Who gets the best offers? Your most loyal or most at risk customers?

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In a meeting the other day, a colleague from another agency, and respected industry person, posed the following question:

“Why are we giving our best offers to our most loyal customers? They’re going to stay anyway, right? Maybe we should be giving them to our least loyal customers to increase their engagement?”

Fair call and an interesting conundrum. In a world with limited resources (in this case, a finite amount of product subsidies our shared client is able to give away each year), perhaps the question should rather have been “From which customers are my best offers likely to extract to the highest commercial return?”

Here’s the thing, in my experience, low loyalty customers are more than happy to take up good offers. The business gets a quick revenue shot in the arm and everyone is happy. For that quarter. Then the bad guys turn bad. Their revenue and at risk scores soon fight their way to the bottom again. But here’s the thing with the good guys. The loyal guys. No matter how much they’re currently worth to you, and let’s face it, your most loyal are almost always your most valuable, they could be worth more. Like a lot more. Like 30% more on average in my experience.

When we at Digital Alchemy look to extract more value from customer assets, we always look to the high value, high loyalty segments first and we always find more. They always offer more. Every. Single. Time.

Don’t for a second think you have all of your best customer’s wallet (or potential wallet). Send them your best offers. As a priority. They will respond with higher value, and deliver over the long term. And they will love you. And talk about you. Which we all know drives even more value.

The question I posed earlier isn’t really a question at all. Send your best offers to your most loyal customers. It’s the smart way to do business.

14 COMMENTS

  1. HI Grant, while I mostly agree your insight poses the question why this is not regularly happening? Very regularly the best offers are towards new customers. Look telcos, ISPs, utilities, banks, …

    Why did I say ‘mostly’? Because most loyal customers isn’t the full answer, too. I think that the model also needs to consider those customers that are estimated to become loyal ones.

    Just 2 ct from Down Under
    Thomas
    @twieberneit

  2. Grant, my question is: are loyal and not so loyal customers in different segments? Or are they from the same segment?
    Or should we be segmenting them differently. If yes, then what is the value of the customers in each of these segments. Do we want these customers and why?

    Again, after segmenting, then what is the customer value our loyal customers expect, and the value the not so loyal customers expect. Can we make a difference in the offering?

    So my answer is: if we believe the not so loyal customers are valuable, how do we structure our offer to them and how do we structure the value to the loyal customers. It does not have to be a price offer, per se

  3. 100% Grant. And it speaks more toward the nature of true loyalty. Many businesses opt for the ‘if you start doing business with me, I’ll give you something special’ model – and refer to them as ‘loyalty schemes’. But that’s not loyalty – that’s bribery. And those customers will leave you the second someone offers a better bribe.

    The most effective business loyalty strategies are the ones which most closely mirror the real-life reciprocal ‘I’ve-got-your-back’ mind-set. The more you look after your most loyal customers, the more they will look after you.

    The payoff comes in immediate share-of-wallet, word-of-mouth, and reduced customer churn.

  4. “Why are we giving our best offers to our most loyal customers? They’re going to stay anyway, right?” – It amazes me that someone considered a ‘respected industry person’ said that. But maybe I shouldn’t be shocked. After all, not everyone has read Humpty Dumpty, and once high-flying companies drop into the tank all the time. That point of view could be a major reason.

    I think the answer to your question depends on a company’s objectives, values, and internal ethical governance. And it doesn’t have to be either/or. It can be both – or neither.

    Some Mylan customers who buy Epipens are ‘loyal.’ But just because you can get more money from them doesn’t necessarily mean you should. There are many angles to this debate, and the one thing people can agree on is that the answers aren’t perfectly straightforward. In my experience, using the singular criteria of how to get the greatest commercial return or share-of-wallet might create high risks for negative outcomes. The stories bubble through our newsfeeds every day.

