Customer Loyalty

Meaning and definition of customer loyalty, Significance of Customer Loyalty, Customer Loyalty Ladder, Loyalty Principles, Benefits of Customer Loyalty, Customer Loyalty and its relationship with customer satisfaction, Customer retention and Brand Loyalty, Factors affecting customer loyalty formation, Rai-Srivastava model of customer loyalty formation, Drivers of Customer Loyalty.

Definition

Customer loyalty is both an attitudinal and behavioural tendency to favour one brand over all others, whether due to satisfaction with the product or service, its convenience or performance, or simply familiarity and comfort with the brand.

Customer loyalty encourages consumers to shop more consistently, spend a greater share of wallet, and feel positive about a shopping experience, helping attract consumers to familiar brands in the face of a competitive environment.

What is Customer Loyalty?• Attracting the right customer• Encouraging customers to buy, buy often, buy in

higher quantities and bring you even more customers• Providing excellent customer service

TYPES OF LOYALTY

• Monogamous vs. Polygamous Loyalty– We live in a world of polygamous, not monogamous

loyalty. For example, a person might shop at WalMart, Easyday and Relaince Fresh and unfailingly shop at all three. The person is then loyal to them, but not to others, and yet 100% loyal to none.

– polygamous loyalty is a better description of actual consumer behaviour than either brand switching (a conscious once-and-for-all change of allegiance to another brand) … or promiscuity (the butterfly tendency to flit from brand to brand without any fixed allegiance).”

Contd..• Behavioural and Attitudinal Loyalty

– In the past, many scholars defined loyalty in behavioural terms. If a person made most purchases in a given product category from one supplier, regardless of the reason, the person was defined as loyal

– A second element of loyalty is attitudinal loyalty. Like behavioural loyalty, attitudinal definitions have existed for a long time. This second element of loyalty focuses on how strong the psychological commitment or attachment is to the brand. By itself, it too has limitations. For example, how loyal are people who rave about a product and promote it to their friends, but then for whatever reason fail to buy it regularly themselves?

“Not all customers were created equal”

Customer Loyalty Programmes• The systematic collection of customer data

in return for rewards or benefits, often used to give customer additional privileges or services to best/loyal customers

Some Bottom Facts• Reduction of 5% of defective customers may result in

80% increase in profitability

• 60% to 80% of lost customers were satisfied

• 90% of customers who love a company will repeat but only 30% of customers who like the company will repeat

• 20-40% of your customers bring 80% of your profits

It costs a business about 5-10 times more to acquire a new customer

Current customers of yours spend 67% more than a new one

According to the 2011 Colloquy Customer Loyalty Census, of the $48 billion worth of perceived value in reward points and miles distributed by American businesses annually, one-third goes unredeemed by consumer

• A customer’s attitudinal preference towards a company can be expressed as:– Repurchase intention or purchasing additional

products or services from the same company.– Willingness to recommend the company to others– Resist lucrative offers from competitors.– Willingness to pay a price premium.

Types of Loyal Customers

High loyal

Latent loyal

Spurious loyal

Low loyal

++ -

-

Frequency of PurchasesAtt

achm

ent

Ideas for building loyalty…• You build customer loyalty by treating people how

they want to be treated. • Does your customer service and marketing plan

include strategies and tactics for customer loyalty & customer retention?

Customer loyalty programs• E-mail newsletters with specials• Buy 10, get 1 free• Discounts

– Bundles– Incentive to pay on-time

• Special customer contests• Special events for loyalty club members• Simple, uncomplicated • Other ideas?

Other ways to build loyalty…• Personal thank you cards• Personal bill messages• Taking advantage of the latest tools available to you

to gather customer information.• Showing that you care and remembering what they

like and don’t like.• Ask your customers how you’re doing – and take it to

heart!• Treat your team well so they treat your customers

well.

How does good customer service help build customer loyalty?

Lessons in Customer Service…• Customer service is the provision of service to customers

before, during, and after a purchase.• The process of ensuring customer satisfaction with a product

or service.• Customer service has often been done badly because it has

been defined badly.• Once a customer is disappointed in your service, you may

never gain loyalty

How do you feel when you get BAD customer service?• Get angry or confrontational?• Report to manager?• Be snotty back?• Ruin your day?

