Make Marketing History

The views of a marketing deviant.

Sunday, November 30, 2008

Customer Loyalty And The Pareto Tyranny.

Customer loyalty is much prized and much misunderstood. The obsession with it is such that companies often confuse habit for loyalty. They see their healthy sales figures and believe they have loyal followers rather than habitual customers. They believe this right up until the point when a competitor disrupts their market and their "loyalists" suddenly jump ship.

Last week, at an airline innovation forum, I also saw that this leads to customers misinterpreting loyalty. They were heavy users, they were anointed by loyalty schemes and they were not satisfied. They had a sense of entitlement derived from the belief that their perceived loyalty should be rewarded.

But are they really loyal or are they merely conditioned by habit and the switching costs implicit in reward schemes? Haven't they essentially made their purchase decisions of their own volition? Haven't they decided that this was the best value available to them? Shouldn't that be enough? They've assigned their lazy loyalty and if they didn't think it worthwhile wouldn't they have moved on?

Apparently not. These customers felt the key to the airline's future was to serve them, the heavy users, better. And many businesses feel that too - citing a bastardised confluence of Pareto and the idea that it costs more to get a new user than to retain an existing one.

The latter is technically true, but if it leads to customers expecting special bonuses then it's not far from competing solely on price. If they say they want more for the same price, it's not very different from saying they want the existing offer for less and, as we know, if you compete on price you're saying you don't really value your offering.

This is the heart of the loyalty conundrum and the received wisdom that companies should focus on the 20% who provide 80% of their profits. There can be no argument about focusing on keeping them happy by providing the best product/service but that should be a given for all customers. It's smarter still to exploit their "loyalty" and profitability by trying to sell them ancillary products and services which will contribute to the growth of a business.

But how much extra profitability can be wrung out of them? Too many businesses overlook the potential for real growth that lies in nurturing a proportion of the less profitable 80% towards true loyalty and greater profitability. If you can generate true loyalty in them via excellence of customer service, constant improvement or alliance with some shared belief, their sheer numbers mean they can have a significant impact on your bottom line.

Without knowing the actual numbers involved, I'd hazard a guess that an airline that could engender that in the back of the plane might reap rich rewards. Indeed if they could get economy passengers to pay a ticket price a couple of percentage points higher than that of the competition, they might, in fact, be doubling the profit margin of the largest part of their customer base.

The key to customer loyalty is not the creation of a pampered elite, it's about maximising the number of profitable customers.


Anonymous Anonymous said...

great post!

seeing this in media buying myself. the biggest trick seems not to get more out of customers (regardless of volume or margin), but getting the customer to do something at all. that is the real hurdle. getting that initial trust. upselling is the easy part.

12:43 AM, December 01, 2008  
Blogger Robert said...

I'm sooooooooooo going to show this to someone and I bet you know who I mean.

I don't think I am wrong is saying I'm pretty sure you'll be making them smile ... probably at someone elses expense.

I love how some companies think that they can get the lions share of someone's wallet when in reality, there is generally an 'invisible ceiling' to how much they will happily spend with one brand in one category.

Great post Mr Dodds, I'm glad your attendance wasn't all is vein!

1:38 AM, December 01, 2008  
Blogger john dodds said...

Thanks Niko - 80/20 is just a power law, a statistical distribution - it doesnt prescribe behaviour.

Rob - why would Emah be interested in this? And there is more to report - some good, some not so good.

3:01 PM, December 01, 2008  
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