    I’m uneasy with the logical extensions you’ve made – that by giving ‘loyal’ customers (however loyal might be defined) your “best offers” that they will respond with higher value and deliver over the long term. It seems that from everything I’ve read and learned, customer retention requires the consistent delivery of many more integrated pieces and parts, and that reducing churn is more complicated than what you’ve described.

  5. Another side to this is customers’ hyper-sensitivity as to who gets what, and when they get it. If an established customer sees a new customer getting a more attractive offer than he/she gets, that’s bad. If an at-risk (or former) customer gets a more attractive offer than an established customer, that’s bad. If a “loyal’ customer, or even an advocating customer, gets an offer that’s more attractive than everyone else, that’s bad. In each of these situations, those not getting the best offers feel cheated, and that diminishes the perception of experience value.

    Loyalty and special offer programs should prioritize being more democratic in their application. I’ve lived in the Philadelphia area for a long time, so I’m fond of looking for opportunities to quote Benjamin Franklin. As he said at the Continental Congress, just before signing the Declaration of Independence in 1776, “We must, indeed, all hang together, or most assuredly we shall all hang separately.” This can easily apply to how loyalty programs should be managed.

  6. IN THEORY you might suggest that that your most loyal customers attach the greatest value to your goodies and that, therefore, they would be wiling to pay more for them and still feel they receive solid value. IN PRACTICE, I can cite one example of a company doing this — and they did so with a very small sliver of customers who they thought they could confidently classify as totally loyal and they priced at a very smal premium (when they tested a slightly higher premium, even the most loyal bailed out).

    IN REALITY, loyal customers expect — and exact — price concessions. Whether it’s volume based pricing, bundling, loyalty perks or some other recognition/incentive, the net effect is a pricing discount for loyalty. This isn’t a nasty word: as long as the discount doesn’t exceed the incremental value captured from loyal customers, such discounts are sound investments.

    And not to dredge up past errors (even if they are oft repeated as urban legend, despite their inaccuracy), but this was a clasic error by Reichheld in “The Loyalty Effect.” Riechheld claimed that loyal customers cost more (and are less costly to serve) — both points are largely false: (1) loyal customers do not pay more (to the same company for the same goodies) than less loyal customers and (2) and, in many instances, loyal customers are the most expensive to servce, as the use more expensive channels, expect extra service and require special attention.

  7. Howard – I would be interested to know the criteria used for defining ‘loyalty’ in the example you gave. Frequent purchasers, for example, are not necessarily loyal to a brand. They could be attracted to a price point/value that is part of a brand’s positioning, but that’s not really loyalty.

    It would also be interesting to see the math on what seems to be the assertion that loyal customers are less profitable. By definition, loyal customers are be less transitory, more forgiving and more active promoters. With those factors quantified, it seems counterintuitive for them to be less profitable.

  8. The company in question scored its customer files using a variety of customer data to put customers in loyalty deciles. The top decile showed very little risk of churn. This was thew only decile they targeted for paying marginally higher prices.

    I didn’t say that loyal customer are less profitable. I said they often pay less and cost more to serve, but by no means did i intend to imply that they are less profitable. To the contrary, I think the argument for customer loyalty rests on the economics, as I have argued for years. The average lifetime value of a loyal customer is far higher than that of a less loyal customer. That is, the retention value, cross-sell/upsel value and referral value are significantly greater for loyal customers; and these increase outweigh the lower prices and higher service costs that often accompany loyal customers. See:

    http://customerthink.com/david_vs_goliath_i_by_howard_lax/

    http://customerthink.com/david_vs_goliath_round_ii_challenging_fred_reichheld_on_the_economics_of_loyalty_again_by_howar/

  9. Shaun, I think a lot of people dumb down loyalty to retention. As you rightly pointed out, customers can continue buying for lots of reasons besides feeling highly satisfied. Being locked into a contract, lack of other options, etc. In extreme cases (think some cable or telecom companies ) customers can appear to loyal (retained) and yet trash the company on social media.

