Baking customer loyalty into your overall business strategy

While working on the manuscript for my new book about Starbucks, I’ve been revisiting what Michael Porter of the Harvard Business School framed as the  “five forces analysis” of business strategy.

While you probably know Porter’s five forces model, I think it is worth examining it from the perspective of building customer engagement and loyalty.  In my experience, many senior leaders use a Porter-like model to assess the attractiveness of markets.  Porter’s five forces are used to look at micro-economic conditions that will likely affect the desirability of product expansions or acquisitions.  Specifically Porter’s forces are:

• Threat of new competition,
• Threat of substitute products or services,
• Bargaining power of consumers,
• Bargaining power of vendors, and
• Intensity of competitive rivalry

From my perspective, customer engagement plays a substantial role in mitigating the threat of new competition.  To the degree that a start-up business drives strong customer engagement and customer loyalty, they are more attractive for acquisition.  If you produce customers who not only “like” your goods and services but truly “love” them,  a prospective competitor might look for an easier market to penetrate.

The threat of substitute products is not mitigated by simply being an excellent operator.  In fact, customer satisfaction offers no insurance against someone else seeking to match your product offerings at an equal or lesser price.  While competitors can try to lure otherwise satisfied customers to them with alternative products or services, truly loyal customers will not likely defect.  By increasing the percentage of “fully-engaged” customer you not only become more profitable over the short-term but you actually make possible competitors consider alternative opportunities that will likely result in easier successes.

One last thought, the Porter Model predicts that as consumer bargaining power increases the attractiveness of a market decreases.  In essence, as the customer becomes more powerful the profit opportunities of a business declines.  From my experience, companies with strong customer engagement also have strong RFM (Recency of purchases, Frequency of purchases, and Monetary value of purchases).  When RFM is high, consumers are reciprocally dependent on the success of their favored companies.  As such, those customers are less focused on price and also become less interested in asserting their bargaining power.

I’d be glad to hear how you view customer engagement and loyalty in the context of your business opportunities and threats.

In any case, I am certain customer loyalty plays an important part in effective strategic planning.