Best practice report: Customer Loyalty 2

January 2, 2014 by BPIR.com Limited

Expert Opinion

Employee Engagement

Loyal customers tend to be more willing to pay higher prices, and are generally more tolerant of problems associated with product performance and services. It has been estimated that a five per cent increase in customer loyalty could result in up to a 30 per cent increase in profitability. [2] Without customer loyalty, even the best designed businesses are likely to falter. Rolph Anderson, a professor of marketing, and his colleagues  at  Philadelphia’s  Drexel  University  in the  United  States,  evaluated  e-business  practices, and identified the following six significant drivers of customer satisfaction which influence loyalty: [3].

  1. Adaptability, by seeking to match products and services to an individual customer’s requirements, is essential for building customer loyalty. Adapting to the needs of individual shoppers increases the likelihood they will find something they want to buy.
  2. Commitment to customers is displayed through responsiveness, and the effective resolution of concerns and complaints. Rather than telling customers what can be done to solve a complaint, organisations can ask customers how they would like a problem to be handled. Resolving complaints so that customers are completely satisfied is crucial: unhappy customers may go online to voice their complaints, which has the potential of reaching tens of thousands of people. Product or service failures that are not resolved promptly or to the full satisfaction of customers will affect future business, as they weaken customer-company bonds and lower perceptions of service quality.
  3. Collaboration with other customers is achieved by enabling customers to share opinions and ideas with each other through the medium of comment links, chat rooms or special events. Customers tend to trust information received from fellow shoppers much more strongly than information they get directly from an organisation. Customers can reinforce each other’s purchase decisions and share valuable insights into product use.
  4. Product assortments—or the ability to offer a broad selection of products—enables customers to select the products (or services) best suited to their particular needs. E-businesses can offer customers convenient, one-stop shopping with immediate options to purchase. Products can be stored at locations where space is abundant and cheap, and alliances can be formed with various suppliers to provide customers with virtually unlimited product assortments and seamless service. By increasing the number of choices on an e-business site, search costs for the shopper are reduced, and this leads to enhanced customer satisfaction and loyalty.
  5. Easy transactions result from making purchasing processes simple, intuitive and user-friendly. Complicated checkout processes may frustrate customers and cause them to abandon purchases. Websites should minimize the effort and time required to navigate the site, find desired information and/or complete purchase transactions. An intuitive, convenient website will minimise a customer’s effort, time and opportunity for mistakes; this, in turn, makes the shopping experience more satisfying and deepens customer loyalty.
  6. An appealing environment is important, as customers appreciate and respond to stimulating shopping environments, attractive store layouts and engaging displays or websites. Selling environments can be enhanced through interesting and entertaining presentations of products to capture the shopper’s attention and encourage interaction. An interesting example of how social media can be used to create an appealing environment comes from WE Fashion, whose headquarters are in the Netherlands. With some 250 stores in Europe and China, the company encouraged customers to try on stylish clothing, shoes, bags and accessories in a store, and then to push a button on something called the “Tweet Mirror”, which would allow them to post an image of themselves on Twitter so their friends could see them in the new outfits and give immediate feedback.

Organisations seeking to generate satisfied and loyal customers should keep in mind the drivers that affect customer attitudes. For each of the above factors, organisations should measure, benchmark and compare their current performance against their past performance and, of course, the performance of their major competitors. [2, 3]


At Illinois State University in the United States, Gary Salegna, a professor of management and quantita- tive methods, and his colleagues argue that customer loyalty grows out of customer satisfaction, and this is enhanced as organisations provide higher levels of quality in their products and services. ,[4] As depicted in Figure 1, see above, the following factors contribute to customer loyalty:

  • product loyalty, which is a preference for—or attachment to certain types of goods or services
  • brand loyalty, which is a commitment to purchasing a particular brand
  • service provider loyalty, which is reflected in a customer’s strong desire to do business with a particular service organisation as a result of high customer satisfaction/emotional commitment
  • product involvement, which is related to a perceived personal relevance of products or services. Product involvement is a major moderator of loyalty and of purchase decisions, as indicated in Figure 2, at the top of the opposite column. In high-involvement situations, customers often desire a relationship (e.g. having a haircut or medical treatment or getting a car repaired). In these situations, the products or services alone are not sufficient to create loyalty; trust and rapport must also be present.

