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Road Map to Retention
Customer loyalty is the brass ring of business: everyone is chasing it, desiring it, yet cannot quite grasp it. The mind-boggling speed and choice of electronic commerce, coupled with reduced shopping involvement and declining brand allegiance, have made customer loyalty an elusive prize. But loyalty need not be out of reach, for technology has provided merchants with new tools - along with the new challenges - for fostering customer allegiance. The rules are simple: customer retention begins by delighting the customer with a dynamite product/service and a positive, consistent purchasing experience. However, this is merely the first element: to create and retain lifetime loyal customers in the current scramble, the merchant must also provide ever- increasing value.
There is little business risk in investing in progressive value aimed at customer retention: loyalty has been empirically demonstrated to bring enormous economic returns. A smart customer rewards initiative. If initiative is implemented in conjunction with a great product/service and stellar customer support, it will give the consumer ample incentive to remain loyal and purchase frequently over his or her lifetime, as each transaction is increasingly personal and gratifying.
Importance of Loyalty
Where do most companies focus their attention? Profit, cash flow and customer acquisition. According to Frederick Reichheld, author of The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value, this concentration is exceedingly misguided. Reichheld asserts that the one business principle most likely to be ignored - customer loyalty - is the only true reflection of how much value a company is generating. Economic experts view customer retention rate as a window to the future, the foremost predictor of strategic success. Why? Customers are the very first to notice when a company's offerings decline in value or when competitors offer superior value and communicate this by shifting their business.
Customer loyalty, in conjunction with being a value indicator, also has a powerful effect on the business bottom line. We all know the statistic - a five percent increase in retention can result in a bottom-line profit increase of up to 75 percent, depending on the industry. The dramatic economic power of customer retention is revealed when viewing customers in terms of lifetime value (LTV). According the book Loyalty.com, a comprehensive study of customer loyalty programs, Cadillac calculates the LTV of their loyal customers at $332,000, while Pizza Hut estimates that their life-long customers are worth in excess of $8,000 to the company. These figures make perfect business sense when one considers that a customer retained for life is more cost-effective, requires less service, provides more business and contributes to new customer acquisition through positive referrals. Thus, customer retention initiatives - creating longitudinal investments in customers - guarantee significant current and future economic benefit.
The Empowered Consumer
The introduction of the Internet and omnipresent information technology pose both opportunities and threats to customer loyalty. On one hand, online (or technology-mediated) shopping is inherently impersonal, thus the consumer's feelings of attachment and investment are lessened. The traditional marketing approach divides consumer purchasing behavior into a five-step process: 1) perception of need, 2) information search, 3) alternative evaluation (assessing value from evoked set of products or services), 4) actual purchase, and 5) post-purchase use and assessment. While these five steps are still present in online shopping, the process is far more rapid when taking place in the Internet's electronic medium: a consumer may move through all five steps in a mere five minutes. This is true even with high-involvement purchases (traditionally requiring extended problem solving): in under an hour at the computer, a person can research cars, compare features and prices, completely customize a vehicle and request it shipped to their local dealer. With the ease of the Internet trumping geographical barriers and the switching costs of traditional retailers, providing a value or reward distinction is essential. Thankfully - on the other hand - technology enables vendors to connect and learn about their customers like never before. Customer intimacy powered by customer relationship management (CRM) means ample opportunities for personalization, customization and communication.
Customers have three currencies to "spend" when purchasing from a vendor: time, money and data (increasingly defined as privacy). Providing superior value may involve any (or all) of these. Wise vendors encourage customer attention and sharing, as well as purchasing. For those with nearly interchangeable offerings and service levels, it will be a far greater challenge to hold on to consumers when the competition lowers their prices or runs a promotion.
Ways to Woo the Empowered Consumer
With reduced customer involvement and brand allegiance, how can a merchant inspire loyalty? Customers base purchase (and repurchase) decisions on perceptions of value (price/benefit), thus only the ongoing perception of high value fuels purchase loyalty. Offering ongoing value incentives is the principle behind reward initiatives. Such incentives - which include options such as private label points programs, continuity/club options and more - are designed to encourage and reward customers for purchase loyalty. Studies of American consumers reveal that 60 percent or more of individuals increase their purchases (by a reported 30 percent) from a particular vendor when offered incentives.
Regardless of program type or media, extensive evaluation and execution of online and offline loyalty initiatives reveal the following rules for developing an optimal loyalty endeavor:
As a customer's purchase level, monetary level and/or frequency increases (RFM), so should the level of return to the customer. Instead of throwing money away on endless customer acquisition, the vendor should direct funds and efforts into retaining its best customers via a tiered system. Implementing a program that rewards every repeat buyer, with heightened rewards as the consumer heightens his or her commercial activity, will ensure that loyalty is established and customers stick around. Also, if value increases with increased participation, competitors will be unable to lure customers away given the increased switching costs. Progressive reward levels encourage customers to shift their business and concentrate their purchases with a single vendor.
It makes sense: just as in interpersonal human relationships, communication is essential to long-term bond formation. And true communication is not one- way: sending only marketing materials is not a dialogue. For the relationship to thrive, the merchant must solicit the customer's input and opinions. Customers enjoy the opportunity to "talk back" to their providers. Communication is also important when dealing with customers that leave. Should a customer defect, extra effort should be expended to connect with him or her and find out why. According to investor Warren Buffett, "There might be more to be gained by studying business failure than business successes...start out with failure and then engineer its removal."
When executing a loyalty initiative, businesses must be cautious that the customer rewards offered do not end up as a cost to the company - the merchant should share the value of loyalty with the customer, but the reward program costs should not exceed the loyalty's value. One restaurant chain made this painful mistake when it offered a trip for two around the world to any loyalty club member who dined at all of their restaurants nationwide, and were shocked when nearly fifty members qualified. Because the reward program was not well planned, it ended up costing the chain in excess of $2 million before it was discontinued. And a vital last point: rewards programs are merely the "icing on the cake" - they cannot fix fatal market flaws or compensate for poor services and products.
In conclusion, loyalty initiatives should be designed to be sustainable, progressive in reward-giving and brand centered. They must also be personal, communicative and geared toward establishing a genuine dialogue for mutual learning and sharing. These elements, if implemented correctly, will give the consumer a strong incentive to purchase frequently over time, as each transaction is increasingly personal, rich and rewarding.
Evaluation of Loyalty Program Options
To follow is an exploration of numerous options for loyalty initiatives. Also reviewed are coupons, coalition programs and purchasing incentives, which are often mistaken as loyalty tools, but are actually acquisition tools.
For more information on related topics visit the following related portals...
CRM and Customer Acquisition/Retention.
Channing Rollo, business intelligence manager and founder of thinkBIG at ClientLogic, is responsible for analyzing and reporting on customer management industry trends, fulfillment and the CRM competitive landscape. Rollo's compositions have appeared in numerous leading trade publications, including Outsourcing Journal, Call Center Magazine, Customer Service Managment Magazine ZDNet, DMA's The Bottom Line, CRMguru, DMReview and FierceCRM. Rollo joined ClientLogic in March 2000, as an e-business analyst before being named manager of Strategic Marketing & Communications. For more information, please contact email@example.com.