A second look at loyalty programs under the microscope

A second look at loyalty
programs under the microscope
Avoiding the pitfalls that make retention strategies
detrimental to profitability

With another perspective from "Commitment-Led Marketing,” by Jan Hofmeyr and
Butch Rice, consultants, professors at Cape University.

our sources
Analysis based on ideas published
key ideas
What could improve the performance of a business more than retaining its
by leading experts, in particular in
the publications presented below customers? Isn’t repeat business a good way to amortize often high customer
and in the “Find Out More” insets. acquisition costs over a greater purchasing volume? Don’t faithful customers
who have learned to trust the brand tend to consume more? Because they are
satisfied, don’t they have a greater propensity to recommend the brand?

Managing These are mistaken assumptions, according to the experts. This is not to
Customers say that a solid base of regular customers is not a great asset. However, many
for Profit companies err in making retention the ultimate objective, and focusing on
V. Kumar,
Wharton School minimizing the attrition rate. In the process, they lose sight of two impor-
Publishing, 2008,
296 pages. tant facts. First, loyalty isn’t necessarily synonymous with profitability, and
second, the focus should be on lifetime customer value, that is, the present
and future value of customers. In fact, all customers do not justify the same
loyalty investments, and don’t have the same behavioral profiles, or even the
same present and potential value.
Customer retention is not
enough
The McKinsey Quarterly, May 2002. (Article) -- Carefully differentiate your retention strategy by customer profile.
Your loyalty program is -- Design your loyalty program with profitability – not just retention
betraying you,
Harvard Business Review, April 2006. (Article) – in mind.
The right way to manage -- Learn how to guide some customers to the door.
unprofitable customers
Harvard Business Review, April 2008. (Article)

Manageris synopses are original works resulting
from critical analysis. They are intended to
highlight the most useful and innovative practical
implications of selected publications. They are not
intended to condense or replace the publications
in question. Learn more about Manageris
on www.manageris.com

A second look at loyalty programs under the microscope m • N° 170b 1

analysis
1 Customer By over-focusing on retention at hand in hand! Indeed, the authors
loyalty traps all costs, however, businesses may of Managing Customers for Profit noted
lose their perspective on the legi- a low degree of correlation between
Businesses must not lose timacy of this strategy. Retaining loyalty and profitability when they
sight of profitability in customers is certainly desirable in analyzed the customer portfolio of
their desire to retain many situations. However, focusing four B-to-C or B-to-B companies in
customers. exclusively on customer loyalty may a number of different sectors. About
In an increasingly competitive sometimes incite employees to do 20 percent of customers turned out
landscape, in which products and things that run counter to the inte- to be loyal, but not very profita-
services run the permanent risk of rests of the company. Indeed, ob- ble, while another 20 percent were
becoming commoditized, compa- servation shows that many mistakes conversely very profitable, but not
nies rival one another to find inge- are made in the name of retention loyal!
nious ways to keep their customers. (Figure A): Initially, retaining customers is a
Indeed, the ability to establish du- good way to amortize acquisition
rable relationships with customers • First trap: confusing loyalty costs. Over time, however, the idea
is a great asset. Don’t they say that and profitability. that customers are more profitable
companies double their profits when Too many companies start with
they increase customer retention by the assumption that loyalty is the Find Out More
just five points? As a result, many key to a profitable customer port- In drafting this synopsis, we relied not only on
companies have made customer folio. They thus concentrate on re- the publications presented on the cover page,
retention a cornerstone of their tention, forgetting that loyalty and but also on the following sources:
strategy. profitability don’t necessarily go -- Customer retention is not enough,
The McKinsey Quarterly, May 2002. (Article
available at www.manageris-executive.com)
A Work on the intensity of the relationship as much
as its longevity.
Some false assumptions about customer retention -- Your loyalty program is betraying you,
Harvard Business Review, April 2006. (Article
Loyalty is directly on sale at www.hbsp.harvard.edu)
Loyal customers are
correlated to customer Make your customer retention programs more
the most profitable
satisfaction effective.
-- The mismanagement of customer
An in-depth analysis of In the telephony or loyalty, Harvard Business Review, July 2002.
four companies in a range banking industry, many (Article on sale at www.hbsp.harvard.edu)
of industries showed dissatisfied customers How are loyalty and profitability not always
that about one-third of stick with the same correlated?
loyal customers are not supplier to avoid -- How valuable is word of mouth?
particularly profitable. administrative headaches. Harvard Business Review, October 2007.
(Article on sale at www.hbsp.harvard.edu)
Loyal customers Take account of the influence of customers in
recommend recommending the brand when analyzing their
the brand value.
-- The price of loyalty, The McKinsey
Customer satisfaction is Quarterly, 2000. (Article available at www.
a better indicator of the manageris-executive.com)
propensity to defend the Optimize the impact of loyalty programs.
brand than longevity. -- Managing your business as if customer
segments matter, The McKinsey Quarterly,
August 2006. (Article available at www.
Loyal customers cost less Rewarding loyalty is the manageris-executive.com)
to serve, because they know best way to reinforce it Refine your customer portfolio segmentation to
our offering well optimize your retention strategy.
-- The right way to manage unprofitable
Loyal customers understand “Points-based” loyalty customers, Harvard Business Review, April
their value to the programs often incite 2008. (Article on sale at www.hbsp.harvard.
company and negotiate customers to shop around edu)
better price terms or free in search of the best offer. Some alternatives to try before getting rid of
complementary services. unprofitable customers.

