Sales & Marketing

Building Customer Loyalty Is Better than Renting It

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Those familiar with incentive-based loyalty programs know that scaling back or — gasp — discontinuing a popular program amounts to a betrayal in the eyes of your “loyal” customers. Many executives are savvy enough to understand they are buying loyalty, but few realize until it is too late that their transaction was merely a rental. When the perks stop, the supposed loyalty dries up just as quickly.

Dictionary.com defines loyalty as: “faithful adherence to a sovereign, government, leader, cause, etc.” Faithful means “steady in allegiance or affection,” so a loyal customer is one with a steady allegiance or affection for your company or product. You create loyalty by aligning your firm’s actions with your customers’ goals.

Genuinely loyal customers are the opposite of bought-off customers, forgiving the occasional misstep and providing a valuable source of ideas and insight for building better businesses. They form an emotional bond binding them to your company and increasing switching costs, but in a non-transactional way.

Loyalty programs vs. rewards programs

Most loyalty programs are really rewards programs. A rewards program influences buying behavior through the use of pre- and post-purchase incentives. Airline frequent flyer programs and supermarket “club cards” provide good examples of rewards programs that are often misunderstood as loyalty programs.

In both examples the objective is to raise consumer switching costs rather than align goals. Airlines don’t really care if the flying experience is convenient or enjoyable as long as you don’t defect to another carrier. Likewise, supermarket club cards exist solely to gather data on your shopping habits; discounts induce signup so the program can facilitate personalized offers to increase or change your purchases. Your interest doesn’t really figure into the picture.

By contrast, Southwest Airlines believes it is in the customer service business — it just happens to fly airplanes. Attitude is a primary hiring consideration and employees are infused with a service ethos that reaches all the way to the top. While air travel in general is commoditizing, Southwest’s Net Promoter Score is 45 points above the industry average. In an industry marked by bankruptcies, Southwest has remained profitable every year since 1973.

Genuine loyalty is completely different

In exchange for their faithful allegiance, customers expect a two-way, mutually beneficial relationship looking out over a similar time horizon. Dictators from tribal societies such as Libya’s Moammar Gadhafi and Africa’s Mobutu Sese Seko provide useful examples of loyalty. They each engendered genuine loyalty from their own tribe due to aligned interests but merely transactional loyalty from other groups that were bought off with spoils or through fear.

Genuine loyalty is not always easy to spot and even harder to quantify. Often there is no visible “program” at all. Benefits are often intrinsic or hard to quantify because actions seem to serve collective goals. Without an affirmative effort to identify loyal customers, many organizations remain ignorant of this powerful resource.

Creating genuine customer loyalty

While loyalty creates strong emotional bonds, it is rationally based. To understand the drivers of loyalty, it’s helpful to consider how fostering loyalty serves the self-interest of your company and its customers.

To your company, true loyalty yields:

  • Lower selling costs. Sales and marketing shouldn’t ignore loyal customers; these are customers who want to buy from your company, don’t make unreasonable demands and are receptive to cross-selling and up-selling.
  • Improved offerings. Listen to your customers and they’ll tell you how to create more competitive offerings that deliver stronger value. Consequently, companies pursuing genuine loyalty actively seek out constructive feedback.
  • Business resiliency. Loyal customers believe in your company, so they are less likely to flee at the first sign of trouble. They realize that smart companies may misstep, but those that align with customer interests quickly regain their footing.

True loyalty also serves the self-interest of your customers:

  • Greater value and functionality. Providing feedback results in better products for your loyal customers to use. Moreover, resulting enhancements reflect their specific needs.
  • Less risk. Stable vendors expose customers to less risk, often eliminating the need to diversify vendor relationships to ensure continuity of supply.
  • Vendor stability. Stable relationships provide room to invest in forging deeper integration.
  • Lower buying costs. Stability creates economies in purchasing.

Loyalty offers its own version of the magic of compound interest. Customer benefits grow stronger with the success of the vendor. Thus, loyal customers benefit every time you make a sale, not just when they purchase. A more profitable vendor is a more stable vendor and generally means more resources for R&D, infrastructure scale-outs and other actions benefitting the long-term interests of committed customers.

Loyal customers therefore have a rational and compelling reason to help your company realize greater success. An easy way for loyal customers to contribute is by providing customer references. Loyal customers will provide references at a frequency that creates burnout in other customers. Often the only incentives they require are acknowledgement and your interest in hearing about what they’d like to see different at your company.

Finding ways to solicit rather than merely accept input up-levels the benefits of loyalty even more. This type of co-creative relationship is detailed in our Lifetime Opportunity Value Equation model and can transform your entire business.

A professional investor friend of mine provides an example. He employs some innovative strategies and is willing to provide feedback regarding the various analytical products he uses. Seeing his suggestions incorporated into the products he uses — sometimes within a couple of weeks — both affirms his value intrinsically and creates better tools for his own investment activities. His perceived value and affinity for these investor tools increases each time. The tool providers get prized product suggestions from an innovative user and free de-bugging assistance.

With proper care, true loyalty creates increasing returns to scale, benefiting from more rather than fewer interactions. While loyalty generates results you can “take to the bank,” loyalty itself is not bankable. It becomes a wasting asset if not continuously tapped. It is far more likely your most loyal customers are wondering where you are than upset by over-attention.

Loyalty reflects deeply on the culture and values of an organization. Even with the right values, conventional wisdom often sabotages us by imposing short-term thinking that fails to appreciate the enormous benefits a loyal customer base brings.

Bruce La Fetra develops strategic marketing plans for SaaS, technology and services clients. After more than 20 years as a consultant and practitioner, he launched La Fetra Consulting to elevate marketing into a strategic role at his clients by encouraging a service-oriented approach and building stronger ties between companies, customers and partners. He previously served as Business Strategist with Rubicon Consulting and Director of Strategic Marketing & Business Development for Internet Commerce at First Data. Contact him at bruce@lafetraconsulting.com.

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