Getting loyalty right
We iterate toward solutions. A new technology surfaces and often we need time to appreciate its uses and to discover why we need it. Other times, we discover a problem first and spend many days sorting out off the shelf solutions that might work only to discover nothing does and we need a crafted solution. It’s been like this is the customer loyalty space, a problem seeking a solution.
For a long time, customer loyalty has been an elusive goal with numerous intermediate points that never quite jelled. Even before there was technology there were loyalty programs. The simplest programs gave script to purchasers (today they’re points) so that over time loyalty could be rewarded with something of value. A classic example is the frequent flyer program in which airlines try to build repeat business through awards for future free travel. Many other loyalty programs base themselves on the same transactional format.
But that has been the state of the art; transactional give-and-get points systems that generate the appearance of customer loyalty but it was only an appearance. Research shows that when you take away the points and the loyalty disappears. So, we’ve spent a lot of time and resources automating the points based loyalty program paradigm until it became a business in its own right. New systems make it possible to manipulate points and customers in various ways and to extract information from the mounds of customer data churned up in typical activity.
However, all of this automation has been at variance with customer loyalty research. If your dream is getting customers to come to you because they like or trust your brand you know the importance of building an emotional connection with them, of engaging them in ways that make them loyal to the brand regardless of incentives. This kind of loyalty inspires customers to do and say nice things about the brand when they don’t have to.
For instance, a customer might demonstrate loyalty when helping another customer in a community or by providing feedback about products, policies, promotions, and services. Conventional loyalty programs fall down here because they often don’t track these truly loyal behaviors and so they don’t reward them. That’s too bad.
On the other hand, many customers seek nothing more than transactional loyalty programs and who could blame them? Transactional loyalty has enabled airlines to cut service to the bone without worry over losing customers to competitors with better policies. They all have the same sad service, more or less, and customers have to be contented with their miles.
But now with the advent of chat bots, machine learning, notifications, and messaging we may have another chance to get loyalty right. Even in situations where customers are fine with transactional encounters, bots and algorithms can improve the experience and perhaps even engage customers so that they can be involved in meaningful transactions served for all sides. Capturing customer data during a transaction and using it in conjunction with other data, either historic or from a representative group and then analyzing it has given vendors many more levers for dealing appropriately with customers in an effort to promote their loyalty.
Perhaps the greatest contribution today comes from notifications. Its one thing to be able to analyze customer behavior and suggest actions but having the ability to notify a customer in real time and in a contextually relevant way is gold. A vendor that can be contextually relevant is a step ahead of the one that asks a perfunctory question—do you want fries?
Moreover, a notification that’s contextually relevant is not seen as a nuisance but as adding value. These and many other subtle changes are placing us on the cusp of a new vendor-customer relationship and making it possible to imagine much better engagement in the not too distant future. It’s a good time for CRM and its users.
Engaging at moments of truth
Lost somewhere in the pile that is a current research project, there’s an article on customer loyalty that says that over half of customers who recently exhibited loyal behavior towards a vendor said that they’d switch to another vendor in an instant. The question prompting this answer is whether these customers would switch for a better deal. It was a trick question trying to determine loyalty.
In some ways this is not surprising, who doesn’t want a better deal? But it also encompasses all that is not well in our approaches to customer loyalty today. We’ve developed a culture in which price is the primary motivator and one’s effort in the marketplace is all about getting the lowest price. But getting a low price and obtaining a great deal are not the same. For instance, the price of a car and the perception of getting a great deal hinges on the car’s brand.
We have also trained customers to expect a reward, discount, special deal, or whatever you want to call it, just for showing up. It makes the 8 year-old soccer league look positively draconian. In fact, we’ve so confused the idea of customer loyalty with rewards that both are practically useless. We reward customers, they collect points, miles, and stamps, and we consider those acts of collection to be evidence of loyalty. But if the article is to be believed (wish I could find it) we’re deluding ourselves, thinking that rewards and loyalty are the same, or perhaps that one breeds the other.
They are separate and distinct though. Rewards, or discounts which is what they amount to, were once thought to be tools for optimizing something called the marginal consumer—someone who didn’t see value at your price point but might be induced to make a purchase at a lower price. Gathering trade from the marginal consumer is a way to increase revenue, even if you can’t get the full price and it’s particularly useful in a market that’s growing at the rate of population and no faster. It’s a way to goose revenues even if it erodes margins (and it is the direct ancestor of the punch line, “We’ll make it up on volume.”) What happens though if every customer becomes a marginal one? Specifically what does this mean for list prices? You already know.
Nevertheless, current reward programs are working, or they’re working well enough. Of course, they aren’t making customers loyal and they aren’t enabling vendors to charge a premium for their wares, so maybe they aren’t working. When I hear rewards I automatically think about the wanted posters in the post office. We want you but you probably don’t want us. Right?
Just when you think things couldn’t get worse for loyalty programs, another report (which I can find) from McKinsey, “The Power of Points: Strategies for Making Loyalty Programs Work,” by Liz Hilton Segel, Phil Auerbach and Ido Segev, delivers the devastating news that, “Companies with loyalty programs posted a 2.28 percent comp sales increase, while those without loyalty programs saw 4.26 percent gains.” Just because you’ve got a loyalty program doesn’t mean it’s working
To add insult to injury, there are many companies that still don’t use rewards or loyalty plans that are doing just fine. Apple comes to mind, they have a robust business and everybody pays list price. Starbucks, mentioned last time, has more than 10 million customers in its loyalty program who are actually loyal by various measures like buying more.
