, not because of a trust emphasizing marketing campaign or out of a deep sense of loyalty to Wells Fargo. I suspect most will stay out of habit, complacency or due to a high barrier to switch banks.
Specifically, banks like many other businesses, understand that the more services or products (checking accounts, investment accounts, safety deposit boxes, etc.) you receive from them, the harder it will be for you to take your business elsewhere.
Retention Plus Loyalty
The big takeaway from this blog is that most programs or strategies referred to as loyalty programs are simply efforts to entice customer retention or reduce likelihood customers will churn.
These programs are often a collection of tactics designed to appeal to the logical side of humans and to get customers to calculate tradeoffs like:
Are the retention benefits worth my next purchase?
Is it more painful to stay with this provider or to leave them?
Don’t get me wrong, well-structured retention programs can and do produce remarkable profits. In fact, when one of my clients figured out how to nudge customers to a second purchase, they gained easy and almost automatic future purchases.
In my opinion, however, retention strategies should not be confused with genuine customer loyalty. Loyalty might be rewarded with perks or benefits, but it is a deep emotional connection that can’t be purchased or lured.
Customer loyalty is a genuine bond that has to be nurtured by businesses to be received from customers. It emerges from trust NOT from coercion or from making it hard for customers to leave.
Being Easy to Fire
I look at a brand like Netflix and see the evolution from a retention strategy to a deeper commitment to customer loyalty.
Once upon a time, Netflix made it difficult to terminate their service agreement. The notion being that the more difficult they made it to leave for customers, the more likely Netflix would profit simply because people neglected to take action to stop paying their monthly subscription. Today, Netflix gains loyalty by being one of the easiest companies to “fire.” Conversely, they are one of the easiest to “rehire.”
If you go to the Netflix landing page, you will see the words “cancel online anytime 24 hours a day” prominently displayed in multiple locations. Should you wish to pause or stop your service, Netflix retains your past viewing history and wish list for ten months, so your relationship with the brand is retained until you wish to hire them again.
Don’t Settle For Just Retention
My goal is to help my clients craft strong retention strategies while also focusing on actions that build emotional connections connected to trust and feelings of personal care. Working in tandem this dual approach cements retention drives true customer loyalty, and even increases referrals from those engaged customers.
What are you doing both on the retention and the loyalty front?
Please know I am here for you as you explore both elements of your strategy. Simply reach out to [email protected] to schedule a time for you and me to chat.
Hi Joseph, I think at this point it is worth paying special attention to “It Starts With Understanding Customer Value”. Few of the managers and employees of the company think about this, and for this reason the companies have big losses. Perhaps your article should be read by the managers who supervise the staff, I think they will find a lot of useful information for themselves.
Thanks for grat post, Heve good day
Agree. A pattern of steady customer purchase orders should not be interpreted as loyalty without knowing the reasons underlying the pattern. In the industrial manufacturing arena where I have spent much of my career, I have seen customers place orders with such regularity, we have a term for it: blanket purchase order. Some BPO’s carry negotiated terms, such as price, quality, and delivery timeliness. Customers can incur obligations, as well, such as minimum order (or release) quantities. Yet, deviation from these specifications can mean termination of the arrangement if the contract has been violated. To your point, repeat orders should not be construed strictly as emanating from loyalty or loyal behavior.
To me, customer loyalty connotes a degree of inelasticity in how decisions are made. Put another way, for loyalty to be genuine, the customer must experience a vendor shortcoming or problem without feeling a congruent need to switch or cancel. If I favor the politics or cause promoted by a particular vendor, I’m (possibly!) more likely to accept a variety inconveniences, including higher price, longer delivery lead time, more difficult acquisition processes, styling or product performance problems. Yet, my goodwill toward my kindred vendor is not boundless, and figuring out the edges of consumer loyalty is a powerful challenge for every CXO. I don’t think any company has bragging rights for solving it. With few exceptions, the one thing vendors can count on is that loyalty edges exist, and they are continuously changing.
Your point that “customer loyalty is a genuine bond that has to be nurtured by businesses to be received from customers. It emerges from trust NOT from coercion . . .” is bang on. This is one reason I would like to see the industry abandon the term Loyalty Program. Loyalty – uncontrived loyalty – results from a variety of variables. Often, the term loyalty program replaces marketing incentive, wrongly, in my view. Businesses think they are fostering loyalty, but more accurately, they’re contriving it through perks that escalate their Cost of Sales, and sacrifice their profit margins. When customers keep buying because they receive discounts, incentives, and other perks, that, to me, seems a gratuitous interpretation of loyalty. But it’s all too common.
As a business development strategist, I don’t find any shame or disappointment by my customer remaining loyal out of embedded habit, or complacency. Embedded-habit loyalty? Heck, yes! I’ll take that anytime – it takes years for companies to master, and few ever achieve it! What about loyalty through high barriers to switching? Yeah, it’s contrived, but I’ll take that, too. There are many ways to foster loyalty, and while it’s more fortifying to say that it’s underpinned by true customer love, I’ll take any reason, so long as that reason is not based on coercion or unethical practices.
Thanks Nata…you are so right about the criticality of Customer Value and the role it plays in business success. Thanks for engaging. Joseph
Andrew, I love the “inelasticity of decision making” concept of loyalty. In essence, the customer constrains choices. Awesome concept. I also think we agree about nurturing vs coercing. Thanks for always adding value. Joseph
Hi Joseph, when I saw the title of your blog, my eyes and ears lit up. Thanks for writing about this important subject that is rarely addressed. I recently tried to find statistics on the value of repeat business vs. loyalty. The most recent study was from 18 years ago, by Bain & Co. I was shocked. It reinforced my theory that most retailers only measure store to store, yearly value increases/decreases, but never focus on each customer one at a time. Recently, Macy’s reported that 46% of their overall sales, which is $24 Billion comes, from 9% of the customers. That’s a wake-up call. I can guarantee that those 9% are not only repeat customers, but are working with a specific associate who understands them as a human; knows what they do for a living, where their kids go to college and when they go on vacation. Thanks again, for your super contribution. Richard
Richard, I was worried I was out on “the skinny branch” with this idea. Thanks for joining me out there and bringing such robust data along. I truly am grateful for your MASSIVE contribution to this post. Joseph