columbia house

  • April 24, 2016
  • rtx10tsvTien Tzuo, CEO of Zuora, wrote a post for re/code that was so good it deserves broader circulation. While the focus is on customer relationships in subscription businesses, it’s also about loyalty and having just written a book about customer loyalty (available next month), it resonated with me.

    My research is full of old style approaches to customer loyalty that, shall we say, aren’t really about loyalty so much as they are about customer coercion. You can coerce a customer into being loyal, what I refer to as performing loyal behaviors, but they don’t exhibit true loyalty. Customer loyalty should be about inspiring customers to defend your brands, to preferentially seek out your products, and to buy them even when they aren’t discounted, have a coupon attached, or involve the award of so-called loyalty points. My research found that customers who behave loyally because of such inducements are easily attracted by the next enticing offer so their loyalty is often more closely associated with the discount or reward than with the brand.

    A great example that Tzuo explores, and that I had overlooked, is called the “negative option” an arrangement that keeps you exhibiting loyal behavior as long as you fail to cancel a service or promotion. The negative option is something of a relic but you can still see it operating in the market today. Tzuo uses Columbia House, the now bankrupt vendor of music and AOL as examples and they’re really good ones.

    If you are too young to remember Columbia House, then good for you. The basic offer was some large number records, tapes or CD’s for a penny as long as you agreed to be a member and receive a monthly shipment until you’d bought an equal number of recordings at full price. After that point you could cancel the service but human inertia often prevented or delayed that event. As a result people appeared to be loyal but weren’t. They were trapped.

    Even today according to Tzuo, AOL has 2.1 million subscribers to its $20 per month dial-up service. As he says, “These AOL customers surely aren’t shelling out for the ‘convenience’ of their painfully slow dial-up service.” He’s right, too, having a dial-up account today is likely more habit for most people, though it’s also possible a few still don’t have cable where they live.

    The negative option lives on in the subscription industry in the form of automatic renewals from month to month as long as a credit card stays active. In these circumstances, customers who appear loyal to the negative option might not be using or otherwise engaging with the vendor despite what appears to be loyal behavior. Businesses in this situation have a ticking bomb on their balance sheets for while the revenue is good, it can disappear at any time and at some point, the negative option practice will generate a good deal of bad will toward the brand.

    Companies like Totango, Gainsight, and even Zuora use their analytics and large customer datasets to understand customer behavior and to spot true loyalty as well as the warning signs of its opposite. Vendors are becoming more aware of the problem of the negative option and more generally, customer behaviors that appear loyal but which might represent inertia or laziness so that they can head off unpleasant surprises like a spontaneous social media campaign that damages a brand.

    The rise of the subscription economy and its culture has placed a bright spotlight on issues of customer retention, engagement, and loyalty. The days when you could sell a product set for a lot of money and move on to the next prospect are ending and being replaced by various forms of subscription and the requirement for greater customer intimacy. But the negative option is from another time and ought to seem out of place today as we focus on retention, subscriptions, and customer intimacy regardless of the markets we serve.

    What was most interesting to me from researching my book was that customers aren’t necessarily interested in amazing experiences that cause delight. Delight is another fad that’s come and gone or should at least be on the way out. Very often customers want and expect simple basic competency and effectiveness so that they can get on with everything else they have to do. This in itself is great insight because it shows that inspiring customer loyalty is within anyone’s grasp if we simply avoid creating a circus and focus on what matters most to customers.


    Published: 8 years ago