To be clear, loyal customers are those who would make repeat purchases even if there were no inducement. Over time loyal customers buy more, expand their exposure to your brand, and they become more profitable because they know and understand your drill.
So what’s the similarity between companies like Apple and Starbucks and the rest of the trade who are giving the store away and barely making it? Engagement plays a big role in loyalty. Presumably only masochists engage with vendors they don’t like so engagement seems like a good place to start, but what comes first? Engaged customers become loyal over time but you could say that every coupon clipper in the world is therefore engaged, so what’s the deal?
Simply put, when customers engage with a vendor on an area of mutual interest there’s the necessary spark for loyalty. Note the mutuality because it’s important. Coupon-clippers are engaged but the vendors really aren’t and it takes no special talent to offer a discount. But vendors have to be able to pick their spots for engagement; to engage in everything is profoundly wasteful. That’s why I advocate for identifying moments of truth. They are the things that customers care about and that vendors need to uncover so that they can engage in a mutually beneficial way.
To engage customers this way is a route to developing their loyalty and as more vendors discover this they effectively train customers in new practices. All of this makes older rewards programs seem quaint.
The next time you’re wondering how to generate loyalty in your customers or speculating about why they take the discount and run, don’t automatically assume that “customers have changed” or some other marketing cliché, and what you have is all you get. Customers always do what they’re supposed to do and if it’s not what vendors want them to do, then it’s likely because vendors haven’t figured out how to ask the right question.
Importance of a System
I was having dinner the other night with friends, telling them about some of the ideas in my book, Solve for the Customer. My friend, we can call him Brian though it’s a pseudonym, was interested in my emphasis on process and my belief that Customer Science has evolved from a general emphasis on process in business, especially in the back office.
Brian’s company does a lot to ensure that its customers are happy and loyal because their business involves long term relationships and agreements that renew for many years at a time. These relationships can last decades and nurturing them can be part of the work of a career. I know this because we’re both in our 50’s and Brian has had the same customers for a very long time.
That’s the kind of relationship that is worthy of the name. Account managers can come and go but Brian, who manages a region with many account managers, still knows many of the customers by name. So I was interested to understand how his company approaches the issues of bonding and retention, satisfaction and loyalty. Not surprisingly, his company’s approach to customers uses direct person-to-person contact and it has built up over time. So it is still a very manual process and while that’s not a bad thing, it can be expensive. Account managers call on their customers frequently and always have a punch list of issues, usually but not exclusively, maintenance issues, to deal with. It’s a high touch business.
In addition to the frequent communications, which happen mostly between maintenance people on one side and operations people on the other, my friend’s company conducts an annual survey of customer executives to gauge account health and they place extra emphasis on customer retention issues, especially when a five-year contract is up for renewal.
I was impressed. Despite only having an annual survey, the personnel involved gathered customer data all the time providing a more real time pulse. Here was a company with its head in the right place and a mere two percent annual attrition rate to prove it. That’s right two, 2, TWO percent. Many people reading this right now would go to extremes to have that kind of number. People in the subscription market tell me that a 90 percent retention rate or better is quite good and many are happy to reach that threshold though few see the likes of 2 percent attrition. So in addition to being impressed, I was also skeptical that very many companies could have similar results in today’s business world if they relied on their existing customer facing processes and systems.
Having full time people managing accounts like this is not cheap and many industries won’t support that overhead nor will their customers accept five or ten year agreements that renew. So if we want similar results in many other businesses, we need to find ways to automate parts of the relationship to both speed up some processes and to reduce costs. At the same time though, we need to be mindful that at some point we might need to insert an expensive employee into the mix to assure a good outcome.
Applying resources is where I believe we fall down too often when dealing with customers. We’ve put a little too much faith in our legacy technologies that were made for simple lookup and retrieval but not necessarily for solving customer issues. For example, in SftC I have this example from an automated system:
“We are sold out of: 32 ct. Tums Ultra Chewy, cherry antacids (245-05-0141). Please substitute: 10-ct. Trojan bare skin condoms (245-03-0387).”
Clearly the automated system is out of its depth but so is the business’ expectation that automation can take care of all customer issues. But ironically, automation can do something even better.
Part of my enthusiasm for Customer Science is my belief that it can solve many customer issues in sales, marketing, and service, if we apply and use analytics and journey mapping to the customer’s journey. There’s nothing wrong with having a customer facing system suggest an alternative for a customer wanting to buy an out of stock item. It’s a good use of analytics and journey mapping unless it all goes wrong as in the example above.
Also, and this is key, no automated process should have as one of its assumptions that the automation is infallible. So Customer Science also suggests that analytics and journey mapping ought to be used to promote self-monitoring. Is this the right substitution? What recourse does the customer have if this is not the right substitution? Is the customer happy with this? How do we know?
If we take approaches to our customer facing processes that include modeling all of the possibilities that we need to provide for, a.k.a. moments of truth, and capturing and analyzing customer feedback, we can approach things like customer bonding which leads to advocacy and loyalty, with the expectation that our automated processes can yield the same kinds of retention rates as a more labor intensive one.
Last point, we spend a lot of thought cycles on personalizing a relationship, at least the part when the vendor and customer are in a moment of truth but I am skeptical that this is the right approach. Personal is nice, but in a business or commercial relationship what’s needed is authenticity not personalization. The business system that suggested condoms instead of antacids won’t get extra points if it addresses the customer by name. But if it suggested a store band of antacid as a legitimate substitute it likely would have preserved the transaction and at the end of the day the authenticity that can drive a transaction is what matters to both the customer and the business.
