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The Customer Loyalty Paradigm Is Ready for Main Street

February 2006 Marketing

Geoffrey Moore’s Crossing the Chasm tells us to knock down Bowling Pins and gather Early Adaptors. Malcolm Gladwell’s The Tipping Point suggests cultivating Mavens, Salespeople, and Connectors to create market acceptance. Miller Heimen Large Account Management Process suggests that we strategically invest in potential Level 5 accounts. Alex Wipperfurth’s Brand Hijack encourages supporting the early market in hijacking your brand. And, Frederick Reichheld instructs us to create Promoters. From the hubbub of opinions, a consensus is developing.

In the past, a winning go-to-market strategy relied upon developing awareness within the target market and following through with distribution and sales to fulfill demand. In this paradigm, awareness within a target business market was developed through a combination of advertising, cold-calling, conference exhibits, and networking.

The new paradigm doesn’t suggest throwing the baby out with the bathwater, but it does add a new tool to our bag of tricks: Leveraging loyal customers to grow revenues.

Stringent Requirement

Customer Loyalty implies a specific kind of customer behavior, one which most customers, even good ones, won’t meet.

Loyal Customers are defined as customers that are willing to make sacrifices on behalf of the brand. Example sacrifices include: accepting a slightly higher price on an individual transaction in support of a long-term relationship with that brand; allowing a company to create a case study of their work with that customer; lending their name to a list of customers served; recommending that company to other prospects, spending more time with the company to work-through particular challenges; working with that company to develop new solutions. Each of these examples requires that the customer make an investment in the vendor.

Many of the typical metrics of customer behavior may derive from customer loyalty, but they do not always imply customer loyalty. In other words, they are necessary, but not sufficient conditions. For example, loyal customers will have a high satisfaction level with the company, but highly satisfied customers may not be willing to support that company in its endeavors. Likewise, loyal customers will be repeat customers, but repeat purchases may due to switching barriers, convenience and lethargy, or economic incentives. And, loyal customers may be big purchasers, but big purchasers may be the result of their greater purchasing need and spending power which they use to knock-down prices.

Fruitful Outcomes

The consensus of thought leaders in sales and marketing is that a fast-growth company requires developing loyal customers and leveraging these customers as an extension of the sales and marketing effort.

Reichheld’s research demonstrated a high correlation between the corporate growth rates and customer loyalty. In industry after industry, the companies that achieved higher rates of customer loyalty grew faster than their competitors. The relationship was revealed in both consumer and business markets.

Operationally Achievable

Developing loyal customers is operationally achievable, providing that all marketing variables are working in coordination.

Seth Godin suggests that begin by examining the offering. Is it truly unique in the market? When customers interact with the offering, does it provide a meaningful and memorable experience? Would competing offers be unable to deliver the same level of value, utility, or organizational acceptance? When the offering meets one or more of these requirements, it has the ability to create loyal customers.

To facilitate customer loyalty, companies can support the communication process between customers. Can a case study be created with respect to the customer experience? Can an executive forum, user forum or weblog be created to allow customers to discuss their experience with the brand? Can incentives be used to reward referrals? Can a good customer experience be leveraged to explore further opportunities to serve? When a company develops a program like these, it is supporting behavior that leads to growth.

Organizationally, divisions and managers can be use customer loyalty to focus their performance. For instance, at Enterprise Rent-A-Car, customer loyalty is measured weekly throughout their markets. These metrics are communicated to all divisions and individual site managers to both reinforce the importance of creating highly positive customer experiences and inform them of their performance in relation to the corporation. Also, the promotion decisions for individual managers are partly determined by their relative ranking of achieving high customer loyalty.

Maturing

Clearly, the customer loyalty paradigm is maturing towards becoming an imperative for all executives. Across industries, companies that achieve higher customer loyalty also achieve greater growth. Sales and marketing executives should examine not simply the number of customers, but the strength and value of the customer relationships. Bringing customer loyalty within the focus of the entire business enables the business to better develop and leverage customer loyalty. Expect this metric to appear on Marketing Executive Dashboards soon.



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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