How do you feel when you get GOOD customer service?• Surprised?• Grateful?• Appreciative?• Want to hug the person?• Want to cry?• Loyal

Diversify to develop great service and therefore customer loyalty• Customer Support & Technology

– On-line help• Chat• Connect for Support• Skype• Web Self-Care

– 24-hour support– Web Self-Care– Mobile Applications

How do you establish trust with customers over the phone? • One of the hardest parts of the job• Mostly dealing with people you might not ever meet

face-to-face• Reassure them you understand their situation• Ask them what they want … simple, but effective• Avoid being argumentative• Ask them how you can make them happy, and work

the compromise from there

Personalize your service & gain loyalty• Small enough to care, large enough to provide a

quality product & service• Now is the time to focus on new products and

services• Implement customer service focused procedures and

processes• Pro-Active customer service• Transition NOW to becoming a Technology Company• Continue to evaluate competitive opportunities

So, how do you build customer loyalty?

• You build it by truly caring about the customer and figuring out how to make them more successful, happy and joyful.

Significance of Customer Loyalty

• Acquiring new customers is an important activity but retaining these customers is crucial for business.

• According to Reichheld and Sasser (1990), in a particular industry, profit increase of 25% to 125% can be achieved if potential switching is reduced by 5%.

• Singh and Sirdeshmukh (2000) says that customer loyalty is turning into “the marketplace currency of the 21st century”.

Contd..• Advantages of customer loyalty:

– Helps in customer retention– Unremitting returns– Emissary customers (positive remarks to other potential

customer)– Premium prices (less price sensitivity with loyal customers. Also

avoid taking risks with the new company)– Lowers cost of sale (no cost involved in acquiring loyal

customers)– Reduces marketing time – Provides opportunity to cross-sell and up-sell

• Today success of business is dependent on how successfully the firm is able to create customer loyalty.

Customer Loyalty Ladder

• Suspect• Prospect• Customer• Client• Advocate

Advocate

Client

Customer

Prospect

Suspect

Customer Loyalty Ladder

• Suspect

Anyone who reads or hears an ad, looks at a brochure orencounters some other type of promotion is a suspect

Customer Loyalty Ladder

• Prospect

Someone who pays attention to your promotion

Customer Loyalty Ladder

• Customers

Those who buy your product or service

Customer Loyalty Ladder

• Client

A customer who buys a second time

Customer Loyalty Ladder

• Advocate

A customer who gives unpaid advertising for theproducts or services of a business

It takes a least 3 times as much money to attract a new customer via traditional forms of advertising as to re-attract a repeat customer

It takes at least 30 times as much marketing money toattract a new customer via traditional forms of advertising as to have a satisfied customer find new customers for you

Satisfied Customer Referral

Traditional Advertising

Most business owners spend less than 5% of their marketing dollars on their customers and spend 95% of their marketing dollars trying to find new customers

Traditional Investment

Advocate

Client

Customer

Prospect

Suspect

5% Marketing $

95% Marketing $

Customer Loyalty Ladder

Goal:

Invest in developing satisfied customers

It takes at least 30 times as much marketing money toattract a new customer via traditional forms of advertising as to have a satisfied customer find new customers for you

Satisfied Customer Referral

Traditional Advertising

Remember:

How Can You Accomplish This?

How?

• Know who your customers are

• Know that your best customer is your most recent satisfied customer

• Know that your best word-of-mouth advertising comes from your most recent satisfied customer

• Act in a way that moves people up the ladder

Lesson Learned

The most recent satisfied customer who has purchasedproducts from you is the least expensive marketingway to find new customers. People love to tell if they are happy.

Your worst customer, who will rip you apart to all their friends, is your most recent unhappy customer.

Advocate

Client

Customer

Prospect

SuspectTraditional Advertising

Nontraditional AdvertisingA great marketing company spends money here

Recommendation

30% of your marketing dollars should be spent on keeping customers…..keeping them happy.Not 5%…..30%.

