Fickle About Loyalty

Six-hundred and forty percent. That’s the increase in revenue—as measured against a control group—System Pavers gained by boosting customer loyalty. The company, which specializes in hardscape home products and services, eschewed hard-selling in favor of the soft-sell of content marketing to achieve those loyalty and revenue gains, reports Director of Marketing Ila Barot-Oldakowski.

This success attests to the ways that content marketing and other resurgent approaches, such as experiential marketing and behavior research, can improve customer loyalty. Additionally, the fact that System Pavers’ sales increase wasn’t the primary intent of the effort—which instead was specifically designed to equip customers and contacts with useful guidance that did not require investment—illustrates that the very notion of customer loyalty is undergoing a major reexamination today. Under review are how companies should be measuring loyalty, how big a role habit and emotions play in loyalty, and the influence of employee satisfaction and loyalty on customer loyalty.

Some loyalty experts think that it’s a welcome time for change. “Companies are basing their focus on loyalty on outdated myths and assumptions,” asserts Marsha Lindsay, CEO at advertising and PR firm Lindsay, Stone & Briggs.

Challenges and challenged

One reason for this reassessment of customer loyalty is the many new challenges conspiring against it, including the growing sway social networks have on purchase decisions; the growth of e-commerce; one-click access to pricing, product, and service information; and the fact that many buying decisions have grown longer and more complex in the digital and social age.

“There’s a common belief that many of the challenges related to building and maintaining customer loyalty are because consumers have more shopping options than ever before,” notes Ken Blake, SVP of the Analytic Consulting Group at Harte Hanks. While that’s certainly an issue, Blake says a larger loyalty challenge is the “explosion of consumer options intersecting with increased expectations on the part of consumers and the inability of many marketers to meet them.”

The proliferation of loyalty programs is another factor, says Nandan Mer, global head of loyalty solutions at MasterCard. “Loyalty programs have existed for a while and there are a multitude of them to choose from,” Mer says. “Therefore, both relevance and differentiation [of those programs] are being challenged.”

Combined, these factors are sparking new thinking on loyalty, which generally falls into three areas: measurement, the role of habit and emotions, and the influence of organizational culture and employees on customer loyalty.

1. Loyalty is overrated and miscalculated

One belief under scrutiny is that loyal customers are big-spending customers. “Companies misunderstand and overestimate loyalty,” Lindsay says. She notes that loyal customers generate smaller portions of revenue at most companies than marketers realize.

Indeed, a growing body of research reveals significant disparity from the longstanding orthodoxy that 20% of customers generate 80% of an organization’s revenue. The Ehrenberg-Bass Institute for Marketing Science puts the revenue generated by those 20% closer to 50%. Yet, CMO Council research on the consumer packaged goods (CPG) industry indicates that fewer than 10% of customers account for 80% of a CPG brand’s revenue.

A related assumption being challenged is “that one’s most loyal customers are also the most profitable,” Lindsay says. “They could be your least profitable if they time purchases to when they know you discount.” Some experts note that loyal B2B customers are the ones most likely to press for price breaks and better contact terms.

In terms of profitability, the customer lifetime value calculations that are often at the core of determining loyalty routinely ignore the cost of boosting customer retention, Database Marketing Institute (DMI) VP Arthur Hughes writes in the report “The Loyalty Effect: A New Look at Lifetime Value.” Hughes’ research supports Loyalty Effect author Frederick Reichheld’s view that customer loyalty, in the form of retention rate, is vital to marketing success, but his research also indicates that to increase profitability marketers should focus much more time and energy on retaining the right customers (and the right employees).

One other area under review is wallet share. “Companies expect the impossible from loyal customers—as in, growth beyond what is probably realistic,” Lindsay says, pointing to the Ehrenberg-Bass Institute research.

Lindsay also points out that many organizations misattribute loyalty. Seemingly purposeful and intentional purchasing decisions that may seem to equate to attitudinal loyalty, on closer inspection, frequently turn out to be based on habit—that is, behavioral loyalty, which some argue isn’t really loyalty at all.

