What s happened CUSTOMER LOYALTY? And 5 Steps You Can Take To Get It Back

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1 What s happened to CUSTOMER LOYALTY? And 5 Steps You Can Take To Get It Back

2 What s happened to CUSTOMER LOYALTY? A business without customers is just a hobby, and loyal customers are the most important of all. In fact, building a loyal customer base is the best way to achieve sustainable profit growth. The importance of loyal customers is well known. They generate more revenue and higher profit over a longer period of time than the average customer. They are the highest probability candidates for cross-selling and up-selling. They are more likely to forgive occasional problems and provide constructive feedback. They are least likely to defect and most likely to recommend to a friend. Arguably, the only performance measure that really counts is the number of loyal customers a business has today. If the number is going up over time, we re winning; if the number is going down, we re losing. Unfortunately, customer loyalty is eroding across many brands and product categories. Given the strong correlation between customer loyalty and business profitability, it is critical to understand why customer loyalty is declining and what we can do to strengthen the loyal customer base for our brands.

3 WHAT IS CUSTOMER LOYALTY? The place to begin is with a good understanding of what constitutes customer loyalty. It s more than just behavior and it s not just an attitude. Customer loyalty is a set of behaviors and attitudes. From a behavioral standpoint, loyal customers have a very limited number of brands in their purchase set and one of these brands accounts for most of their category purchases. Loyal customers consider the brand they buy most often to be their usual/regular/main brand. Further, loyal customers have frequent, varied, and recent interactions with their usual brand in addition to purchases. Finally, these behaviors have been maintained over an extended period of time (the length of time depends on the length of the purchase cycle). Defining a loyal customer: 1. Claim a brand to be their usual, regular or main brand 2. Frequent, varied and recent interactions with brand 3. Maintains relationship over numerous purchase cycle These same behaviors can be used to define a habitual or even transactional customer. However, a loyal customer is more committed to their usual brand than a transactional or habitual customer is to their brand. It s the attitudes of loyal customers toward their usual brand that sets them apart. Loyal customers are highly satisfied with their usual brand and believe that it is much better than the alternatives. Loyal customers trust their usual brand and believe that it provides good value for the money. Loyal customers believe they made the right brand choice and they are willing to recommend their brand to others. For customers who have a strong behavioral and attitudinal connection with a brand, the competition is virtually eliminated from their consideration set. In addition, price is not the dominant consideration driving brand choice--it s just one component in a larger value proposition. It costs 6X more to sell to a PROSPECT than to sell the same thing to a CUSTOMER.

4 WHY IS CUSTOMER LOYALTY ERODING? When a business markets its brand like commodities, Persistently high unemployment and under employment have made it gets transaction consumers cautious about their purchases and sensitive to prices. They need to get as much for their money as they can. In addition, customers. the internet and social media have empowered customers with more information than ever before about brands, product features, prices, availability, and customer satisfaction. The combination of economic necessity and the instantaneous availability of information are creating a marketplace dominated by savvy shoppers. At the same time, businesses are under pressure from slow growth, operating uncertainties, and higher costs. To keep product moving, price promotions proliferate and equity building is put on the back burner. As businesses turn from marketing brands to selling commodities, they are undermining customer loyalty. When businesses sell on price, savvy shoppers base their buying decisions primarily on price; in the process, they become more transactional and far less loyal. Businesses that market their brands like commodities get transactional customers. WHAT SHOULD WE DO? 1. Measure loyalty An essential first step is to begin measuring customer loyalty for our brands and key competitors. Our listening/learning strategy needs to be comprehensive, consistent, and actionable. We will automatically get better at whatever we measure. Since information is the foundation for successful action, take the time to carefully plan the research with input from all stakeholders, including consumers. A well designed research plan will not only keep us in touch with our customers perceptions of us, it will also allow us to monitor how our competitors are doing at retaining the loyalty of their customers. When we see that our competitors aren t doing a good job of retaining the loyalty of their customers, we can launch opportunistic customer acquisition campaigns that have a higher than average probability of success. (336) de@concinnitymarketing.com

5 2. Target the right customers All customers are not the same. It s important to target the right consumers and equally important to avoid the wrong ones. The right consumers are those who are or may become loyal customers of our brand; the wrong consumers are those who are loyal customers of a competitor or probably won t ever become loyal customers of our brand. In general, consumers can be segmented into five loyalty groups: NON-PROSPECTS PROSPECTS OCCASIONAL CUSTOMERS FREQUENT CUSTOMERS LOYAL CUSTOMERS Non-Prospects: These consumers are loyal to competitive brands or they re deal shoppers. Usually it s best to avoid wasting limited business-building resources chasing these consumers. However, there may be circumstances when some of these bad bets would be open to considering our brand and it may be worth launching a targeted awareness/trial program to identify potential Prospects (key metrics: responses and cost per response). Prospects: Currently, these consumers only buy competitive brands, but they may be open to our brand. As Prospects are identified, they should be enrolled in a multi-channel conversion program designed to turn Prospects into Customers. Converting customers is expensive in the short-term, but building a loyal customer-base pays huge dividends in the long run. That s why conversion programs should be evaluated through the lens of long-term ROI.