Invest in Keeping Customers

Advocate

Client

Customer

Prospect

Suspect

To Keep Customers:30% Marketing $

To Find Customers:70% Marketing $

To climb the loyalty ladder, business owners must exceed customer expectations

Marketers’ Roles in Delivering Quality

• Correctly identifying customers’ needs and requirements• Communicate customer expectations properly to product

designers• Be sure orders are filled correctly and on time• Provide customers with proper instructions, training, and

technical assistance• Stay in touch with customers after the sale• Gather customer ideas for improvements and convey

them to the appropriate departments

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Customer Satisfaction and Loyalty• Satisfaction stands for gratification, pleasure or

fulfillment of desire.• It evaluates what is received and what was expected.• 7P’s interact with the customer evaluation from the

customer’s end leads to satisfaction/dissatisfaction• Customer satisfaction/dissatisfaction is the cognitive

judgment of a customer resulting out of an interaction between customer’s personality and a company’s marketing practices in the prospective of the expectation the customer had with the product and perception of the benefits received.

Satisfaction vs. loyalty

Highly competitive

Low differentiation

Delighted customers

probable good loyalty program

Low customer value

Alternative available

High barriers to change due to

excellent loyalty program

Vulnerable to change

High satisfaction

low satisfaction

Low loyalty High loyalty46

Contd..• Following points distinguish satisfaction from loyalty

– Customer satisfaction is the measure of how adequately customer’s expectations are met whereas Customer loyalty is all about customer’s intention to revisit and readiness in taking participative activities with the organization

– Customer satisfaction is a requirement for customer loyalty formation but it does not guarantee repeat purchase.

– Satisfaction Retention Commitment Loyalty

Customer Retention and Loyalty• Most businesses suffer from a peculiar sort of myopia where

they fail to align their marketing efforts with customers’ preferences. It ultimately hurts the potential base of customers’ willingness to return.

• Reichheld (1996) said that rise in the rate of return of consumers has direct or indirect result on company revenue.

• Customer retention and loyalty confer remarkable economic perks to an organization.

• Accenture conducted a study including 16 retail banks of north America and found that moving customers higher up the ladder of loyalty, results in 20% rise in profitability per consumer.

Contd..• Being customer centric involves three main challenges:

– Acquaintance with the customer– Finding the customer– Delivering differentiated customer experiences.

• Importance of customer retention are listed by Rowe and Barnes (1998) as:– The cost of gaining a new customer is about 6 times high as

compared to retain a customer.– A dissatisfied customer will tell 10 others about the complaint.– 91% customers whose complaints are not addressed, will not

return.– 63%-85% switchers are dissatisfied customers.– More than 65% of the customers who will not return do so because

of the way they are treated, not because of the product.

Retention is not Loyalty

It's inescapable. Everywhere we look we see marketers promise to "improve customer loyalty.". Peter Drucker said, "If you can't measure it, you can't manage it.“

Usually we find that what people mean when they talk about loyalty is really customer retention rate—whether the customer sticks around and buys again. Retention is an old and valued friend to data-oriented marketers, but it is not the same as loyalty. And it's not as useful.

Understanding the difference between loyalty and retention is important because of the implied assumption that they correlate with business success (more revenue or profits or both)

Contd..Retention rate is usually defined as the percent of a customer population who were “active” as of some earlier date and are still considered active a year later. So retention is a number, like 81% (that's good) or 27% (that's bad). Most important, retention rate is not a measure of individual customer behaviour. It is a measure of the behaviour of an entire customer population.Loyalty on the other hand is a measure of the performance of individual customers. A loyalty score is built of many parts. It can include how much a customer has bought, how often they purchase, how many different items they buy from your product set, how long it's been since they last bought or visited your website, and their future value. It's obvious that these numbers will vary from customer to customer.Some companies are happy to define loyalty as the customer's “commitment to the brand.”(Mark Klein, founder & CEO, Loyalty Builders Inc. September 04, 2013)

Brand Loyalty

• The concept of brand loyalty involves buying products from a single manufacturer repeatedly instead of going to other suppliers.

• Such state us exhibited in repeat buying behaviour, advocacy and other favourable activities.

Contd..

• Brand loyalty stands for a withstanding purchase decision based upon strong motivation to repurchase.

• To become loyal to a brand, customers need to be able to perceive that brand as a right option which offers good quality at reasonable price.

• Attitudinal disposition, peer pressure and familiarity with the sales person can lead to brand loyalty.

