The Mismanagement of Customer Loyalty
The Mismanagement of Customer Loyalty
Part A. Basic Concepts and Ideas
1. Although the best customers are often defined as the loyal ones, it has been found that loyal customers don’t generate the high profits companies assume they do. The relationship between loyalty and profitability is actually much weaker and more subtle than proponents of loyalty programs claim.
2. Companies need to look beyond customer loyalty alone, and instead find ways to measure the relationship between loyalty and profitability in order to truly understand which customers need to be focused on.
3. Several tools exist that evaluate customers. All probability models, including event history modeling, depend on three simple factors – when did the customer buy for the first time? When did he/she purchase last? And when did he/she purchase in between? Once these questions are answered, customers can be grouped into separate loyalty strategies – Butterflies, True Friends, Strangers and Barnacles. These loyalty strategies help companies evaluate the varying strengths of customer relationships.
Part B. Implications for Application
1. Through studies conducted, it appears there is not much merit to the claims that it costs less to serve loyal customers, loyal customers pay higher prices, and loyal customers help market the company. Strong positive correlations were not found in any of these three areas, which is a surprising contradiction to the way many companies designed loyalty programs for years. Companies must reevaluate the way customer relationships are handled and how much time is worth investing in them on a case-by-case basis. Determining which customers are both profitable and loyal will enable companies to create stronger and more efficient loyalty programs and boost overall profitability. Loyalty should be measured on customer attitudes as well as behavior. While helpful observations can be drawn from studying the behavior of customers, analyzing their attitudes can
Part A. Basic Concepts and Ideas
1. Although the best customers are often defined as the loyal ones, it has been found that loyal customers don’t generate the high profits companies assume they do. The relationship between loyalty and profitability is actually much weaker and more subtle than proponents of loyalty programs claim.
2. Companies need to look beyond customer loyalty alone, and instead find ways to measure the relationship between loyalty and profitability in order to truly understand which customers need to be focused on.
3. Several tools exist that evaluate customers. All probability models, including event history modeling, depend on three simple factors – when did the customer buy for the first time? When did he/she purchase last? And when did he/she purchase in between? Once these questions are answered, customers can be grouped into separate loyalty strategies – Butterflies, True Friends, Strangers and Barnacles. These loyalty strategies help companies evaluate the varying strengths of customer relationships.
Part B. Implications for Application
1. Through studies conducted, it appears there is not much merit to the claims that it costs less to serve loyal customers, loyal customers pay higher prices, and loyal customers help market the company. Strong positive correlations were not found in any of these three areas, which is a surprising contradiction to the way many companies designed loyalty programs for years. Companies must reevaluate the way customer relationships are handled and how much time is worth investing in them on a case-by-case basis. Determining which customers are both profitable and loyal will enable companies to create stronger and more efficient loyalty programs and boost overall profitability. Loyalty should be measured on customer attitudes as well as behavior. While helpful observations can be drawn from studying the behavior of customers, analyzing their attitudes can