6 Occasional Customers: These consumers primarily buy another brand, but they do buy our brand sometimes. By understanding their reasons for being Occasional Customers, we can enroll them in the right marketing program. Some of these consumers should be enrolled in a multi-channel conversion program designed to turn them into Frequent/Loyal Customers (key program metrics: conversion rate and long-term ROI). Others should be enrolled in an efficient repeat purchase program to keep them engaged with the brand and generate profitable promoted volume (key program metrics: near-term ROI). Frequent Customers: These consumers primarily buy our brand, but sometimes they buy other brands. Frequent Customers should be enrolled in an efficient program designed to maximize purchase frequency, increase connections with the brand across communication channels, and build an emotional bond with the customer. The key program metrics are: share of purchases and defection rate. Loyal Customers: These consumers only buy and have an emotional bond with our brand. Loyal Customers should be enrolled in an efficient program designed to maintain purchase frequency, participation with the brand across communication channels, and their emotional bond with the brand. Additionally, Loyal Customers are brand evangelists. They are our most important brand advocates and the source of organic growth. The key program metrics are: share of purchases, defection rate, and referrals. Loyal customers only buy from and have an emotioal bond with their brand. 33 % REPEAT CUSTOMERS spend more than NEW CUSTOMERS

7 3. Meet/exceed expectations Loyal customers don t choose a usual brand solely on the basis of price. Product, packaging, brand imagery, brand experiences, etc. all influence a consumer s choice of a usual brand. Therefore, every action in every department needs to be measured against one simple criterion: Will this increase or decrease customer loyalty? Maintaining our customers loyalty depends on meeting their expectations. Unfortunately, budget cutting initiatives often involve cheapening the product to maintain margins and cutting marketing to fund price promotions. The result is deteriorating customer loyalty and rising attrition rates. Once loyal customers are lost, they are very difficult to win back. If we want customers to be loyal to our brand, we need to focus on increasing our brand s equity in their eyes. Whether times are good or tough, increasing the equity of our brand is how we earn our customers loyalty. When times are good, we need to initiate relevant and differentiating product improvements and quality initiatives, increase availability, and aggressively build brand awareness and attract new customers. When times are tough, we need to focus on core capabilities, maintain quality, reinforce our loyal customer base and divest unprofitable customers, and concentrate on marketing activities with measureable results and proven track records. 4. Keep it affordable Consumers will generally pay more to get more. However, the price premium they will pay depends on the equity advantage a brand has over lower priced competitors. If the price gap gets too wide relative to the equity gap, even loyal customers will begin to defect to the lower priced brands. In addition, during slowdowns, consumers become more price-sensitive. Under these conditions, it s important for a brand to maintain its equity advantage as well as narrow the price gap versus lower priced competitors. If they don t, higher tier brands will lose to lower tier brands. During boom times, price gaps can widen. To effectively manage the equity and pricing gaps, we need reliable, up-to-date information on key brands as well as data on economic conditions and consumer confidence. It also helps to have a robust database marketing capability. With it we can deliver pricing and equity programs with surgical precision to individual customers, while minimizing the risk of competitive reaction.

8 5. Stay connected Finally, the savvy shoppers in today s marketplace don t want to feel taken for granted. If we want our customers to be loyal to our brands, we need to make them feel valued. We need to make customers feel valued. By creating a personal connection, 1:1 marketing programs across multiple communication channels (direct mail, , websites, social media, mobile, events, customer service, fulfillment, etc.) are a powerful way to demonstrate to individual customers that we value their loyalty. At the center of these programs is a customer-centric database that enables us to deliver the right communications with the right offers to the right customers through the right channels. Businesses that make the necessary commitment to turn unknown customers into known customers are strongly positioned to build and sustain customer loyalty. By using database marketing as an integral part of their marketing mix, they have a powerful tool for making customers feel valued and valued customers are far more likely to be loyal customers. CONCLUSION If sustainable profit growth is the objective of our business, then it is essential to attract and retain the customers with the highest lifetime value loyal customers. In fact, the competitive advantage of having a loyal customer base is most evident when times are tough. Building a business on customer loyalty is a long-term strategy and not a short-term promotion. Customer loyalty is a strategic decision with implications for the entire organization. Marketing, Sales, Manufacturing, Research, Finance, etc. all play vital roles in building and sustaining a loyal customer base. While it s difficult for competitors to break the bond between loyal customers and their usual brand, businesses can undermine the loyalty of even their most loyal customers. Maintaining the loyalty of those customers should be job one for every business. If we want to build and maintain a loyal customer base, we need to target the right consumers, deliver the value we promise, keep our prices affordable, and consistently make our loyal customers feel valued. It s not a particularly complicated formula: We earn our customers loyalty by being loyal to them.

9 HOW CAN WE HELP? At Concinnity we understand the customer relationship and none is more important to us than the relationship we share with our clients. Our philosophy is simple: Engage with exceptional clients Integrate ourselves into their business Leverage our knowledge and experience to provide the best strategies and solutions for success Our success is determined by our clients success. Concinnity help companies achieve better returns on their marketing investment by enabling them to market in a more relevant and measurable way. We help exploit the hidden value found in data and unlock its strategic potential. Contact us below to learn more: (336) North Main Street, Suite 1901 Winston-Salem, NC (336) chris@concinnitymarketing.com