Contd..• Jacoby and Chestnut (1978) gave comprehensive definition of

Brand Loyalty which has 4 dimensions:– Purchasing sequence– Purchasing proportion– Purchasing probabilities– Behavioural variable

• Another definition by Olson and Jacoby (1971) has 6 dimensions:– Biasness– Retention– Category spending– Product attitude– Expression over time and – Decision making process

Brand Loyalty Vs Customer Loyalty• Customer loyalty is about share of wallet whereas brand

loyalty equals share of mind.• Customers who are truly loyal to a brand are considered as

truly loyal to the company.• Customers who go for customer loyalty programs are

supposedly loyal to themselves and what works for them.• Customer loyalty mainly relates to a customer’s spending

power while brand loyalty has very little to do with prices or money. It is more to do with the way the brand is perceived in the consumer’s mind.

• Companies try to achieve customer loyalty by offering free coupons, special offers, extended warranties etc.

To 20 Brand Loyalty Leaders-20141. Amazon: tablets 2. Apple: tablets 3. Apple: smartphone 4. YouTube: social networking 5. WhatsApp: instant messaging 6. Amazon: online retail 7. Google; search engines 8. Kindle: e-readers 9. Samsung: smartphones 10. Dunkin’ Donuts: coffee (out-of-

home)

11. Facebook: social networking 12. Netflix: video streaming 13. Beats by Dr. Dre:

headphones 14. Call of Duty: Ghosts: major

league gaming 15. Amazon: online retail 16. Zappos: online retail 17. Apple: computers 18. Instagram: social

networking 19. PayPal: online payments 20. Twitter: social networking

Factors Affecting Customer Loyalty• Customer loyalty is a business mantra worth reciting and

rehearsing.• Loyalty has a significance in terms of greater share of wallet, higher

satisfaction, profitable customer relationships, diminished rate of defection and inimitable competitive advantages.

• Peter Clark, co-editor of The Wise Marketer and co-author of The Loyalty Guide report series, underlined six factors which play vital roles in affecting loyalty and commitment of the customers:

1. Core Offering2. Satisfaction3. Elasticity Level4. Share of Wallet5. The Market Place6. Demographics

1. Core Product• A high level of loyalty is a matter of solid and reliable core

product that has higher appeal for customers than loyalty cards and programmes.

• Companies holding an enviable loyalty base intently focus on crafting the right product with a value preposition desired by the target segment and strive to deliver the brand promise consistently.

• The core product entails the following factors which affect customer loyalty:– Location and edifice (attractiveness of location and ambience)– The product or service (customized)

2. Satisfaction• Although, satisfaction is a vital business metric that is capable of

determining customer loyalty, but isolated measurement of satisfaction is not effective in predicting loyalty.

• Many auto manufacturers claims satisfaction levels of about 90% or more but few can claim the repurchase levels of even half that.

• Customers may not use the product because of some other reason apart from dissatisfaction.

• A higher level of customer satisfaction does not necessarily correspond to a higher level of customer satisfaction.

• Still, in the absence of satisfaction, loyalty can never be attained.• Customer satisfaction is the starting point of customer

satisfaction.• This is the basic requirement of any customer to become loyal.

3. Elasticity LevelElasticity stands for the significance and credence involved in a

purchasing decision:• Customer’s Participation: this is the decisive factor in loyalty

formation as it determines the level of customer’s attention and seriousness towards perceived expectations and the corresponding evaluation of the product or service.

• Customer’s decisiveness: A state if uncertainty or indecisiveness in customer decision making is largely driven by the level of involvement as there are certain decisions that call for higher involvement and thus greater clarity is required about the expected attributes and performance. Customers may be confused and they decide to stay with a single brand.

4. The MarketplaceMarkets also have a power to affect the formation of customer

loyalty. Some elements are:• Switching Prospects: the quality and quantity of easily

available alternatives strongly affect a customer’s intention of staying or switching.

– Lower switching costs will result in higher instances of switching.– Amount of time and efforts invested in a business relationship cause

a customer to think twice before switching.• Inertia Loyalty: When customer chooses to stay with the

business just to avoid the trouble and uncertainty associated with searching and dealing with an unfamiliar brand.

– Banks- Customers display inertia loyalty as customers avoid changing their banks.