2 m • N° 170b A second look at loyalty programs under the microscope

B
year after year is far from proven. Loyal customers are far from being ideal customers!
In the analyzed companies, three
Experience shows that loyal customers, even when they are profitable, are not always as valuable as
assumptions generally cited to sup- one might think.
port this assertion were shown to be In fact, on the grounds that they are old customers attached to the brand, loyal customers tend to:
inconclusive: loyal customers were
not less costly to serve, they were -- Negotiate discounts or demand special privileges.
not willing to pay more, and they e.g. Loyal customers consider that they should naturally receive discounts, due to the total volumes they
generate for the company.
were not more active in promoting
the company (Figure B). -- Refuse annual or periodic price revisions.
e.g. On the grounds they are old customers, many loyal customers want to freeze their price conditions.
• Second trap: focusing on the -- Demand more favorable treatment than other customers.
customer lifespan. e.g. Loyal customers rarely appreciate being asked to wait before being served (queuing time at a call
When companies decide to tac- center, for example).
kle the issue of loyalty, they often
implicitly establish the objective of -- Demand more customized services.
e.g. At a retail bank, for example, loyal customers often consider that a specific account manager should
maximizing the customer lifespan. be assigned to them and personally follow all of their transactions.
Yet, customer longevity may be only
a marginal performance factor; the -- React with greater virulence.
intensity of the relationship appears e.g. Loyal customers make more noise when they are dissatisfied, make formal complaints more
to be more important in many cases. systematically and return a greater proportion of merchandise.
The authors of the article Customer Based on Managing Customers for Profit, V. Kumar, Wharton School Publishing, 2008.
retention is not enough cite the example
of a retail bank that lost approxima- the number of stamps issued for the –– Learn how to guide less profitable
tely 5 percent of its customers every same purchase. What was originally customers to the door.
year, eroding its managed assets by designed to retain customers beca-
3 percent in the process. This was
certainly an incitation for the bank
me a factor in encouraging them to
shop around for the store offering
2 Segment your
to do something to keep these cus- the largest number of stamps for a retention efforts
tomers from leaving! However, in a given purchase! The company should not
less visible manner, customers who Sometimes, retention efforts are make efforts to retain
maintained their accounts but had actually made in the wrong direc- every customer.
significantly reduced the amount of tion. For instance, a financial institu-
their assets actually eroded mana- tion invested significantly to increase All customers do not deserve the
ged assets by 24 percent! For this customer satisfaction, and achieved same amount of retention effort. A
bank, rather than preventing these excellent scores, but with hardly any thorough analysis of the customer
customers from closing their ac- impact on growth! The reason for portfolio often highlights conside-
counts, the objective was primarily this was that the observed revenue rable differences between segments,
to increase the intensity of the re- declines were actually due to chan- which can be decisive in determi-
lationship, or increase its share of ges in the personal situations of the ning the relevance of potential re-
wallet with them. What is more, this concerned customers, and thus to a tention measures, such as margin,
phenomenon is nothing exceptio- radical change in their needs, more development potential, sensitivity
nal, as it was observed in two-thirds than to their level of satisfaction. to various marketing drivers, etc. A
of the sixteen industries studied by Generally speaking, companies are first step in targeting retention ef-
the authors. often observed to confuse satisfac- forts is thus to distinguish between
tion and loyalty. In reality, there are the different customer segments.
• Third trap: tackling the wrong many dissatisfied, but faithful custo-
loyalty drivers. mers, as well as satisfied customers • Reason in terms of
A third type of mistake concerns who are nonetheless unfaithful. profitability rather than sales
the means deployed to ensure cus- volume.
tomer loyalty. Examples of failed So, the focus on customer loyalty All customers do not contribute
customer loyalty programs abound. must be handled carefully. In par- equally to company profitability
One famous example is the Green ticular, observation has shown that (Figure C). It is not rare that a small
Stamp program in the U.S., in companies can apply three main proportion of customers accounts
which consumers received stamps principles to avoid these missteps: for an important share of profits,
when making purchases at participa- –– Carefully identify which custo- whereas another fraction generates
ting stores. The mechanism ended mers deserve to be the target of more cost than income. A prere-
up achieving the exact opposite of retention efforts; quisite for developing an efficient
what it was designed to do, as stores –– Design loyalty measures with an retention strategy thus consists in
began to compete with one another, eye on profitability, and not just prioritizing customers according to
by doubling or even quadrupling retention; their contribution to profitability.

