Following last month’s article introducing strategies for customer relationships, Daniel Ray shares with us his approach to implementing sustainable and profitable relationships. As a professor of marketing and head of the Client Capital Institute at Grenoble Ecole de Management, he demonstrates that customer satisfaction influences a company’s profitability.
Earn the loyalty of existing customers or attract new ones?
This question always comes up when marketing departments are deciding how to spend their budget. The common perception is that the first priority should be to earn the loyalty of existing customers. “However, that’s not always the case. You have to consider four key factors that will influence the impact of a customer’s loyalty. If these factors are positive, then customer loyalty will be extremely profitable. But if not, then you’re wasting your money! In fact, these four factors efficiently explain why many loyalty programs are not profitable.” explains Daniel Ray.
Four factors to ensure profitable customer loyalty
- Word of mouth: It is essential to consider to what extent word of mouth will increase the impact of your marketing campaigns as this will directly impact profitability.
- Cost reduction: You have to consider whether or not satisfying a loyal customer costs less than seducing a new customer. Loyal customers know your strengths and limits. And you have a better idea of how to satisfy them because you know their habits. Therefore, it's usually cheaper to satisfy a loyal customer.
- Cross- and up-selling: One of the key advantages of a loyal customer is the fact his or her average purchases are superior to a new customer. A loyal customer trusts the brand and can therefore be tempted to buy complementary products or higher-end products.
- The price premium: In general, a loyal customer will pay less attention to prices. If you increase your prices within a reasonable limit, the loyal customer will not abandon the brand.
Before focusing all your efforts on customer loyalty, it's essential to calculate how much you can capitalize on each of these four factors. There are currently two types of approaches you can then use to earn a customer's loyalty.
First approach: to keep customers willingly or unwillingly
Earning Customer Loyalty
This is the most common approach. And it used to work well. But today’s market has evolved. This approach generally has two possible tactics:
- Lock down the customer: By using legal contracts or technological constraints, you can force a customer to stay with brand. Take for example printers that only work with a specific brand’s ink. This type of approach works. But we should ask ourselves how long this will last given the rising irritation of customers when faced with such tactics.
- Customer inertia: In the banking sector for example, a customer is generally kept for 22 years, even when satisfaction is low. Are customers simply stupid? No! It’s just inertia. The time and effort it takes to change keeps customers from doing so, especially when they’re not sure other brands will be any better. This inertia is all the more present when the costs and risks associated with changing are higher. But this tactic is falling apart for two reasons. First, as the state implements legislation, it simplifies the process and increases customer protection. Second, the digital era will have an enormous impact as the effort to change brands will soon take no more than a few clicks!
Second approach: create attachment to a brand
In this case there are also two possible tactics:
- Focus on the brand’s image: By highlighting the brand’s image, a company can effectively create a sustainable appeal for customers and thus earn their loyalty (e.g. Apple or Harley Davidson). However, this technique can often be expensive and risky in terms of return on investment. It’s difficult and time-consuming to create a strong brand image. However, it only takes a second to lose your image. For example, Nike suffered immediately from the revelation that it employed child workers, and more recently Volkswagen suffered a huge setback.
- Invest in customer satisfaction: Customer satisfaction policies offer real advantages. Once you’ve measured customer satisfaction, you know how and when to act. It’s for this reason that most companies bank on customer satisfaction to earn loyalty. But this tactic is based on the assumption that satisfaction automatically leads to loyalty. Are there situations this might not be true? If so, that would mean money spent on satisfaction might in fact be useless to increase customer loyalty.
The Loyalty Model: Creating Sustainable Customer Satisfaction
Calculating your Loyalty Model means understanding the relationship between satisfaction and loyalty. This allows you to validate the profitability of customer satisfaction policies and decide how to optimize future policies. “Research demonstrates that there is a strong correlation between customer satisfaction and profitability.” adds Daniel Ray.
Research carried out on the American stock exchange highlighted that over the past 20 years, companies that satisfy their customers do 50% better on the stock exchange than their competitors in only 10 years. “However to achieve sustainable customer satisfaction, you don’t have to simply implement norms, processes and KPIs. You have to implement a real customer culture that will improve satisfaction sustainably at reduced costs.” concludes Daniel Ray.