Porter’s Five Forces and the Power of Customer Loyalty

Michael Porter’s “five forces analysis” is a strategic tool that’s been guiding business strategy for decades. When crafting my book Leading the Starbucks Way, I explored this framework through the lens of customer engagement and loyalty and will highlight my findings here.

Porter’s Five Forces – A Quick Refresher

For those unacquainted with Porter’s five forces, here’s the list of variables that alter business success:

1. Threats of new competition

2. Threats of substitute products or services

3. The bargaining power of consumers

4. The bargaining power of vendors

5. The intensity of competitive rivalry

Now that you have the list, let’s explore some of these forces in the context of customer engagement and loyalty.

• Combatting New Competition: Imagine you’re a new entrant, staring down an established player whose customers are fiercely loyal. That’s intimidating, right? Engaged customers aren’t just loyal; they’re a fortress. They make upstart business leaders think twice, potentially diverting them to less defended markets.

• Facing Substitute Threats: Your operations can be top-tier, but that doesn’t necessarily protect you from a newcomer who offers similar products at a cheaper price. However, a customer base that’s in love with what you do and how you do it? That’s an intangible that serves as a barrier to competitors who are trying to woo your customers away.

• Bargaining Power and The Consumer: Porter’s framework suggests a consumer purchasing power weakens markets. However, deeply engaged customers form symbiotic bonds with favored brands. Their purchase behaviors, epitomized by high RFM (Recency, Frequency, Monetary value), make them less price-sensitive and less likely to assert their bargaining power.

Actionable Takeaways:

Given Porter’s framework, here are a few tips to leverage strong customer relationships:

• Deepen Engagement: Instead of aiming for satisfaction, aim to cultivate genuine relationships with your customers. Encourage feedback, engage in community activities, and offer personalized experiences.

• Innovate, But Keep Core Values: While it’s crucial to innovate and evolve, ensure that your core values remain constant. Loyal customers are connected to what you stand for, not just what you sell.

• Monitor and Enhance RFM Metrics: Track the recency, frequency, and monetary value of customer purchases. Tailor marketing campaigns, loyalty programs, and engagement strategies to boost these metrics.

• Educate Your Customer Base: Empower your customers with knowledge. The more they understand your brand, offerings, values, and what’s in it for them to buy from you – the deeper their loyalty and more likely their referrals.

• Stay Updated on Market Dynamics: Regularly assess your market using Porter’s model. Understand shifts, anticipate changes, and strategize to maintain customer engagement amidst evolving scenarios.

• Feedback Loop: Encourage a feedback culture. Listen to your customers. They’ll often show you potential substitutes or emerging competitors before you notice them.

Porter’s five forces are a strategic framework for assessing and driving customer loyalty and engagement. As you chart future customer experience strategy, you’ll likely want to consider competitor and product threats, consumer bargaining power, and the intensity of competitive rivalry as you drive customer engagement and loyalty.

To learn more about how you can drive emotional engagement, please contact me at josephmichelli.com/contact.