C
This can require a relatively com- Analyze the profitability of your customer portfolio
plex analysis process, both in terms
Classifying customers in increasing order of profitability can often help companies understand the
of collecting and processing data, need to adopt a segmented approach, rather than try to retain all customers indiscriminately.
but generally produces valuable in-
sights. For example, the Harrah’s
casino chain used data collected by 100 %
magnetic cards used by players to

Cumulative profit
discover that 26 percent of gamblers
generated 82 percent of revenues. Example of a typical customer portfolio A small number
More importantly, this analysis also of customers
helped identify the profile of the represents the
most profitable customers. Surpri- majority of
singly, these were not the super-rich company profits
players whom casinos habitually
woo with a passion, but retirees with
an entertainment budget who like Number of customers
to spend time at the slot machines!
Armed with this information, the
chain was able to direct its marke-
ting efforts much more efficiently. Costly Unprofitable Unattractive Very profitable
customers customers customers customers
• Integrate future as well as (negative (almost (low profit) (majority of
present customer value. profit) no profit) profits)
The retention strategy must be
targeted not only based on the
observed economic contribution Based on Driving Customer Equity, Roland Rust, Valarie Zeithaml, Katherine Lemon, The Free Press, 2000.
of customers – which is actually
based on their past behavior – but tomer shopped, the company was Experience shows that this custo-
also their future potential. This is able to target its efforts much more mer sub-segment is clearly the most
why retail banks take great pains to effectively. sensitive to customer retention me-
attract customers such as students chanisms. Identifying the customers
and young executives, who may be • Focus first on potentially composing this segment is therefore
moderately attractive in the short switchable customers. essential to target loyalty initiatives
term but are expected with time to Customers have different reasons effectively.
become the profitable portfolio of for remaining faithful to a supplier.
the future. Some become emotionally attached, • Take account of the influencer
Reliably predicting future custo- others find switching too tedious, role.
mer potential is no easy task, but is and still others make a deliberate When selecting customers who
extremely valuable. The best ap- choice and continuously reevaluate merit special attention, a fourth
proach is to analyze data on the their decision. The article Customer dimension should be considered,
profile and behavior of these custo- retention is not enough underlines the namely, their influence on those
mers in order to continually refine fact that the objectives of a loyalty around them in terms of word of
predictive models, based on an ana- strategy should vary greatly de- mouth. Indeed, some customers are
lysis of probable future behavior. pending on the customer segment. more proactive and credible spokes-
For example, a mail-order company Customers with a strong emotional people for the brand than others,
habitually targeted communication attachment – 7 percent of clothing just as some are more or less viru-
efforts based on a traditional indus- customers and 40 percent of car- lent detractors. Companies there-
try indicator, the RFM score, reflec- bonated beverage customers – are fore have an interest in identifying
ting the Recency with which custo- highly unlikely to switch brands. influential customers in order to win
mers had last made a purchase, the Likewise, depending on the indus- their attachment, or at least minimi-
Frequency of their purchases and try, between 10 and 25 percent of ze their hostility. This can be done
the Monetary value of their expen- customers naturally tend to avoid by conducting surveys, running
ditures. A critical analysis showed challenging their initial choice and sponsorship campaigns or facilita-
that this approach cost about $1 stick with the same supplier out of ting user forums, for example. Em-
million in wasted communication mere inertia. On the other hand, ployees should also be sensitized to
efforts. By conducting a more de- about half of customers – ranging certain factors that can be indicative
tailed analysis taking account of from 30 percent in fixed telephony of influence, e.g. people who send
not only the purchasing volume, to nearly 80 percent for groceries – requests for information, who chat a
but the type of products purchased are very deliberate in their choices lot with salespeople, who read spe-
and the pace at which each cus- every time they make a purchase. cialized trade magazines, etc.

