February 2002

Keeping Your Existing Customers Loyal

BY NARAS V. EECHAMBADI 

Too many companies, when they think about customer loyalty programs, tend to jump into overly formal programs that are cumbersome to administrate, require too much bureaucracy and simply do not do anything to get customers excited or to change their behavior. The most basic way to approach the creation of a loyalty program is to put together a framework for analyzing what is best for your particular situation and implementing solutions that are appropriate for your needs and company culture.

Loyalty can take two forms. First, a customer becomes a more valuable customer; i.e., he or she buys from your company more often, buys more valuable goods or services (via upselling) or buys more volume each transaction. Of course, the customer could do all of the above. The other important aspect of customer loyalty is word-of-mouth referral. This can be an extremely powerful force multiplier in marketing and sales, but it is also hard to design, motivate and measure. For the purposes of this article, we will focus on methods for improving direct customer loyalty rather than word-of-mouth referrals.

Of course, not even the greatest loyalty program on earth will keep your customers loyal if you do not deliver a good product or service at the right price, providing a perception of good value from the view of the customer. If your customers do not perceive this (and huge attrition or churn rates may be indicative of that), then you are better off trying to fix your basic value proposition than trying to design a loyalty program. If you are not very good at delivering on your core message, what hope is there that you can deliver on a loyalty program? Without this basic foundation, any money spent on a loyalty program will be wasted, because you will be pushing on a string. 

Building On Basics
Once you have determined that you have a fundamentally sound product or service and that the majority of your customers perceive reasonable value in what you provide, you can start to identify what you can do to increase loyalty. The second step in ensuring loyalty is to make sure that you are delivering basic support services, such as after-sales support, to a satisfactory level. These can be measured against standard benchmarks for your industry or your historical performance against relevant metrics; for example, how many customers call for support (or log on to the Web site for it) and how long do the calls last? Surveys that measure customer satisfaction with service and problem resolution are a good source, as well. If these metrics fall short of benchmarks, then it is important to shore up these areas. Customers like to have their issues resolved in a single phone call within a reasonable time. If there must be multiple calls, then case management is essential. A company that has very poor case management and very poor customer satisfaction scores because of the multiple calls that are required to resolve simple service issues has its work cut out for it before it can think about a customer loyalty program. Launching a major and expensive loyalty program is essentially putting the cart before the horse'first the company must fix its customer service issues.

Beyond The Basics
Once the basic issues of product and after-sales service have been taken care of, it is now essential to understand the magnitude of the loyalty issues. Now it is time to determine what the measures of loyalty are. They might be as follows:

• What is the length of time a customer has done business with your company?
• What share of services do you provide (e.g., share of wallet, share of pantry)?
• How frequently does the customer shop with you? Has that been increasing or decreasing over time?
• How much does the customer buy during a typical transaction? Have the quantities been going up or down over time?
• What percentage of your customers have been with you one year, two years, five years or more? How are these trends changing? 
• Which type of customers has been loyal, the valuable ones or the not-so-valuable ones?

Understanding the answers to questions such as these is essential to defining the problem you are trying to solve.

Once these questions have been answered, the next step is to define the objectives of the loyalty program. 

• Are you trying to increase retention overall or just among the most valuable customers (usually a more profitable and feasible effort)?
• Do you understand what is causing customers to be disloyal?
• How will you measure increased loyalty?

Most companies have a small percentage of customers who provide the majority of revenues and the overwhelming share of profits. These are the customers whose loyalty is most important. A company might identify, for example, that 10 percent of its customer base provides 80 percent of its profits. This company might consider calling each of these top-tier customers once a quarter to thank them for their business, with no attempt to sell them additional products (even if this is counter to a company's normal culture and approach). Customers might be surprised by the calls (and the lack of sales pressure) and such a program can result in reduced attrition among this very valuable customer base. An added bonus is that these customers might, in the future, be much more likely to buy additional products compared with similar customers who did not receive thank-you calls. A focused program like this one is easier to administer and more profitable than attempting to do this with the entire customer base.

Formal Programs
Once common-sense approaches such as the one above have been implemented, if there is still a perceived need to do something more to improve loyalty, then it may be time to set up a formal program. This can take several forms. It can be proprietary, meaning it is designed specifically for your company; or it can be syndicated, piggybacking on an existing loyalty program to take advantage of a system that already exists. Many loyalty companies offer canned programs that can be customized to a client's needs, seeking to combine the best of these approaches. Piggybacking on existing loyalty programs can be a very effective way of getting up and running quickly and tying your company to a larger program.

Specialty loyalty companies will often customize existing programs to a company's needs. Airline frequent flier programs are usually managed by third parties. This can significantly cut down the cost and time of getting the program up and running. It also has the advantage of having a unique look and feel. The customer only benefits from the program if they do more business with you.

Proprietary loyalty programs can be expensive and should be carefully thought out with an assurance that the economics are very well understood.

With all of these programs, there is the danger that they are seen as entitlements for normal behavior rather than as rewards for loyalty. Most airline customers now regard airline miles as their due. Whether it really makes them stick to one particular airline or be more loyal to it is debatable. Airlines have chosen, rightfully, to focus their most valuable rewards (e.g., first-class upgrades, calls answered within two rings) on their best frequent fliers. They can, however, abuse their loyalty program customers by mailing them too often with bulky monthly statements with too many useless stuffers. This runs the risk of alienating customers and devaluing the loyalty program.

An important component of a loyalty program that can be very effective, but is often ignored by many companies, is the element of surprise. Calling customers to say thank you (like the example earlier in this article), giving customers surprise gifts (Ritz Carlton used to give guests a special gift during each visit based on how often they had stayed with them) or just sending customized birthday or holiday cards (Amica Insurance does this very effectively, their life insurance solicitations are timed before crucial birthday milestones when rates go up) can play a very big part in making customers feel good about a company and keep them coming back. These gestures and systems are often easier to set up than formal loyalty programs and the payback can be much better.

Another important element is transparency and convenience. The customer should know very clearly what he or she needs to do in order to be considered a valuable customer. Additionally, being recognized as such should not require any behavior outside of the behavior that is being encouraged. In other words, don't triple the points a customer earns if he or she is willing to go to your Web site and register for a special promotion. That is an inconvenience. The customer should earn triple points for a particular purchase, for example. Make it easy for the customer to redeem points (or whatever the incentive is). Some airlines and hotels require weeks of advance notice to redeem points, which is not particularly attractive to the customer.

It is important to understand the particular issue of customer loyalty you face, what you are trying to solve and what constitutes success in your particular business situation. Putting together a program that is easy to understand for customers, provides obvious value and builds on the basic value proposition provided to the customer are the key to developing and instituting a successful loyalty program. Constantly measuring and monitoring results to ensure that incremental loyalty is actually materializing and yielding bottom-line impact in the form of more profitable customers and more profitable sales are key to ensuring a robust and mutually rewarding loyalty program.

Naras Eechambadi, PhD is founder and CEO of Quaero Corporation, a CRM services provider. He has two decades of experience helping senior executives leverage customer information to build enhanced relationships and increase profitability. He specializes in identifying new trends that will change business processes and transform companies across industries and then helping companies manage that transformation.