Conversely, in a low product involvement situation, no relationship is expected (e.g. department stores, where price is the main determining factor). In other cases, such as in restaurants, customers are usually looking for the overall value of the product or service offerings and, if the perceived value changes, they may take their business elsewhere.

Figure 3, below, further explores customer relationships and loyalty, describing different degrees of product involvement and customisation in relation to four categories of product/service offerings. The levels of personal relationships and loyalty associated with each category are outlined in the matrix below, and further explained in the text that follows:

Cell I. Standardised Product Offerings, Low Personal Relevance: these products/services are purchased frequently and involve little personal attachment. They represent lower cost, standardised, commodities. There is minimal opportunity for employees to vary product offerings. There is little opportunity to build personal relationships or loyalty over time. Examples include fast food outlets or department stores.

Cell II. Standardised Product Offerings, High Personal Relevance: in this category, consumers have high product involvement, but service providers tend to offer little service variation or flexibility; however, the consumer is more involved in the purchase decision. Examples include higher priced items such as electronics or automobiles.

Cell III. Differentiated Product Offerings, Low Personal  Relevance: although product customisation exists, the customer does not have a great deal of product involvement. Hence, while there is significant customer contact, he/she is not seeking high relationship involvement. Examples in this category are sit-down restaurants and tax return services.

Cell IV. Personalized Product Offerings, High Personal Relevance: in these situations, customers tend to develop relationships with key personnel. Customisation and product uniqueness lead to high consumer product involvement. Over time, increased interaction may enhance the development of high personal and service provider loyalty. Examples include professional services such as doctors, lawyers, accountants.
Organisations capable of building and sustaining a combination of personal, product and brand loyalty that leads to service provider loyalty have a higher potential of attracting and maintaining loyal customers.

The Value of Loyal Customers

Lakshmi Tatikonda, emeritus professor of accounting at the University of Wisconsin in the United States, argues that in today’s competitive business environment, merely satisfying customers is not enough; it is also important to build lasting and positive relationships with them. [5] Customer loyalty is the result of higher levels of satisfaction. These generate enthusiasm and encourage customers to repeatedly and consistently purchase goods or services from a specific organisation/brand. The benefits of customer loyalty include lower marketing costs, broader sales opportunities, sales of premium-priced items, additional sales through word of mouth, and better customer/supplier partnerships. As customers become acquainted with products and vendors, they feel comfortable and buy more items, including higher-priced items. Loyal customers generate higher profit margins than new customers. It can cost companies up to 10 times as much to attract a new customer than to support existing customers. Studies indicate that a five per cent improvement in customer retention can add from 25 per cent to 85 per cent to the bottom line, as shown in Figure 4, see below: [5, 6]

Greater profits come from keeping customers for a longer period of time and expanding overall market share. Loyal customers are less expensive to service. They purchase premium-priced products and referrals from loyal customers, together with their positive endorsements, lead to the attraction of new customers.
Customer “Touch Points” Affect Loyalty

According to Joyce Ouellette, director of marketing at Ricoh Americas Corp., expensive advertising and marketing campaigns can be rendered ineffective by weak customer support, including contract negotia- tions, billing, new customer assistance, and post-sales follow up. These customer “touch-points” contribute to building a good or bad impression of organisations and their brands. To improve this situation, Ouellette recommends mapping—“warts and all”— organisational information flow processes such as the following:

  1. Identify the places generating the most customer complaints associated with inconsistent or unreliable information.
  2. Focus on customer needs, rather than organisational weaknesses that do not affect customer needs.
  3. Enlist experts with front-line experience to help re-design processes. [7]

At each point, there is the potential to either delight or alienate customers. Creating effective touch-points involves striking a balance between people, technology and processes. According to a recent Ricoh global survey, improving these touch points can generate an extra 10 per cent in revenue.