3 Design the to optimize the profitability of se- information, rather than focusing its
retention lected measures. efforts on all the customers it ho-
ped to retain, the company could
policy… with • Select loyalty drivers based on concentrate primarily on those
an eye on an in-depth behavioral analysis. whose behavior indicated that they
The efficiency of various reten- were at risk, at a time when they
profitability tion techniques varies considerably were still hesitating.
The retention policy depending on the characteristics Similarly, Harrah's casinos
should be fine-tuned of target customers and the timi- conducted a very detailed analysis
very precisely. ng of execution. This is why data of gambler behavior that identified
mining is often an excellent means no less than 90 different segments.
Just as attempting to retain all to optimize the retention strategy. Harrah’s used this information to de-
customers indiscriminately is not a The article Managing your business as velop offers and advantages adapted
good idea, it is also not recommen- if customer segments matter relates the to the consumption habits of each
ded to apply the same loyalty policy example of a telecommunications of these segments, and achieved
to every customer a company wishes firm that significantly improved the spectacular results – visits rose by
to retain (Figure D). Many com- performance of its retention strategy
panies now regret having launched by using detailed statistical analysis. Find Out More
apparently attractive retention pro- An initial score was established to Managing
grams that ended up so costly that calculate the probability that cus- Customers for
they became counterproductive. tomers would cancel service depen- Profit
The key to avoiding this trap is ding on their behavior over time. V. Kumar, Wharton School
to move away from the rationale of For example, they discovered that Publishing, 2008.
retention at any price, even for a canceling a broadband line was one
particularly profitable segment. Ins- of the advance warning signs that
tead, the retention policy should be a customer was likely to cancel a In this book, the author analyzes the most
differentiated very precisely in order landline as well. Using this kind of effective marketing strategies to support
sustained growth. He takes an objective look at
D the “customer orientation at any price” craze,
and underlines the need for a scientific approach
Adopt a segmented retention approach to optimize the retention strategy.
The loyalty policy must not lose sight of the fact that the objective is to improve company profitability According to the author, the point is not to
over time. Businesses should consequently differentiate the resources they want to invest based on define a universally effective strategy, but
the profitability and potential loyalty of the customers they are addressing. to select the right strategies using the most
suitable indicators. In particular, he encourages
Loyal unprofitable customers Loyal profitable customers managers to get back to the basics in their
Objective: Improve the contribution Objective: Convince these customers to thinking, the ultimate goal being to increase the
Loyalty

