Module 9
Loyalty
Objectives
Be able to define/operationalize “loyalty” in
various ways and understand the
strengths and weaknesses of each.
Identify different classifications of
customers with respect to loyalty.
Understand different perspectives on the
role that loyalty plays in company
profitability and growth. How has this
evolved?
MBNA EXAMPLE
MBNA lowered their defection rate to 5% half the industry average
Their ranking went from 38th to 4th over an
8 year period
(Did Not mention how large the customer
base grew during this period to improve
position – only mentioned that they did not
grow through acquisitions)
Loyalty-based Management
Frederick F. Reichheld
Preparation Questions
What does the author mean by the assertion that
“building a highly loyal customer base cannot be
done as an add-on.”
What is the fallacy behind using pricing/price
promotions as a means of recruiting new
customers.
If, as the authors suggest, it is a better strategy
to stick with existing customers rather than
recruiting new ones, why do more companies
not do this?
“Building a highly loyal customer base
cannot be done as an add-on.”
“Business leaders intuitively know that when
customer loyalty goes up, profits do too.
Yet few companies have systematically
revamped their operations with customer
loyalty in mind.”
Better economies mean the company
can pay workers better, which sets
off a whole chain of events
Increased pay boosts employee morale
Employees stay with the company longer
Productivity rises and training costs fall
Job satisfaction increases
Knowledge and experience increases
RESULT
Retained employees are higher quality and more
capable of providing customer value.
Customers become more inclined to stay loyal
Best customers and employees become part of
the loyalty-based system
Competitors are left with less desirable
customers and less talented employees
The Right Customers
People who buy because of a personal
referral tend to be more loyal than those
who buy because of an advertisement
Those who buy at standard price are more
loyal than those who buy on price
promotion
“Companies typically use pricing as a blunt
instrument to bring customers in
indiscriminately, when instead they should be
pricing to filter out precisely the customers
unlikely to be loyal”
“Although it is tempting to use new products to
win whole new markets, it almost always
makes better sense to stick with existing
customer segments.”
“Customers build trust with a company’s
employees, not the company itself.”
The Mismanagement of
Customer Loyalty
Werner Reinartz and V. Kumar
Preparation Questions
The authors of this article present assertions
about the nature of customer loyalty and
profitability that seem to be in direct contrast with
those of the first article. Can you resolve this
conflict?
What are the two factors that are considered to
arrive at four different types of customers?
What are the four types of customers? Can you
think of examples where you personally fit into
each category?
Cost of Keeping Customers On
Profit in thousands
20
15
10
Profit in thousands
5
0
-5
1 3 5 7 9 11 13 15 17 19 21 23 25
Months
One explanation…
Previous approaches compared a company with
the highest level of retention to companies that
had average levels of such factors as revenue,
costs, and profit per customer.
Previous approaches also compared before and
after performance of companies adopting loyalty
strategies.
This article examines any old company in
isolation comparing the loyal customers with the
non-loyal customers.
Loyal Customers and WOM
Correlation between ‘customer marketing’
and loyalty “not strong”.
Customers with attitudinal and behavioral
loyalty more likely to spread company’s
reputation (up to 54%) than customers
who are only behaviorally loyal.
Chooseing a Loyalty Strategy
Category
Profitability/Loyalty
Loyalty Strategy
True Friends
•Profitable & loyal
•Buy regularly but
not intensively
•Approach softly.
•Don’t over communicate.
•Reward loyalty
Butterflies
•Profitable but
disloyal
•Milk them with short-term
hard sell offers.
•Stop investing after their
purchases drop off.
Barnacles
•Unprofitable but
very loyal
•If they have money to spend,
offer them products related to
those already bought.
Strangers
•Neither profitable
nor loyal
•Identify early.
•Invest nothing.
The One Number You Need
To Grow
Frederick Reichheld