5. Demographics

• Jan Hofmeyr and Butch Rice (developers of The Conversion Model) suggested that there are low chances of educated and well-off customers staying committed to a particular brand.

• Less affluent customers have small risk taking ability and they cannot afford to try out various brands freely.

• Also, younger customers have more variety seeking attitude than old customers, hence younger ones are less likely to be loyal to a particular brand.

6. Share of Wallet

• It is the share of money the customer is ready to allocate to a particular brand in the category.

• Due to increased competition and saturated markets, share of wallet is a metric worth working for as it is less costlier and more profitable to increase the share of what a customer has already been spending than attracting and convincing new customer to allocate his/her money.

Significance of Customer Loyalty• Acquiring new customers is an important business activity, but retaining

them is crucial for business.• As we know that acquiring a new customer is more costly than retaining

them, therefore customer loyalty has its significance.• Companies should strive to retain customers and build sense of

satisfaction and belonging towards the company. All these aspects may lead to customer loyalty.

• Customer loyalty has been drawing attention from both the corporate as well as academics as it holds a place of immense importance in most businesses.

– Kotler (1997) linked loyalty to strategic aspects of business and said that it constitutes underlying objective for strategic market planning.

– Petrick (2004) emphasized that better customer satisfaction and customer loyalty result in greater profitability, favourable publicity, a big pool of customers and lower marketing costs.

– Customer loyalty today is an essential condition to implement effective business strategy.

Contd..• Some advantages associated with the customer becoming loyal

are:– Helps customer retention– Unremitting returns: A loyal customer acts as a perpetual source of

revenue and profit by staying with the company.– Emissary customers: positive remarks about the co. to other

prospects.– Premium prices: a loyal customer is likely to be less price sensitive.– Lowers cost of sales: Acquiring such customers do not cost anything.– Reduces market time: through positive referrals and opportunities,

customer acquisition becomes easier for the co.– Provide opportunity for cross-sell and up-sell

Rai-Srivastava’s Satisfaction-Emotion Quadrate Model of Customer Loyalty

CL = f (Satisfaction, Emotions)• Satisfaction– Stands for pleasure or gratification.– Some researchers suggest that satisfaction is a two fold concept that is made up of rational

as well as emotional responses of customers.– Satisfaction has most often regarded as most obvious portent of customer loyalty.– Customer satisfaction is a vital for any organization to survive and revenue might drive the

organization into myopia. So careful analysis of customer satisfaction needs to be taken into consideration.

– It should be noted that all loyal customers are satisfied customers but all satisfied customers may not be loyal to the company/product.

• Emotions– The role and effect of emotions in determining the shape and intensity of customer

response is too important to be ignored.– Emotions are psychological states of willingness arising from cognitive evaluations of events

or one’s views (delight, resentment etc.).– Positive emotions are not only helpful in lessening a customer’s agitation in an event of

service failure but also induce positive behavioural intentions among customers whereas negative emotions are bound to affect service quality evaluations and the resultant level of satisfaction unfavourably.

Satisfaction-Emotion Quadrate

Pleased Loyalist

Indifferent Partisan

High

High

Low

Low

Satisfaction

Emoti

ons

Indifferent• Having Low Satisfaction- Low Emotions• These customers are considered potentially disloyal as they are

most prone to succumb to competitive pressures.• Their stay with the company can be merely because of inertia,

unavailability of desired alternatives, high level of switching costs or some other obligatory forces.

• Such customers lie in the high risk zone of the company as the resources invested in serving them can prove to have been wasted.

• Also, these customers are not giving any benefits to the company such as recommendations, exclusive considerations etc.

• Example?

Pleased• High Satisfaction-Low Emotions• Primary basis of relationship is satisfaction.• Continuing the relationship is a rational choice based on

decision making criteria of the customer.• In B2C format, cost – benefit analysis are involved in the

decision to stay with the company.• Though such customers show signs of loyalty towards the

company, their loyalty is subject to change with expectations (an attractive offer promising greater benefits).

• Example?

Partisan• Low Satisfaction – High Performance• It is deep attachment to the company or the brand. Customer’s

allegiance towards the company in this category is highly driven by the effective processes of the brain.

• Partisans are those customers who are ready to endure dissatisfaction without inflicting any permanent damage to their relationship with the company.

• It is possible only when the intensity of emotions is strong enough to alter the evaluative criteria.