of these customers to the continue to choose the brand profitability of the sales strategy, rather than the
company’s performance by Principal means: number or lifespan of customers.
changing their behavior and –– Advertising, to reassure them about His main message focuses on the need to
consumption habits in line the quality and advantages of the adopt a differentiated strategy depending on
with the company’s interests product / brand total customer value over their entire lifespan
Principal means: –– Further customize the offering, to reinforce (Customer Lifetime Value). He proposes various
–– Encourage them to adopt other their attachment to the brand methods to calculate customer contribution to
products and services –– Reward and grant special advantages, company performance, in a usable form.
–– Give them incentives to increase the to show the company values them and In the process, he helps readers become aware of
company’s share of their wallet reinforce their attachment in the process many popular misconceptions about retention.
For example, the most valuable customers
Profitability are not necessarily the most loyal, and the
Unfaithful unprofitable customers Unfaithful profitable customers profitability of a retention strategy depends not
Objective: Avoid wasting resources on Objective: Influence the purchasing decision at only on its efficiency in reducing the attrition
a target unlikely to create the last minute rate, but also on how well resources are invested
value for the company according to the profitability of each customer
Principal means: segment.
Principal means: –– Make special offers, when price has a decisive
–– Set prices to ensure each purchase influence on the purchasing decision Finally, he proposes a set of ideas on adapting
is profitable, invoice additional –– Conduct initiatives at the point of sale to the marketing strategy to each customer profile,
services trigger purchases including relevant management of various
–– Simplify service to make it less –– Undertake direct marketing to keep possible sales and distribution channels and
costly customers up to date and encourage them potential customization of service levels.
to try out and consume new offerings A book that incites companies to take an
objective look at the way they understand and
Based on The Mismanagement of Customer Loyalty, Harvard Business Review, July 2002. manager customer retention.


40 percent and the profitability of its lose sight of a more serious problem, washes realized that drivers ten-
best customers rose by 25 percent. i.e. losing business. Second, because ded to space their visits more clo-
the most active customers happen to sely to obtain this advantage. The
• Aim not only to retain often also be the most loyal. company’s loyalty program thus
customers, but also to expand Measures designed to strengthen killed two birds with one stone:
the relationship. the relationship with customers not only did it increase the firm’s
Effectively retaining customers are founded upon two dimensions, share of wallet with its customers,
means more than just extending the which should be generally addressed who saw the benefit of going to a
lifespan of the relationship. It often simultaneously: single suppler rather than shop-
also includes trying to increase the –– Increase the usage intensity of ping around, but it also increased
share of sales realized with them. products and services. the frequency with which they
First, because focusing on the at- A carwash company that offered used the service.
trition rate can cause companies to a free wash for every eight paid –– Diversify consumed products and
services.
Rather than offering a systematic
E discount to reward consumption,
Learn to manage bad customers a more astute strategy is to reward
Although companies should avoid trying to retain customers who cost more than they generate, loyalty in such a way that triggers
the authors of The right way to manage unprofitable customers recommend that companies apply a the purchase of other products
gradual approach before finally showing customers the door. and services. This is the strategy
chosen by stores that offer dis-
Understand
counts only on certain types of
products, selected among the
Why is a given customer so unprofitable? Has the company misunderstood or most profitable, or brands that
mismanaged this customer? offer a product that customers
e.g. An advertising agency noted that its small customers were unattractive largely
because it devoted meager resources to them, and they were thus not encouraged to would ordinarily not have pur-
use more of the agency’s services! chased, but which they try out
on that occasion, and are often
tempted to purchase subsequent-
ly. An example would be offering
Educate a night flight in business class to a
Can a given customer be made to behave in ways that the company finds more passenger who habitually travels
acceptable? in tourist class.
e.g. Fidelity Investment trained a segment of very costly time-consuming customers
to use its web site to find answers to their questions, and thus reduced call center • Use invisible advantages to
traffic considerably. retain customers.
When the loyalty program beco-
mes a dimension of the core offe-
Renegotiate ring, the risk of escalation and price
Can an agreement be found to make the relationship more satisfactory for both wars is very real. The author of Ma-
the customer and the company? naging Customers for Profit recommends
e.g. A U.S. hospital established a prepayment system to continue to serve insolvent managing the retention policy in
patients, and defined a roster of less expensive drugs to propose to them first. a non-transparent manner: openly
presenting a not too generous tradi-
tional loyalty program, while simul-
taneously applying a more discreet
Migrate
policy in which customers are diffe-
Can the company recommend another supplier that will consider this customer rentiated according to their contri-
attractive? bution to company performance.
e.g. A large legal firm recommends independent lawyers to customers that it finds
unattractive. These customers are then better served, because they are valued by Rather than announcing a simple
these independent attorneys. discount according to purchased
volume, it is often more effective
to surprise customers by rewarding
them with a service of higher quality
Terminate or one that is better adapted to their
If a satisfactory response has not been found to any of the above questions, it is particular needs. Citybank esta-
probably time to take the initiative to terminate the relationship. blished a caller ID system, for exam-
ple, in order to cut the call center
Based on The right way to manage unprofitable customers, Harvard Business Review, April 2008. queuing time of its most profitable
customers. These customers thus re-