2. Marketing needs Maslow

Conversely, some marketers believe that behavioral loyalty is much more likely to prompt purchases than attitudinal loyalty. In other words, loyalty is synonymous with habit. Customers make product selections based on their own shopping habits and rituals, even when these habits are like being on autopilot. This increasing recognition of the influence that habit plays in purchasing explains why some marketing professionals are peppering their discussions with reference to Carl Jung and to Abraham Maslow’s hierarchy of needs. Lindsay observes that many of today’s most effective marketers study consumers’ everyday habits and rituals, including their shopping rituals, and then “figure out how to insinuate their brand into [those rituals], and identify potentially new product offering opportunities within the rituals and habits, and then brand and launch them.”

She says that the sharpest marketers: 1. study people’s everyday habits (including shopping rituals); 2. figure out how to position their brand within these rituals (or work with R&D to create new products that fit these rituals); and 3. reframe marketing’s objective in terms of habits. “When you reframe the job in terms of breaking or leveraging habituated behaviors,” she says, “you get different strategies and tactics as a result, and likely, better results.”

For example, Nike organizes its products around the promise that they’ll help customers achieve their personal best, with an emphasis on “personal.” NIKEiD’s customization offering—through which customers can select their own color schemes for their footwear and workout gear (e.g. gym bags)—promises, “Your workout, your style.”

As powerful as habits may be, the fact remains that emotions are often just as likely to influence customers’ purchases—and emotions often have a more powerful relation to retention since an attitudinally loyalty customer is less likely to switch brands based on factors like price or promotions. “When brands can associate their [unemotional] products with an emotional value, they don’t just build sales, they build a [connection] with the brand due to the resulting emotional fulfillment, [and] that secures the new loyalty that exists in today’s market,” says Jeanette McMurtry, principal of marketing firm e4marketing. “It’s not price-driven. It’s not always reputation-driven. The new loyalty is driven by how a product makes you feel about yourself, and your ability to ‘do good’—a basic human need that many marketers overlook.”

3. Employee loyalty trumps customer loyalty

It turns out that customers may not be the only stakeholders to focus on when the goal is to improve customer loyalty. New research from Demand Metric, a global marketing research and advisory firm, indicates that companies with employee engagement rates over 50% enjoy customer retention rates that are dramatically higher than companies with employee engagement rates under 50%. Fifty-five percent of companies on the high side of this “engagement divide” enjoy customer retention rates of 80% or above, according to Jerry Rackley, chief analyst at Demand Metric. Only 37% of companies on the low side of this divide enjoy customer retention rates at this level. This is both revelatory and troubling: 40% of global employees are passive or actively disengaged, according to human capital consulting firm Aon-Hewitt’s 2013 report on employee engagement.

Addressing employee engagement is tough work, particularly in the marketing function. “Marketers totally buy in to achieving customer loyalty as worthy of their time and attention,” Rackley says. “Not so much with employee engagement.” But other research also links employee engagement and customer loyalty.

A global study by LRN, a firm that helps companies foster ethical cultures, finds that organizations in which employees are primarily inspired by shared values and a commitment to a mission and purpose (i.e. “self-governing” cultures) are three times as likely to believe that their company has a good reputation among its customers compared to organizations whose employees are primarily motivated or coerced by carrots and sticks. Developing a self-governing culture is difficult (only 4% of companies had done so in 2011, according to LRN research), but it appears to be well worth doing. Companies with a self-governing culture are nine times more likely to observe high levels of customer satisfaction than other firms.

But relegating this type of work to human resources is a mistake, Rackley says. “Customer loyalty is an end,” he adds. “Employee engagement is perhaps the most effective means to that end.” That’s why marketers who view engagement as an HR-only issue ought to consider treating employee engagement as a rich source of competitive differentiation and collaborate with HR to help build that engagement—and customer focus—through internal marketing efforts.

Rackley reiterates that the high-quality service that engenders loyalty begins with employees, who he describes as “ground zero for improving customer loyalty.”

New loyalty measures, new thinking about the influence of habits and emotions, and a new look at the impact of employees on customer loyalty is why Lindsay advises marketers to list the customer loyalty “orthodoxies and best practices you hold dear and then double-check if they’re still true, and what’s true today.” When marketers do, they likely will be startled by what they discover.

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