“Loyalization” is probably one of the most commonly used terms in the marketing world… It is also one of the worst used terms. The idea of retaining the customer and avoiding their abandonment to the competition has lost value over the years, to the point that today they term “to loyalize” is used for almost any promotional action, as indiscriminate and ineffective as it may prove to be.
It is important to clearly define this idea from the beginning, because many of the traditional techniques generally contained under the “Loyalization” umbrella are proving to be less effective than expected. All companies aspire to have loyal customers. Why? Supposedly, because it costs less to attend to them, they are more likely to acquire new products and services - cross-selling, up-selling- and they have a high rate of recommending the company to potential customers. Theoretically, Loyalization strategies must serve to maintain this type of model customer. The problem is that…on numerous occasions, it doesn’t happen that way. The crux of the matter does not lie in loyalizing all customers in order to retain them, but rather in knowing exactly which customers must be retained and rewarded, in such a way that loyalization actions are profitable for the company. This is happening less and less. In fact, it is almost never the case.
The existing relationship between loyalization and the profitability of the customer and the sales action is critical. Not all loyal customers are profitable, nor are all profitable customers loyal. This premise, as simple as it seems, explains many of the resounding failures the current loyalization programs are reaping. In order to loyalize intelligently, it is imperative to have an extremely high knowledge of the customer portfolio; a knowledge that, as explained in the previous chapter, can only be provided by advanced Customer Intelligence techniques. If the company decides to undertake loyalization actions, and it has not previously made an exhaustive analysis of its customer portfolio, it could easily find itself in a situation in which its customer retention actions not only do not provide results, but also become a machine for loss of financial and human resources.
Over the last few years, at least in our country, many companies’ loyalization strategies have been marked by discretion. The well-worn “points programs” are prolific in all types of sectors, flooding consumers’ wallets with “affinity cards”, whose use is doubtful at the very least. Initially conceived to reward the most loyal customers with discounts and advantageous prices, “Affinity Cards” have lost much of their attraction because they treat every customer in the same way.It doesn’t matter how much a customer invests in a supermarket, gas station, or clothing store. It doesn’t matter how often they frequent it, what type of products and/or services they acquire. It doesn’t matter what their new needs are or how their customer profile and spending habits evolve. Everyone is treated in the same way, with cards that have lost their initial purpose as a “plus” for whoever had it.
The customer, the consumer himself, does not even perceive that “plus” any longer. The customer knows that he or she has dozens of points cards that, regardless of his or her income level, preferences, or behaviors, put him or her exactly on the same level as a consumer from a completely different segment. On the other hand, focusing solely on the number of consumers that have an affinity card is not significant: what is really revealing is how many of them use it on average per month, or per year. Only in this way can we know if the company has a customer database that is current and reliable, an analysis of which will provide rigorous, valuable, and real information. The mass proliferation of points cards has unleashed a “plastic war”, in which the “Share of Wallet” is the key reference index. In this “war”, the companies with the greatest “Share of Wallet” win, that is, those that knew best how to “enrich” their cards by bringing added value to them (direct contact to customer’s mobile phone, monitoring of purchasing habits, etc.) and, above all, not limiting themselves to launching them indiscriminately, but rather in the framework of an intelligent loyalization program.
In the year 2000, the consumer incentives and rewards market reaped 29 billion dollars. This amount was distributed in the following manner: 33% went to sales incentives; 31%, to incentives aimed at distributors; 23% to the customer –individual or company-; and the remaining 13% to employeesii. This trend has only increased in recent years, especially in the consumer goods and distribution sectors, where competition has hardened and the “hunt” for loyal customers has become the priority.
If companies put more resources into retention activities and customers have become increasingly immune to this type of activity, can we declare loyalization dead? No; that would be going too far. There are companies that loyalize, and loyalize successfully. Non-Spanish companies like Dell, Starbuck’s, and Harley Davidson – whose case we will analyze later in greater detail- have been able to create a club of loyal consumers and good consumer motivators.
We’ve mentioned two of the factors that characterize intelligent loyalization strategies: customer / provider dialogue and a cutting-edge relational model. What do we mean by a loyal customer? The majority of experts agrees that it is that customer who regularly repeats the purchasing process, varies this process –that is, the customer does not always purchase the same products and services, but rather evolves with the company-, recommends their provider to other potential customers, proves him or herself “immune” to the competition’s “temptations”, and temporarily tolerates a deficiency in the provider’s service, placing more importance on their overall satisfaction than on occasional failures.
It is advisable to distinguish between the concepts of “loyalty” and “linking” with the company, because they are not identical, and they frequently lead to mistakes in the interpretation of customer behavior. A simple example is enough to explain the difference between the two concepts: a customer may be extremely linked to their bank – with direct billing, payments, personal loans and a mortgage, etc…-, but choose any other financial entity that is more specialized or that seems more reliable to them, when they have the capital available to invest. This would be a clear case of a customer who is linked, but not loyal. The financial sector in particular, and all companies in general, should put more emphasis on analyzing their customer’s degree of linking vs. loyalty.