ceived a highly appreciated benefit company. Poor information on how • Guide customers to other
at very low cost for the bank. Simi- to use a product may explain why suppliers.
larly, many hotel chains offer loyal the customer service hot line is sa- If certain customers nonetheless
customers upgrades on their hotel turated, for example. Rather than continue to weigh heavily on profi-
rooms, without openly advertising jumping to the conclusion that tability, the best solution is probably
or guaranteeing this service. certain customers are simply not to encourage them to switch to ano-
attractive, companies may want to ther supplier. Instead of simply jet-
• Invest in continuously winning start by educating these customers. tisoning these customers, however,
new profitable, but unfaithful Fidelity Investment, for example, companies are advised to help them
customers. established a training program faci- make the transition, for example, by
Finally, companies should not try litated by remote operators to teach proposing a list of suppliers more
to retain even the most profitable time-consuming customers how adapted to their needs. This is a
customer segments at all costs, be- to use the Internet online support. good way to avoid the negative im-
cause a large share of their profitabi- The calls made by these customers pact of word of mouth on company
lity is generated by customers who to customer service representatives reputation, preserve the possibility
are naturally fickle. The resources consequently dropped significantly, of reestablishing a relationship with
invested in fruitless attempts to re- and their profitability rose. Other these customers later on, and may
tain these customers can often be customers limit their consumption even lead to agreements between
used more efficiently to win other because they don’t understand the firms to refer various customer profi-
such customers in replacement. A full extent and value of the services les to one another.
European telephony operator did offered by the brand. In one case,
this brilliantly, for example. This doctors who lacked the requisite
•••
firm built an offering dedicated to computer skills failed to take ad-
the 25 percent of “flighty” custo- vantage of the full range of services
mers neglected by competitors. Two connected with a piece of sophis- Although retaining customers is
years later, the brand represents 10 ticated medical equipment. A little theoretically the royal road to higher
percent of the market. For this type training was all it took to grow the profits, companies must be careful to
of customer, short but intensive ad- corresponding volume of business avoid the trap of trying to win their
vertising campaigns are generally and make this segment profitable. loyalty at any price. Instead, they
more profitable than an impossible should focus on a precisely segmen-
retention strategy. • Revise past contractual terms ted approach that does not attempt
with customers. to increase the customer lifespan
Before eliminating customers, systematically, but takes account of
4 Learn how companies should always ask them- the profitability of targeted custo-
to manage bad selves whether it is possible to do mers, as well as the effort required
something to make the relationship to retain them.
customers acceptable. This might mean re-
An optimized retention negotiating the contractual terms.
strategy may ultimately This solution can often be effective
require dropping if it is well communicated and ex-
unattractive customers. plained to customers. A heavy ma-
chinery supplier revised its pricing
Retaining customers must not be terms with this in mind. Defining
an end in itself. Many companies different levels of service enabled Find Out More
have a portfolio containing custo- this supplier to invoice on-site ser- The following sources are recommended to
mers who are not only unprofitable, vice to unprofitable customers and those who would like to explore this topic
but even cause them to lose money. thus move toward a more profitable further:
Trying to retain this segment would relationship. -- Commitment-Led Marketing, Jan
naturally be senseless! Revising the methods used to Hofmeyr, Butch Rice, John Wiley Sons, 2000.
Yet, companies should not always manage customer relationships can (Book)
simply get rid of costly customers. also encourage them to shift to more Base your marketing policy on customer
The risk to a company’s reputation, appropriate distribution channels attachment to the brand.
the prohibition on refusing to sell, or payment methods. The Echos- -- Driving Customer Equity, Roland Rust,
long-term contracts, etc. are often tar satellite television channel, for Valarie Zeithaml, Katherine Lemon, The Free
good reasons to adopt a more gra- instance, created a prepaid service Press, 2000. (Book)
dual approach (Figure E): offering for customers who had a Develop your customer equity with a segmented
bad payment history. This approach approach.
• Educate customers. helped the company keep these cus- -- The Anatomy of Buzz, Emanuel Rozen,
Some customers are expensive tomers, while making them more Currency-Doubleday, 2000. (Book)
to serve for reasons related to the profitable. Take advantage of word of mouth.