• Such customers are found to be highly enthusiastic for the brand and may risk their own social identity by strongly supporting and recommending the brand to others.

• Example: Movies and cricket in India.

Loyalist• High Satisfaction – High Emotions• This type of customer loyalty sustains for a long run.• In this case customers choose to stick to the company not only

because they are highly satisfied, but also of a feeling of affiliation towards it.

• Low switching intentions/ high switching costs with no significant advantage.

• Loyalty blooms to its full strength when loyalists demonstrate manifestations of customer loyalty by offering:

– Preference– Patronage and – Premium

Contd..• Preference

– Loyalists with strong preference towards a particular brand actually demonstrate behavioural loyalty outcomes such as repurchase intentions, resistance towards switching and exclusive purchasing.

– This form of loyalty is more action based instead of being driven from an attitudinal predisposition of the mind.

– A person buying regular household items from the nearest general store over a sustained period of time might be termed as a loyal customer but his loyalty would be tested if, in the vicinity, an organized store comes up with discounted prices. If customer is still purchasing from the nearest general store, that means preference of customer towards that store.

Contd..

• Patronage– Customers with high patronage intentions not only

recommend the service provider, but also lend their support for betterment of services through constructive feedback.

– A regular customer of pizza hut can be considered as loyal when customer is willing to actively recommend Pizza Hut by talking positively for the brand. Also customer is interested in providing feedback in order to improve services.

Contd..

• Premium– One of the most prominent traits of loyal

customers is their insensitivity towards price hikes.– These customers are more interested in brand

value and other advantages associated with a particular service provider.

– Customers seems assured that premium prices are charged

Customer Profitability Analysis (CPA)

• Best conducted with an accounting technique called Activity-Based Costing (ABC).

• Estimate all revenue coming from the customer, less all costs that go into serving that customer.

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Customer Lifetime Value (CLV)

• Describes the net present value of the stream of future profits expected over the customer’s lifetime purchases.

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Cultivating Customer Relationships

• Customer relationship management (CRM) is the process of carefully managing detailed information about individual customers and all customer “touch points” to maximize customer loyalty.– Touch point—any occasion on which a customer

encounters the brand and product.

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CRM Steps

1. Identify your prospects and customers2. Differentiate customers in terms of their

needs and their value to your company3. Interact with individual customers4. Customize products, services, and messages

to each customer

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IMPORTANCE OF CRM

• PARETO’S LAW 80:20 RULE20% of customer account for 80% of turn over20% of customer account for 80% of profit20% of customer account for 80% of all your

problems82

Acquisition is not the same as retention

Acquisition Retention

Sales analysis

merchandising

advertising

Customer segmentation

Campaign management

Channel support

Trust and privacy

Product quality

Customer service

Customer satisfaction

The Customer Development Process

• Potentials• Prospects• First-time customers• Repeat customers• Clients• Members• Advocates• Partners

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Building Loyalty

• Interact with customers• Develop loyalty programs

– Frequency programs– Club membership programs

• Personalize marketing• Create institutional ties

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• Loyalty is about the conscious decision of your customers to commit their continual repurchases to your brand. It is :

Driving an extra few miles to do your shopping Recommending it to your best friendAn emotional and rational ‘lock-in’Sometimes encouraged by an incentive or rewardA better path to profit

Loyalty is essentially a one-way commitment for which the customer receives a reward, but it is also about relationships

Two-way interaction in which both sides create and exchange mutual benefits

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Inertia does not equal loyalty• Satisfaction is important business success• However, satisfaction itself is not the only thing that delivers

increased profits and a greater share of customer’s wallets• Satisfaction is only a feeling that is most likely to disappear

quickly• Satisfaction alone isn’t adequate customer loyalty must

combine with satisfaction for it to be effective

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Database Uses

• Identify the best prospects• Match a specific offer with a specific customer

as a way to sell, cross-sell, and up-sell• Deepen customer loyalty by remembering

preferences and offering relevant incentives and information

• Reactivate customer purchasing• Avoid serious mistakes

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Downside of Database Marketing and CRM

• Large investment• Difficulty in getting everyone to be customer

oriented• Not all customers want an ongoing

relationship• Assumptions behind CRM may not always hold

true

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