Letter: Article Covered a Narrow Perception of Loyalty

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Dave Hendricks' article ("A Narrow Perception of Loyalty," March 20) was appropriately titled: It covered a narrow perception of loyalty. Its thesis, "Everything you have heard is probably wrong," was supported with but two examples. They were:

1. The often-misquoted statement about dramatically increased profits coming from a 5 percent increase in customer retention. Serious students of loyalty have read its reputed source, "The Loyalty Effect" by Frederick Reichheld, and realize that the book is a little more careful in what it says. For example, Reichheld does not give the actual results of any company. Rather, he describes more of a theoretical situation (presumably based on his research) for a credit card company with existing high retention rates.

Obviously, anyone applying the results of his illustration across all forms of business, from low-margin food retailers to high-margin jewelry stores, would be imprudent. Reichheld's point, at least to me, is that focusing on improved customer retention will lead to higher profits. It is not a magic, in-all-circumstances, in-all-industries, formula that states that a 5 percent improvement in customer retention (regardless of the existing retention rate) automatically will lead to "profit increases of 25 percent to 85 percent," a range that, in itself, suggests it's more directional than a guaranteed outcome.

Some people misquote Reichheld, others don't. Only those who hear the former receive the wrong message. Even then, most loyalty executives I have met have a healthy degree of skepticism and wouldn't take such a statement at face value. Nor would they blindly accept the article's opening statement: "Companies can boost profits almost 100 percent by retaining just 5 percent more customers." Their own experience suggests otherwise. The statement seems to be a straw man set up to be demolished. It's certainly not a statement I've heard. I wonder how many of your readers have ever heard it?

2. "Your best customers are not loyal to you" and "Are your so-called best customers slowly killing you?" (implying that they are). This section is another straw man set up to be demolished. The problem appears to lie in the author's definition. It seems self-contradictory to call someone a "best customer" and then suggest they're not. Either they are or aren't. Let me illustrate from my 12 years of loyalty marketing experiences in food retailing: The optimal way to define best customers in that industry is to measure only what they have spent in the latest (rolling) quarter.

In the United States, as described in my books, I find the DROP'N breakout most helpful in classifying customers: Diamonds (those who spend, on average, more than $100/week in the quarter); Rubies (spend $50-100/week); Opals ($25-50); Pearls (under $25); and New (those who shopped for the first time in the quarter).

My definition of best customers, incidentally, is the Diamonds and Rubies combined. Contrary to what the article suggests (presumably because it used another definition of best customers or perhaps because it draws from industries with unique economic patterns, or both), the DROP'N methodology in food retailing always has Diamond customers, not only with higher spending (by definition) than Rubies but also, typically, with higher customer retention rates, visits per month (frequency), spending per visit and gross profit percentages. Rubies, in turn, have higher metrics than Opals who, in turn, have higher metrics than Pearls.

It's a classic case of waterfall economics. As spending levels fall, so do all the important metrics. It's the same on every continent I've worked in. What I have learned over the years when someone makes a statement about best customers is to ask the speaker what's his definition of a best customer. Different companies use different definitions, which, as a result, yield different metrics.

My advice to anyone hearing or reading anything quoting loyalty statistics is first to understand what exactly is the basis of such measurements. Otherwise, someone is likely to remind us of Disraeli's observation: "There are three types of lies: lies, dammed lies and statistics."

Brian Woolf, President, Retail Strategy Center,Greenville, SC


We welcome your views - by mail, by fax to 212/925-8754 or by e-mail to editor@dmnews.com. All letters must be accompanied by a daytime phone number and may be edited for space.


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