a wider perspective
Another perspective from Commitment-Led Marketing, by Jan Hofmeyr and Butch Rice, consultants,
professors at Cape University.

O
n what does cus- pointed or dissatisfied customers target. It could also probably raise
tomer loyalty de- tend to stick with the same brand, prices without losing much volume.
pend? What are the because they are skeptical of the
key drivers to retain ability of alternative brands to sa- Conversely, consider the case of
the most profitable tisfy their needs better. Pepsi in the nineties. Pepsi noted
customers? Regardless of their inhe- that its customers were strongly
rent interest for the company, do all The structure of the market in committed to its brand – but much
customers deserve the same atten- terms of customer commitment calls less so were the customers of several
tion to ensure their fidelity? for marketing strategies – particu- competing soda brands. In this si-
larly in terms of the role and impor- tuation, a conquest strategy is often
Jan Hofmeyr and Butch Rice take tance of the retention policy – that the best bet, preferably focused on
an original and illuminating look at are highly differentiated depending brands to which customers show a
this topic, based on the concept of on the context. relatively low degree of attachment.
brand commitment. What is com-
mitment? For marketing experts, it’s For instance, suppose that you Studying the degree of customer
the conviction of customers that the observe that your brand has a lower attachment to your brand and com-
brand they use is the best possible degree of customer commitment peting brands also helps identify
choice. This concept turns out to than competing brands. You should the most suitable marketing drivers.
be much more powerful in practice probably resolve this problem by For instance, for customers who are
than the degree of satisfaction in focusing on retention, rather than extremely committed to the brand,
predicting the likelihood of custo- continuing to invest to win custo- compared both to non-customers
mer attrition. This is for the very mers who would be not only difficult and uncommitted customers, adver-
good reason that commitment en- to entice away from competitors, tising appears to have the greatest
compasses not only the notion of sa- but would also probably not stay impact in terms of favorable res-
tisfaction, but also two other factors with your brand for long! This is ponse and memorization. A brand
that are just as important in determi- what happened to the Le Chat laun- that is highly visible on the market
ning loyalty: dry detergent brand in France, when and enjoys a high degree of custo-
confronted with Ariel. Le Chat fi- mer commitment generally should
–– The importance of brand choi- nally turned this situation around invest in advertising, as an excel-
ce. Depending on the purchase, by focusing more on the ecological lent means to maintain the level of
brand choice is more or less impor- dimension of its product. commitment. On the other hand,
tant. For example, many travelers when customers are not particularly
between Paris and London consi- Suppose this time that the obser- attached to the brand, the efficiency
der departure and arrival airports ved level of customer commitment of advertising should be verified ca-
and flight schedules or even price is high both for your brand and refully, as observation shows that
to be more important than the competing brands. This happened it has less impact, or can even be
choice between British Airways to a breakfast cereal, for example, counter-productive, by arousing cy-
or Air France. On the other hand, which was positioned as “healthy,” nical responses.
most laundry detergent buyers but was not very tasty. Fans of this
are very concerned about finding cereal had clearly made a deliberate Breaking down the marketing
their preferred brand and are very choice in light of the importance strategy very precisely is a challen-
reluctant to switch or give into they give to their diet. Customers ge that many companies find to be
the siren’s song of promotional of competing brands also knew very complex, but which can have a ma-
offers by competitors. well why they didn’t like it! In this jor impact on performance. Indeed,
context, the brand should probably the notion of commitment adds to
–– Perceived potential alternatives. minimize advertising investments to the arsenal of approaches that ena-
On some markets, even disap- concentrate on satisfying its core ble them to fine-tune their efforts.

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A second look at loyalty programs under the microscope

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