Like most management disciplines, CRM suffers from a number of fallacies. Supposed facts, almost rules, that everyone should adhere to, or at least aspire to. As often as not, they are based either upon sloppy research or no research at all. They are just ‘CRM Myths’.
One of these CRM myths is that CRM is all about creating loyal customers, because loyal customers are supposedly cheaper to serve, pay higher prices and recommend the company to others more. In other words, loyal customers are supposedly more profitable customers. Sadly, like many other CRM myths, it simply isn’t true. Reinartz & Kumar in a series of long-term studies over five years showed that loyal customers did not necessarily cost less, pay more and tell others more. In fact, loyalty correlated poorly with customer profitability in the four industries they looked at. In other words, loyal customers were not necessarily the most profitable customers. Sometimes they were, but more often than not, they weren’t.
I call this the ‘Loyalty Myth’.
The big problem with the Loyalty Myth is that it treats all customers as one large homogenous group to be treated exactly the same. The simplistic goal is to make all customers more loyal. And then profits will flow. In reality, the customer base consists of any number of small groups with different characteristics, different profitabilities and different growth potential. It is customer profitability and in particular, profitability growth that really matters, not loyalty. Loyalty is a means to an end (more profits), not an end in itself. Or rather, as Reinartz & Kumar have clearly shown, loyalty isn’t a reliable route to profitability at all.
The real challenge is to identify which customer groups are likely to become more profitable over time and then to spend as little money as required to ensure that they do. Each different customer group should be looked at to identify their current profitability and their potential for growth, and money should only be spent on those with the most growth potential. That may mean spending money on ihghly targeted marketing to get lower-value customers to become medium-value customers, rather than on increased service for high value customers, (particularly where they are already spending all their money with you already). It may also mean removing all spending on customers who are unprofitable and are unlikely to become profitable, and who you would prefer to defect to the competition. It all depends upon where the best returns are available for the limited money you have to invest in growing customers.
In these difficult economic times, it really pays to focus on growing customer profitability rather than on the Loyalty Myth. Your job and those of all your colleagues may ultimately depend upon how well you do this. Nobody is going to thank you because you focused on growing customer loyalty whilst the company went bankrupt all around you.
What do you think? Is your company driven by the Loyalty Myth? Or are you driven by customer profitability?
Post a comment or email me at graham(dot)hill(at)web(dot)de to get the conversation going.
Graham Hill
Independent CRM Consultant
Interim CRM Manager
Further Reading:
Reinartz & Kumar, ‘The Mismanagement of Customer Loyalty’
Harvard Business Review
http://www.edensilk.com.au/document/MismanagementofLoyalty.pdf
Timothy Koller, ‘What is Value Based Management?’
McKinsey Quarterly
http://www.exinfm.com/pdffiles/whba94.pdf
Smart reminder of the importance of understanding your customer down to the nitty-gritty level. Any CRM data solutions well suited to the small business owner, say for retailers or online merchants, that you (or anyone) can recommend (for monitoring and reporting on purchase behavior)?
Very true point Graham – I think one of the challenges is that customer satisfaction, customer loyalty (measured by retention or similar method), customer growth etc are measures that are being used by most businesses as measures of success. These are relatively easy to measure, easy to understand and often only touch one department (depending on the definition and measuring method of course). Customer profitability on the other hand is a much more “sophisticated” measure and is connected to several departments (e.g. marketing, sales, finance) in an organization, which makes it “harder” to deal with…..my experience tells me that companies in general would like to measure customer profitability but “underestimate” (and hence often end up not doing it!) the work necessary to develop and use it as a solid and valid measure of business performance. Anyone with similar and/or different experiences?
Graham, you make a good point. Increasing loyalty with unprofitable customers makes little sense.
That said, it’s critical to define what you mean by “loyalty.” The article by Reinartz & Kumar that you cited defines loyalty as repeat buying. Most loyalty experts also include attitudinal characteristics, not just purchase behavior.
Perhaps to provide a more balanced view, you could provide references to other studies that show that genuine loyalty does link to improved corporate performance.
Bob Thompson, CustomerThink Corp.
Blog: Unconventional Wisdom