Forget Everything You’ve Heard About Customer Loyalty

By Heather Baldwin

Much has been made in recent years about the importance of customer loyalty. Forget satisfaction, says the conventional position, loyalty is the key to growing profits going forward. The only problem with this line of thinking is that it has taken awhile for the science of customer loyalty to catch up with the trend. Only now are we beginning to truly understand loyalty, say Timothy Keiningham and his three co-authors of Loyalty Myths: Hyped Strategies That Will Put You Out of Business – and Proven Tactics That Really Work (Wiley, 2005). The science, say the authors, has revealed seven truths of managing for customer loyalty. Here are four of them.

1. Manage for customer selection before you manage for customer retention. Your ultimate goal is to generate profits. So, your first job with respect to customer loyalty is to determine which customers’ loyalty is worth pursuing. The way to do that, say the authors, is by using a forward-looking measure of customer profitability. They call this approach CLVf, which they define as the net present value of a customer’s cumulative profits over his or her lifetime with the company. The key components in calculating CLVf are customer acquisition and retention costs, the gross contribution each customer provides and the marketing costs incurred for all customers in each time period. "By knowing a customer’s expected CLVf it becomes possible to set an upper threshold for investing in loyalty without running the risk of overspending," say the authors.

2. Customer loyalty takes more time to grow than most management teams have to give. Planning and patience are required. Few companies today have the correct information from which to launch a proper loyalty program. Sure, companies have reams of data collected in CRM and other systems, but "rarely do firms have adequate information about their customers to effectively populate a customer base for purposes of embarking on a customer loyalty strategy," say the authors. Managers must not only take the time to put the process in place, but they must patiently wait for customers and the market to understand the new approach and bring them business as a result.

3. The chain of effects from loyalty to profits is twisted and complex; learn the specific response patterns of customers in your industry. "There are no surrogates for understanding how your customers will behave," say the authors. Using conventional wisdom is a surefire recipe for disaster. Instead, spend some time understanding the chain of effects for your unique customers and situation.

4. Satisfied and loyal employees can make a difference, but customer loyalty can and often does happen in the absence of employee satisfaction and loyalty. Yes, you read that right – employee satisfaction is not a critical element of customer loyalty. We’re not suggesting, of course, you ditch your employee satisfaction initiatives, but it is essential you understand that while employees make critical contributions they are not the critical key, say the authors. Instead, they explain, the critical key is "how well a business equips employees to accomplish a task they fully understand." In other words, if you have $1,000 to spend, it would be better spent helping employees do their jobs better than on sterling silver recognition pins.