Creating loyal customers, members, guests – it’s the goal of just about every company – or at least it should be. And for industry sectors like airlines, supermarkets and hotels, it’s probably harder to find one without a loyalty scheme of some kind than with.
But do these traditional techniques actually create value? In this first of two articles, I’ll challenge whether our expectation of loyal customer behaviour is true in the real world, and suggest some alternative ways to find loyalty.
Myths or Maxims?
Let’s start by going back over a decade to 2006, to a review by the Rotman School of Management, testing some age-old statements about loyal customers:
- Loyal customers will pay more – actually the more familiar a customer becomes with your offering, the better able they are to pick the best times and routes to a lower price
- They are more receptive to cross-selling – as a loyal customer, this group can be amongst the most sensitive to feeling their custom is taken advantage of by excessive frequency of marketing offers
- Loyal customers cost less to manage – quite the contrary; many regular customers in industries like airlines and car hire have higher expectations of the service they should receive
- Loyals will always speak positively to others about your brand – whilst willing to forgive, long term customers are no guarantee of positive sentiment, and can feel a bad experience ‘insults’ their loyalty
So much for the reality check! In 2012, McKinsey released research that backed up these earlier findings. For example, they found that retailers with loyalty schemes actually achieved lower sales increases than those without. They also highlighted work with a travel company where more than one-third of its best customers were not even in their loyalty programme.
So What Does Create Loyalty?
One thing is for sure – loyalty does not start and finish with a points-and-reward card scheme. Although a loyalty card or promotion can create an initial buzz of success, customers quickly learn how to play the system. By offering predictable deals at certain times of year, without targeting them at those customers most likely to generate profit, such tactics simply encourage shoppers to become cherry-pickers.
Tip 1: Get Emotional – Beyond the Transaction
Educating customers in ‘deal loyalty’ teaches them to seek out specials wherever they may find them. They become loyal to the mechanic, not your brand. This is why so many shoppers carry a range of loyalty cards, and voucher-check on items they have decided upon, even when at their favourite website. Instead, focus on the end-to-end experience, especially at emotional touch points that customers find a hassle or worrying. It’s for this reason that Amazon Prime is so compelling. By offering (free-for-a-subscription) next day delivery to its members, Amazon shifts the focus away from the transactional price to a brand experience of speedy delivery, backed by the likely experience of many previous successful deliveries. And with each successful parcel arrival, Prime membership seems even better value-for-money, offering convenience, assurance and preferential treatment benefits in one.
By doing so, Amazon’s proposition also achieves Tip 2…….
Tip 2: Don’t Lock In, Lock Out
It’s easy for banks, telecom and utility companies to misinterpret length of tenure (that’s marketing speak for how long you’ve been a customer) with loyalty. Telecom and utility contracts use ‘lock in’ clauses, binding its customer for a fixed number of months or years. Banks rely on inertia – the realisation that customers perceive changing their bank as such hassle, it’s just easier to stay put, unless they really mess up. These techniques are effective in extending customer life, but do little for brand loyalty or advocacy.
In contrast, leading players in the insurance industry are discovering that, by offering features that customers really value as part of their overall experience, they create factors that ‘lock out’ competitors. For example, auto insurers Admiral target young drivers, offering a telematics ‘black box’ that monitors the car and rewards safe driving with lower premiums. Customers feel that their personal efforts to drive responsibly are being recognised, instead of ‘industry averages’. Similarly, in healthcare insurance, Allianz identified that allocating a personal case manager to a health claim as soon as it was received helped policyholders to feel personally cared for at a vulnerable time, and made claims quicker and easier to achieve. The overall goal here is to cultivate and create a positive memory that customers don’t want to be without. They stay because they want to, not because they have to.
Tip 3: Innovate around things that customers dislike most
Anyone who has watched the popular BBC TV reality-show The Apprentice will be familiar with candidates endlessly referencing their USPs (unique selling points) – what singles them out as the reason to be hired. Most of the time, this is simply bragging or posturing without any genuine originality or even truth – there are more than a few companies that exhibit this behaviour!
Back in the real world, USPs certainly have their place, but rather than differentiate simply for the sake of it, I’d advocate targeting your innovation efforts on the pain-points in your customer experience.
Probably the best current example of this is the taxi-cab innovation experience of Uber. The starting point for Uber’s founders was simply to take everything they hated about using cabs and flipping it on its head.
That included things like:
- trying to book a cab, even when you’re not sure where you are in an unfamiliar city
- wondering how far away your cab is, and waiting around in the cold outside until it arrives
- wanting to know the fare in advance
- wishing they could bill on account – no cash, tips or asking for a receipt to worry about
- handling that difficult conversation about splitting a fare with friends (“No – it’s fine, I’ll get it”)
Such an approach is also known as ‘disruptive innovation’ and certainly Uber has been stirring up just about every market it has entered! But it has also forced competitors in the traditional taxi space to up their game.
Editor’s Note: It’s hard to use Uber as a case study without recognising the questionable employer relationship it has/had with its drivers. This blogpost is focused on the customer experience, but I acknowledge that a wider stakeholder view of Uber would bring up some less positive data.
You see the same disruptive innovation approach and impact from brands like Skype, Netflix, First Direct…even Dyson.
But the secret here is not just to think of ideas that fix customer dislikes, but to actively build these solutions into the business model. In other words, these fixes have to actively contribute to generating profit in a direct or indirect way. By doing this, it becomes wedded to how a business wants to operate, especially as it’s also in the customers’ interests and so is warmly received by them too.
In Part 2, I’ll look at how businesses can segment their customers, in order to reflect different levels and types of loyalty.
References and further reading:
Photo by Thomas’s Pics – http://flic.kr/p/dTs8h5