A Loyalty Program Doesn’t Loyalty Make – Repeat Business Is NOT The Grand Prize
For clients with whom I have helped create loyalty programs, I am quick to make a somewhat unpopular set of distinctions between repeat business and customer loyalty.
Given the confusion that abounds between loyalty and repeat business, I thought I would share a couple of nuances that I hope will prove conceptually helpful.
It Starts With Understanding Customer Value
One of my favorite business metrics – one that is too often overlooked or underutilized is customer lifetime value (abbreviated at least four ways CLV, CLTV, LVC or LTV).
However you abbreviate it, customer lifetime value is a calculation with varying levels of rigor (some businesses roughly guess the number others use specific customer inputs to project it).
While I often work with complex models to determine customer lifetime value, at a macro level the most basic calculation looks at average monthly customer spend multiplied by gross margin divided by monthly churn.
For example, if average monthly customer spend is $60, your gross margin is 30%, and your customer churn is 5% – your overall customer lifetime value is $360. Kissmetrics has a solid infographic demonstrating the calculation of lifetime value in the context of Starbucks.
In future blogs, I intend to talk more in-depth about customer churn because customer defection is multifactorial with different business implications. For example, voluntary and involuntary churn need to be handled differently, and there is a very positive side to negative churn – but I digress.
Insights from Calculating Customer Lifetime Value
From my perspective, some of the most important benefits of calculating customer lifetime value are the insights gained concerning the impact of churn rates (percentage of customers who leave your business over a given time frame) and retention costs (money spent to keep customers). Therein, come lessons for distinguishing between what I view as differentiated retention and loyalty strategies.
To make this maximally clear, let me provide several examples of retention strategies that are only posing as loyalty strategies.
When it comes to airlines, I have no loyalty. I fly mostly based on who flies where I need to travel when I need to go there. That said, some of the retention strategies used by the airline industry (which they call loyalty programs) do influence my decision-making.
In essence, if all things are equal, I will choose an airline on which I have earned or seek to earn status benefits. Those benefits are retention costs the airlines use to induce increased customer value from me.
Beyond overtly incentivizing repeat purchase behavior, some brands attempt to bundle products and services in a way that makes it difficult for you to extract yourself from your relationship with them.
Recently, Wells Fargo Bank’s sales and cross-selling incentives resulted in lawsuits, fines, and consumer distrust. Despite those scandals, Wells Fargo is seeking to retain customers in part by communicating a commitment to lapsed trustworthiness dating back to a time when the company carried gold across the United States by stagecoach.
Assuredly, most of Wells Fargo’s customers are staying with the bank, not because of a trust emphasizing marketing campaign or out of a deep sense of loyalty to Wells Fargo. I suspect most will stay out of habit, complacency or due to a high barrier to switch banks.
Specifically, banks like many other businesses, understand that the more services or products (checking accounts, investment accounts, safety deposit boxes, etc.) you receive from them, the harder it will be for you to take your business elsewhere.
Retention Plus Loyalty
The big takeaway from this blog is that most programs or strategies referred to as loyalty programs are simply efforts to entice customer retention or reduce likelihood customers will churn.
These programs are often a collection of tactics designed to appeal to the logical side of humans and to get customers to calculate tradeoffs like:
Are the retention benefits worth my next purchase?
Is it more painful to stay with this provider or to leave them?
Don’t get me wrong, well-structured retention programs can and do produce remarkable profits. In fact, when one of my clients figured out how to nudge customers to a second purchase, they gained easy and almost automatic future purchases.
In my opinion, however, retention strategies should not be confused with genuine customer loyalty. Loyalty might be rewarded with perks or benefits, but it is a deep emotional connection that can’t be purchased or lured.
Customer loyalty is a genuine bond that has to be nurtured by businesses to be received from customers. It emerges from trust NOT from coercion or from making it hard for customers to leave.
Being Easy to Fire
I look at a brand like Netflix and see the evolution from a retention strategy to a deeper commitment to customer loyalty.
Once upon a time, Netflix made it difficult to terminate their service agreement. The notion being that the more difficult they made it to leave for customers, the more likely Netflix would profit simply because people neglected to take action to stop paying their monthly subscription. Today, Netflix gains loyalty by being one of the easiest companies to “fire.” Conversely, they are one of the easiest to “rehire.”
If you go to the Netflix landing page, you will see the words “cancel online anytime 24 hours a day” prominently displayed in multiple locations. Should you wish to pause or stop your service, Netflix retains your past viewing history and wish list for ten months, so your relationship with the brand is retained until you wish to hire them again.
Don’t Settle For Just Retention
My goal is to help my clients craft strong retention strategies while also focusing on actions that build emotional connections connected to trust and feelings of personal care. Working in tandem this dual approach cements retention drives true customer loyalty, and even increases referrals from those engaged customers.
What are you doing both on the retention and the loyalty front?
Please know I am here for you as you explore both elements of your strategy. Simply reach out to firstname.lastname@example.org to schedule a time for you and me to chat.
Joseph A. Michelli, Ph.D. is a professional speaker and chief experience officer at The Michelli Experience. A New York Times #1 bestselling author, Dr. Michelli and his team consult with some of the world’s best customer experience companies.
Follow on Twitter: @josephmichelli
As usual, Joseph, great article. I’ve always felt that loyalty is more an emotion, while retention is more transactional. Hope all is well in your world!
Shep, it’s great to hear from you! Great minds think alike and then there is us…..I trust you are hitting the cover off the ball. Joseph