Loyalty Programme Ideas
Kendall Peiguss, writing for HubSpot Inc. in the United States, offers the following loyalty programme ideas:

  1. Use a simplified points system: if the relationship between points earned and tangible rewards is complex and confusing, customers will become disinterested. Conversions should be simple and intuitive.
  2. Use tiered loyalty systems: these help to find a balance between attainable and desirable rewards. Small rewards can be offered initially for being part of the programme. Encourage repeat customers by increasing the value of rewards as they move up the loyalty ladder. This keeps customers coming back, helping them to realise that higher level reward status is not impossible to reach, and that the rewards are worth shooting for.
  3. Charge a fee for VIP Benefits: by having upfront fees, customers can be relieved of inconveniences that might impede future purchases. For example, Amazon customers were abandoning their shopping carts when they encountered unexpected freight charges. To counter this, Amazon offered a loyalty programme, involving an annual charge of US $79, which enabled VIP customers to enjoy free two-day shipping on millions of products with no minimum purchase, in addition to other benefits. (While Amazon made a small loss in freight costs, it made up for this with increased transactions by VIP customers.)
  4. Offer to recover and resell used products: sustainability programmes can strike a chord with customers and engender ongoing loyalty.
  5. Form wider partnerships by providing all-inclusive offers: strategic partnerships for customer loyalty or coalition programmes can be extremely effective for customer retention and company growth. (For example, a farm machinery supplier could partner with a veterinary practice, a feed supplier and an accounting firm to grow its customer network.)
  6. Make a game out of it: games can be used to encourage repeat customers and solidify a brand image. For example, a fast-food outlet might allow customers to play a game after making three unique orders. Players could chose from four cards and have a 25 per cent chance of winning a free dessert, gift card or drink. [8]

Suggestions for Creating Customer Loyalty
When asked to comment on the most essential ingredients for creating customer loyalty, industry leaders gave the following answers:

  • Trust: “The essential ingredient in loyalty marketing is trust. Trust that organisations will respect one’s time and only present relevant content, and that data captured by a company will be kept private and used only to make interactions more delightful. This important ingredient must guide all loyalty marketing tactics. True loyalty marketing results in customers willing to pay a premium for a product or service because they trust the brand and customer experience over the long haul.” – Loni Kao Stark: Director of Product, Solution & Industry Marketing, Adobe.
  • Personal Connection: “My essential ingredient is personal connection. I truly believe that knowing your advocates and connecting with them as people makes all the difference in the world in the effectiveness of loyalty marketing efforts.” – Heather Foeh: Director of Customer Culture, Eloqua.
  • Proactive, Personalized Communications: “Proactive communications can highlight relevant opportunities, concerns, and other important information that people want to know, such as special deals, fraud alerts, power outages, and upcoming appointments. Consumers increasingly view these communications as positive, brand-reinforcing experiences.” – Debbie Braunert: VP Marketing, SoundBite Communications.
  • Simplicity: “It’s said that any fool can make something complicated, but it takes a genius to make it simple. And this concept is certainly true in loyalty, where the essential ingredient for customers is simplicity. Loyalty programs have to make enrolment, earning, tracking, and redeeming rewards simple across all channels.”
    – Dennis Goodman: Director of Loyalty Programs, 89 Degrees.
  • Active, Real-Time Engagement: “Active, realtime engagement is the most critical ingredient to loyalty marketing. The right mix of engagement practices—both social and traditional brings customers together with a brand in a meaningful way, making them feel heard and connected.” – Oliver Trabert: CTO, QuestBack
  • “Current loyalty marketing must-haves are location intelligence, right-timed rewards, and omni-channel one-to-one messaging:
    1. Customer interactions are enhanced with location intelligence and become more personal with references to a town or store location.
    2. Right-timed rewards – acknowledgement of recent purchases, website visits, toll-free calls, and catalogue orders. They tell the customer, “We see you, we value you, and we want to take our relationship with you to the next level.”
    3. Omni-channel consumer conversations for delivery of seamless connections. For example, the online chat operator references a recent in-store purchase. The cashier views each consumer’s reward status and delivers additional discounts on the spot.” – John O’Hara: President, Pitney Bowes Software
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