Customer Loyalty Improves Retention, Part 1

One of my predictions for this year is retention marketing will increase its importance in online marketing. Acquisition marketing activities through such channels as affiliates and search are becoming increasingly sophisticated. The tools and skills are out there, and the efficiency improvements are beginning to tail off. That’s not to say there aren’t improvements to be made. It’s just not the low-hanging fruit for most organizations these days.

Meanwhile, conversion optimization is gaining momentum. There has been a lot more focus on what actually happens when someone gets to a site over the past couple years, spawning growth in Web analytics and multivariate testing services. There’s still a lot of mileage for most organizations to gain through site improvements, but the process is generally underway.

From the work we’ve done with many organizations, however, I think companies generally heave a sigh of relief when they make a sale, as if that means the job is done. They created awareness, acquired the traffic, and converted it on the site, thus creating the most important asset: the customer. Then, they neglect that asset and set off in pursuit of new ones. As a result, most customer databases are littered with customers who have only transacted once. Retention marketing is converting someone twice without having to acquire her twice. You don’t want to have to go through all that heavy lifting again!

As part of this increased focus on retention marketing, there’ll be an increased emphasis on customer loyalty. Over the next few weeks, I’ll look at issues around customer loyalty, such as what it is, how to measure it, and how to use data and insights to manage the retention marketing process more effectively.

What Is Customer Loyalty?

Is customer loyalty a state of mind or a set of behaviors? How can we really establish whether a customer is loyal or not? In a multichannel world, is the notion of loyalty even valid or useful?

These are tough questions that have been debated for years. “Loyalty” is usually defined as a quality, which suggests it’s more attitudinal than behavioral. In marketing, however, we’re generally interested in outcomes (like someone buying something). Are behaviors actually the best loyalty indicators?

As part of my MBA, I did a lot of research on store loyalty among U.K. supermarkets. I measured how much people spent in each grocery store they shopped in during a 12-week period and created a metric to measure how loyal they were to various retail brands. I found most people spent most of their weekly shopping time in one supermarket. You could argue, then, most people appear to be loyal. But what’s the context to this behavior? Are they only loyal to that store because it’s the closest or most convenient? Would they rather shop somewhere else if it were more convenient?

Another example can be found in financial services. People can appear to be very loyal to their banks. I’ve had my main account at my bank since I was a student. I must be very loyal, right? But if I were asked whether I considered myself to be a loyal supporter of my bank, I’d say I wasn’t. I’m behaviorally loyal, but I don’t consider myself a loyal customer. The pain of switching accounts to another bank is just too high at present. Inertia effects are at work here, and there’s a great deal of inertia in financial services.

Of course, the Internet can break down inertia. Your competitor is only a click away. I can now choose to get my groceries delivered by whichever supermarket delivers to my area. I’m actively encouraged to use shopping comparison sites to get the best deal from a selection of stores.

Yet technology can also create barriers to switching. For example, my household generally gets all its online groceries from one supermarket chain because all our orders are stored there. Similarly, Amazon gets a significant chunk of my expenditure in certain categories mainly because it’s so easy to buy, not because it’s necessarily the cheapest.

Part two: How do we measure customer loyalty? Do we look at behavioral indicators, or should we be concerned about what our customers think of us? Or both?

Till then…

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