By John Hennessy
DM Direct Newsletter, published an interesting take on loyalty by N. Ramasubraman (Ram). Mr. Ram is a practicing loyalty manager from India. He works for Surfgold, which is a pan-Asian loyalty management company.
Mr. Ram makes the claim that just because you measure high customer retention rates, you may not have high levels of loyalty. Instead you might have passive loyalty.
Passive loyalty or inertia loyalty occurs due to a variety of reasons and under a number of different scenarios where the customer is exhibiting repeat buying behavior - not out of choice but because he is forced to do so. In such a scenario, retention rates could be really misleading as an indicator of future potential for business. What are the cases of passive loyalty?
- Situations of quasi-monopoly: Where there is only a single shop in a location and you have to buy your products there.
- Habitual buying: When you buy your cigarettes from the vendor next to the railway station.
- Risk minimization: This is typical of products that you buy on someone's recommendation, such as medicine.
- Switching hassles: You would like to switch brands but you feel the cost of switching is way too high and that the benefits are not high enough.
- Lack of a decent alternative: Think about it: when you use the postal service or water utility, are you doing so out of volitional loyalty?
In each of the above cases, the retention rate will tell us that the customers are highly loyal to the brand and that going by their past behavior, they are likely to buy the brand again in the future. But the truth is that the customer is there because he does not have a choice. Now, would you call that loyalty? At the first opportunity he gets, he is going to walk out, leaving you with your carefully calculated indices and metrics.
Mr. Ram doesn't suggest completely ignoring customer retention levels, he recommends adding an opportunity-to-switch index to get a better read on true loyalty.
Moderator's Comment: Are retailers aware of why their regular customers choose to shop in their stores, on their Web sites or through their catalogs?
It's very important to understand why your customers reward you with their business. The answers you get from some of your customers may not be the ones you want to hear, but if you want to forge a stronger relationship with your customers, you need to ask. - John Hennessy - Moderator