The authors of Why Loyalty Matters certainly value customer loyalty. But they also contend that only 20 percent of a firm's customers are actually profitable and most of a company's profitable customers are not loyal.
In an article on harvardbsuiness.org, the two authors - Timothy Keiningham, global chief strategy officer at Ipsos Loyalty, and Lerzan Aksoy, associate professor of marketing at Fordham University - wrote that instead of stockpiling loyal customers, both B-to-B and B-to-C businesses should be asking:
- Which loyal customers are good for the business,
- How do we hang onto them, and
- How do we get more customers like them.
The authors note that the simple solution to improve customer loyalty in tough times is to offer off-price deals, a strategy that has proven to improve loyalty in the past. But they also note that it's a flawed strategy.
"This doesn't mean we should not find ways to be more efficient so that we can pass cost savings on to our customers. But price-driven loyalty is always the lowest form of loyalty. It means that we aren't offering differentiated value to our customers," the authors wrote
Mr. Keiningham and Ms. Aksoy said that's why it's essential to determine which loyal customers are profitable. Unprofitable loyal customers tend to be loyal either because of unprofitable pricing or exchange policies or they ask for excessive services they're not willing to pay a fair price for.
By comparison, profitable loyal customers are driven by key differentiating aspects to a business' products or services.
"The key to a successful loyalty strategy is to become crystal clear as to what these are, and to focus on tangibly improving these elements," wrote the authors. "It is also imperative that we actively let customers and prospective customers know that these are the things the company stands for and that the firm is committed to being best at. By doing this, our best customers will have the necessary information to clearly articulate why our organizations deserve their loyalty in good times and in bad."
Why Loyalty Matters is scheduled to come out in June 2009.
Discussion Questions: Do you agree that most "loyal customers" are actually unprofitable customers? If so, what are the challenges of having customer loyalty programs account for that? What do you think of the suggestions cited in the article for honing in on profitable, loyal customers?