Rethinking Your Approach to Customer Loyalty and How it Can Impact Your Business

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Companies seeking to safeguard and grow their revenue should focus on increasing the loyalty of existing customers rather than focusing primarily on customer acquisition.

With the right mindset and organizational commitment, increasing customer loyalty is an attainable goal and one that should be a company priority.

The best businesses find a way to make customer loyalty programs work and the reason is simple: Loyal customers outspend other customers.

An Accenture report from 2017 describes that 66% of consumers spend more on brands that they’re loyal to. This finding shows a clear incentive for businesses to take the plunge into building a meaningful customer loyalty improvement program.

Creating an effective customer loyalty improvement program requires understanding the impact of customer loyalty, seeing loyalty programs from the customer’s point of view, and using practical objective methods for assessing where and how loyalty programs are the most effective.

Customer Loyalty Is Powerful

Customer loyalty over time guarantees the future of a business’ profitability.

Loyal customers are increasingly valuable the longer that they’re loyal.

A Bain & Company study reports that the longer customers have had a relationship with online retailers, the more they spend, amounting to a 67% increase in money spent after 31 months when compared to the first purchases in the relationship.

This relationship duration spending bonus holds up in other industries too. Customers spent 23% more on buying groceries after 31 months than they did in the first month buying from the same grocery store chain.

However, customer loyalty is even more powerful than these figures suggest.

Loyal Customers Provide Free Benefits For Companies

Loyal customers are overwhelmingly more profitable than other customers because loyal customers do more for a business than purely generating revenue during purchases.

As stated in Accenture’s report, 55% of consumers tell their friends about the brands that they’re loyal to, with 12% being loyal enough to applaud brands and defend them against detractors on social media.

Brand evangelists and brand defenders are often customers who have the deepest level of experience with a brand and they provide accurate information to their friends and social media followers and behave like another marketing channel.

Customers trust what their friends say about companies and this heavily influences their purchasing decisions. Customer loyalty can thus increase the rate of new customer acquisition as well.

It’s difficult to quantify the exact value of defenders on social media, but the social proof that loyal customers create for free is a powerful indicator and driver of future revenue.

The Impact Of Customer Loyalty Is Variable

Some industries benefit from customer loyalty more than others. McKinsey’s report on marketing led growth indicates that loyalty’s impact on a customer’s decision to buy varies across types of purchases.

 

According to the report, purchasing decisions for some products, such as auto insurance, are 76% driven by loyalty, whereas purchases of other products, like cosmetics, are only 4% driven by loyalty.

This means that companies seeking to improve customer loyalty should first think about whether they are selling products that are sold primarily via customer loyalty or whether their products are sold primarily via their features in comparison to other similar products.

Some Customers Are Routinely Loyal

The McKinsey report claims that 13% of consumers were completely loyal to their preferred brand and would never consider alternatives. The remaining 87% of consumers were willing to be disloyal if they found a product they preferred.

The twist is that 29% of consumers shopped around for a product before ultimately returning to the brand that they were initially loyal to. These consumers are first on the list for customer retention efforts because while they are open to other brands, they still feel a stronger tie to the initial brand they felt loyal to.

The best strategy for increasing customer loyalty is to target the 29% of customers who are vulnerable to disloyalty but are still loyal. Prevent losses first, then work on expanding loyalty to new customer segments.

Some Customers Will Not React Well To Loyalty Improvement Programs

Aside from the customers that are vulnerable to disloyalty, Accenture’s report finds that 23% of customers react negatively to loyalty improvement efforts. These customers are predominantly in younger demographics, who will be the potential customers of the future.

 

Be wary of over-handling this customer segment. While no loyalty program is perfect, putting additional thought into the approach for younger demographics would be beneficial.

Practical Steps For Increasing Customer Loyalty

Given the challenges of customer retention, coming up with an actionable strategy for improving loyalty for the right segment of customers requires getting creative.

The smoothest way forward is to think about a customer loyalty program from the perspective of the customer interacting with a business.

Give Customers The Channel They Want To Use

Customers’ reasons for staying loyal may be unrelated to a customer loyalty program, but that’s a good thing! Customers who are loyal before a loyalty program are customers who genuinely prefer your company and your product. Loyal customers also tend to have positive feelings towards the customer service these companies are providing.

A report discussing the results of the American Express’ 2017 Customer Service Barometer study states that more than 60% of consumers prefer to use digital self-service tools for simple inquiries. These tools include company websites, mobile applications, online chat, and voice response systems.

For more complicated inquiries, 40% of consumers reach for the phone with the hopes of talking to a human, and 23% of consumers try to find a way to talk to customer service face to face.

In a nutshell, customers prefer to use the easiest channels for the easiest inquiries, but are willing to invest more effort in getting service if they think their inquiry is more complicated.

If a company offers easy to use service channels, customers will find themselves exerting less effort to have their inquiries answered, improving both customer effort scores and loyalty.

Make things easy for your customers by giving them the self-service channels that they want to use and as an added bonus your company can save money on customer service costs.

Calibrate Pricing

Ease of interaction, while important, is not the only factor that can impact customer loyalty.

The International Council of Shopping Centers (ICSC) conducted a survey in 2017 found that 92% of the consumers surveyed claimed that price and value were the biggest reasons to be loyal to a brand. The survey also found that price and value were 13% more likely to be ranked as the biggest loyalty factors in comparison to product quality.