    Still, the opposite is also true — a customer can be a brand advocate but not continue buying because of changing circumstances, no budget, etc. I admire Apple and say nice things about the company and its products, but I’m not an Apple customer/user.

    Why can’t a customer be loyal to lower prices? I agree that shouldn’t be the only thing in most cases, but I can think of a few brands I like mainly because of good pricing. Why is that not “real” loyalty?

    Howard, I agree with you that the argument of loyalty = premium prices or lower costs is flawed. It certainly doesn’t match my experience as a customer or a business manager.

    But what then are the reasons that loyal customers are more profitable? Lower marketing costs due to lower churn? Increasing spend over time?

  10. Regarding the question Bob raised about loyal customers being the most profitable, I had the same concern. In my experience, this connection should not be assumed. For example, some companies stick to certain vendors because the vendor has lax (or non-existent) policies about accepting returns. In another situation, one company I worked for had customers who reliably purchased from them because their credit enforcement was poor. Several of their ‘loyal’ customers routinely took 60 days or longer to pay. Competitors maintained much stricter terms, and were more demanding about collecting payments. In a third instance, some customers were ‘loyal’ purchasers, but a high percentage of their orders were placed as short lead-time ‘rush’ shipments that always converted production schedules into episodes of crisis management.

    Yes, those customers were ‘loyal’, but it’s hard to consider them profitable.

  11. Howard’s response addresses Bob’s question. More frequent purchases, cross-selling and upselling, non-necessity of expense associated with rebooting the core product/service proposition, etc. are some of the economics involved. Also, not covered but equally important, is the effectiveness of prospect targeting, i.e. finding customers whose needs and requirements best fit the value proposition. My colleague Peter Fader at Wharton has thoroughly discussed the range of customer loyalty and profitability elements in his book on customer centricity.

  12. Thanks, Michael.

    At the end of the day, loyalty is operationalized in terems of “loyalty behaviors,” those behaviors that create value for the company. While you can alwasy cherry pick examples and counter-examples, the issue is “the norm.” And exceptions notwithstanding, loyal customers tend to buy more stuff, more frequently, recommend others more often and stay customers longer than less loyal customers. This effectively translates into greater profitability than when the same customer buys less, less often, doesn’t recommend others and churns.

  13. . . . . but doesn’t the assumption of loyalty = profitability lead companies to financial difficulty? There is so much discussion about whether companies should ‘fire’ their customers (see When – and How – Should You Fire a Customer http://customerthink.com/when_you_should_fire_customer/). That article makes the distinction between satisfied and unsatisfied customers, but does not assert anything about the profitability of ‘loyal’ customers (the definition of which has not been established here. That leads to conflating the meanings of Loyalty and Satisfaction. To me, they are not the same).

    I am confident that my name and account number appears on the ‘loyal customer’ dashboard for several companies. If I knew who they were, I would dash off a quick email asking to be placed in a more truthful category: Would churn in two seconds if switching costs weren’t so high.

  14. Andrew, I think you’ve touched on the great myth of loyalty as it relates to business. And you’re right – we haven’t really done a good job here of defining what loyalty is.

    Very few businesses operate on true principles of loyalty. Most confuse it with Entrapment (If you sign for a 3 year contract, or earn enough points, you’ll get a better deal, but one “Would churn in two seconds if switching costs weren’t so high.”) or Bribery (If you sign up today, you get a good deal).

    As idealistic as it sounds, “loyalty” isn’t quite so directly quid-pro-quo. It is, though, reciprocal in a karma-esque fashion. Sears understood that years ago, with practices like return policies that would make today’s CFO’s cringe. Their customers back then were rabidly loyal. That changed in the late 80s’, and so have their fortunes ever since..

    Amazon and Zappo’s are current examples. They don’t wait for customers to demonstrate loyalty to them before they demonstrate it to their customers.

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