If the definition of an intelligently loyalized customer is clear, the strategic objective, as we mentioned earlier, is to find that customer profile. Nobody questions the original efficiency of the currently used loyalization models, anchored mainly in the famous points cards; what is being questioned is the economic profitability and the sales efficiency the models as they are used currently in numerous companies. What companies take intelligent advantage of the invaluable information their customers provide them with through the points cards? The answer is still discouraging.
The most widely-used affinity and loyalization models must double their efforts in order to be profitable and efficient, and this is only possible if they are built to feed themselves, that is, to generate information on customer spending habits and behavior that, using refined Customer Intelligence techniques, allow proper customer portfolio segmentation. It is essential that we understand that intelligent loyalization is not viable without intelligent customer portfolio segmentation, anchored in the models we defined in the previous chapters.
The challenge, then, is detecting with rigorous exactness what relationship between value, profitability, and loyalty unites our customers, and adopting the most appropriate sales and marketing strategies for each one of them. In their book “The Mismanagement of Customer Loyalty”, professors W.Reinartz and V. Kumar propose original focuses. Regarding profitable but disloyal customers – “butterfly customers”- a company must set the goal of making the most of them as long as they are at the heart of the portfolio, because soon they could migrate to the competition.For profitable but loyal customers –“true friends”-, the strategy must be based more on permanent, exquisite care for their needs. For those loyal but not very profitable customers – “clinging customers”- the company must figure out whether their potential lifespan in the heart of the company is worth the greater loyalization effort. While for customers who are neither loyal, nor profitable – “outsiders”-, the solution is simple: zero effort on the part of the provideriii.
The concept of loyalty to a provider from the customer’s point of view is very connected to the concept of brand image. In an environment where the customer is increasingly demanding and better informed, a brand’s consolidation of power, that is, building “Brand Equity” is carried out over a short period of time and demands agile maneuvers on the part of marketing directors. The majority of customers, and especially of final customers, are not “monogamous”, that is, loyal to only one brand; nor are they “promiscuous”, that is, loyal to all brands. Almost all customers can be qualified as “polygamous”, that is, loyal to multiple brands at the same timeiv. The challenge for any company is building a brand image that allows it to have loyal customers, within their polygamy...
As consumers, we are all loyal to certain brands and we are all willing to recommend them…by the same token, we are all ready to “pulverize”, in front of our friends and acquaintances, those providers that have disappointed us. In fact, internal Daemon Quest studies reveal that a satisfied consumer relates their favorable experiences to an average of five people, while a customer who has problems with their provider usually transmits their bad experiences to an average of nine people. Customer abandonment prevention, known in marketing jargon as “churn”, is one of the main headaches companies all over the world have to face, especially those aimed at the final customer.
Only by applying Customer Intelligence strategies can we avoiding facing systematic customer loss year after year. By applying Customer Intelligence techniques, we can obtain reductions in the churn rate of between 18% and 36%, which considerably increases a company’s profitability. Figures even larger than these are already being obtained in Spain by some of the most innovative and prestigious financial entities in our country.
Let’s return to exhaustive customer portfolio knowledge. Using Data Mining techniques, it is possible to develop “abandonment paths” and detect exactly which customers are about to “fly” to the competition. Customer Intelligence strategies allow us to establish a simple “alarm” system, based on the behavior analysis of customers that abandoned a company, that allows us to detect customers that display similar symptoms, before they make the final decision to go to the competition. This predictive tool allows any company to adopt decisions before it’s too late.
If we take a banking entity as an example and study the behavior of customers who have abandoned it in the past, we will probably see that they started by canceling certain direct payments, they considerably decreased credit card use and account transactions, they tried unsuccessfully to re-negotiate their mortgage and, finally, they ended up taking their pay slip away from the bank. Intelligent “churn” prevention systems allow us to alert the bank in the beginning phases of the abandonment process, and not when it’s already too late…
It’s not always necessary to prevent customer abandonment. A proper loyalization strategy allows a company to detect the customers it must retain, but also what percentage of customers it is not at all interested in, because of their scarce or non-existent linking and their high maintenance cost. The adoption of “exit strategies” is a delicate matter, but any company must plan for it; otherwise it risks seeing its unprofitable customer segment grow, along with the risk of economic losses. Toughening price policies, providing only minimal services, and imposing more strict contract conditions are some of the most common formulas for “inviting” those “outsider” customers to abandon the company without incident and avoid them “contaminating” customers the company is interested in.
Analyze and predict are the two key words that underlie any New Loyalization Strategy. “The best way to predict the future is to know the past”, declared Lord Byron, many years before marketing experts struggled to figure out the medium and long-term behavior of their customers...