For B2C companies this may be particularly helpful to know as this indicates that dropping prices may be a better way of ensuring loyalty than spending money to improve your product. Discounts for loyal customers are an effective way of making sure that loyal customers stay loyal and that other customers have an incentive to become loyal and continue to engage with your product offerings.

Use The Two Pie Model

Sometimes improving customer loyalty is simpler than adjusting pricing or introducing an easy to use support channel. Rather than focusing on making changes to increase loyalty directly, it can pay off to reduce the number of reasons that customers might have for being disloyal in the first place.

However, today most companies are trying to increase loyalty. As noted by a Harvard Business Review (HBR) article, 89% of customer service managers stated that their strategy to increase customer loyalty was to exceed their customers’ expectations.

While logical that exceeding customers’ expectations would increase loyalty, thinking about it the other way around and focusing on reducing the reasons to be disloyal can make more sense for the business.

Exceeding expectations often requires extra work and can get expensive as your business continues to scale and is a tough bar to meet. In fact, in the same HBR study, 84% of customers reported that their expectations hadn’t been exceeded in their most recent customer service interaction.

The time, money, and effort put into exceeding their expectations may not always be the best way to move the needle.

To explain why this disconnect exists, HBR proposes using what they call the two pie model. Using this model can help businesses creatively think about improving customer loyalty.

One pie is the “loyalty” pie, which has many different small or medium sized slices that are drivers of customer loyalty.

Good customer service, a great product, and customer loyalty programs each have slices of the pie which are heftier in comparison to the other slices, but no single slice accounts for the majority of the pie. Customer loyalty has many factors and each factor contributes a little bit towards driving individual customers to remain customers.

The other pie is the “disloyalty” pie, which contains drivers of customer disloyalty. This pie contains a few large slices, with the largest slice– perhaps larger than half the pie– being poor customer service.

Poor customer service is overwhelmingly the most common reason for breaking customer relationships. Among millenials, 74% of those surveyed reported that a bad customer service experience would cause them to switch retailers. Importantly, Accenture found that in 2017, 77% of consumers were more likely to retract their loyalty than in prior years.

The takeaway is that reducing dissatisfaction can often encourage more customer loyalty than increasing satisfaction and can be easier to identify and take action on improving.

Create a Unique Loyalty Program That Differentiates Your Company

Be sure to reinvest in loyal customers relative to the revenue that they bring to the business.

Sometimes, the best way to do this is by providing them with loyalty benefits that address problems they might have with a competitor’s rewards program.

For example, Southwest Airlines links its Rapid Rewards loyalty point system to the amount that customers spend on their tickets rather than the distance that the ticket may take them like other airlines do.

As an airline, Southwest offers flights along common routes which cover great distances and are highly booked across all of the airlines who run those routes.

In order to compete with other airlines offering the same route, Southwest must be creative on how they differentiate their value to customers. Flying these routes thus generates a lot of reward miles for each Southwest customer. For the airlines who use the miles system, this system isn’t associated with higher revenue, customer loyalty, or even customer spending.

Because there are many other options for the same product — flights along a popular route– customers can easily go elsewhere. If Southwest rewarded customers for the distance that they flew, they’d often be rewarding the segment of customers most likely to be disloyal because of the nature of their business.

Instead, Southwest rewards customers who spend more. This means that customers who fly on more expensive (but shorter) routes will feel like they’re getting a better reward for staying loyal than they could with other airlines. These routes are also more likely to be underserved by other airlines, putting Southwest in a much stronger position to capture the market.   

This program differentiates Southwest from other airlines while costing the same amount as other airlines spend on loyalty programs; the difference is that the loyalty rewards given to Southwest customers scale perfectly with the amount that they spend.

Southwest retains the loyalty of profitable customers as a result. Likewise, customers that are easy to keep loyal because of their limited number of choices are more likely to stay loyal when they get a reward that’s structured in a way that benefits them.

Start A/B Testing

According to an A/B test case study by Marketing Experiments, optimizing the first seven seconds of a customer’s visit to a company’s website can result in a 14.65% increase in the rate of visitors to conversions. This means that if a company has a recurring customer base, there are probably ways to get more revenue from those customers.

Getting more revenue from existing customers is much easier than getting revenue from new customers.

 

In a marketing tell-all by Duolingo’s chief growth expert, one of the biggest insights gleaned from A/B testing was encouraging customers to engage with the app by sending push notifications telling the user that there was something new to see.

By simply adding a home screen notification counter to their iOS app’s icon, Duolingo saw a 6% increase in daily active users.

More importantly, by performing the test, Duolingo was able to learn what time of day individual users were the most likely to engage with the app after receiving a notification. They then used this information to build a habit for their users by notifying them slightly before they were most likely to engage with the app.

The lesson is clear: start running tests on customer segments so that you can guide them through engagement with your product.

Strong Loyalties Await

Combining these methods for increasing customer loyalty will bolster a company’s subset of loyal customers without breaking the budget.

The single biggest takeaway is that customers are often pleased with a frictionless experience whether that’s an interaction with the product itself or with customer service.

Use these methods to find unique areas of customer friction and create a plan to address them and make it easier to start your trek towards building a more loyal customer base.