Customer Loyalty

7 Mar, 2019

Written by Ranjith Parasuraman

What is customer loyalty?

Customer loyalty is the faithfulness of a customer to a company. Loyalty makes a customer stick to a company in spite of distractions. For example, a loyal customer might forgive mistakes of a company, buy the company’s product/service even when he doesn’t need it and ignore better product/service of other companies. For example, Apple has loyal customers who forgive the company for its mistakes, overlook better products and repeatedly buy new versions of its products even though they don’t need it.

Why is customer loyalty important to your company?

Customer loyalty will help a company in the following ways:-

• Loyal customers will guarantee future profit.
• It will shield a company from outside competition.
• Customers will be forgiving towards the company’s mistakes.
• Customers will do marketing for the company through word of mouth.
• Customers will buy more as they will enjoy the process of buying from a company they like.

How to build customer loyalty?

It is not easy to build customer loyalty. If there were standard methods to make customers loyal every company will have loyal customers. There are two kinds of customer loyalty. One is natural loyalty and the other is incentivised loyalty. In natural loyalty, customers become loyal because of admiration and connection to a company. In incentivised loyalty, customers become loyal because a company pays them to be loyal. Loyalty programs work through incentivised loyalty.

How do loyalty programs work?

Loyalty programs work by making your customers buy repeatedly from your company by providing benefits for doing so. A loyalty program will not make customers naturally loyal to a company. But it can make customers buy more. Customers will buy more purely for the benefits. As soon as you stop the benefits they will default to their normal buying behaviour. So, loyalty programs create a permanent cost for your company. They will increase the revenue of your company, but always at a cost. But that doesn’t mean loyalty programs shouldn’t be implemented. A well-designed loyalty program will be a win-win for your company and the customers. The key is giving benefits which are valuable to customers but not expensive for your company.

What is a good loyalty program?

A good loyalty program provides maximum benefits to customers at least cost for your company. Most companies design bad loyalty programs in an attempt to reduce cost. Such programs do not work as the benefits are not good enough to incentivise customers to buy more. A loyalty program doesn’t have to be a points-based system. It can be any scheme which provides benefits to customers. The three major types of loyalty programs are discounting, freebies and points system.

Discounting

The simplest benefit to give customers is discounts. It can be given out in the form of a bulk discount or a subscription. In both cases, the idea is to lock customers for a period of time. In bulk discount, you ask customers to pay an advance fee for discounts in future orders in a time period. A good example of this model is Amazon Prime. Amazon charges customers an advance fee for availing discount in delivery fees for a year. This model is also used by companies offering services at a monthly fee. Such companies also offer a yearly plan in which customers pay in advance for the whole year and get a discount worth 2 months’ fees. Another way to give discounts is the subscription model. In this model, you ask customers to pay a fixed fee every month to avail your products/services at a discounted price. For example, if you are a retailer selling diapers, you can offer a diaper subscription where customers get diapers at a 10% discount if they subscribe to buy four packs of diapers every month.

Freebies

Another way to give benefits to customers is by partnering up with other companies to give freebies. The idea is to give samples of the product/service of the partner company to your customers. The partnership should be non-monetary. Your company shouldn’t pay the partner company for the freebies. But still, the partnership will be a win-win deal for both companies. Your company benefits by giving benefits which are valuable to customers and free-of-cost to your company. The partner company gains by getting a chance to impress your customers and convert them into paying customers.

Points system

The points system is another method to provide benefits to customers. In this system, you give points to customers when they buy from your company. Customers can redeem these points for real money when buying again from your company. The points in effect give discounts to customers for future transactions. Since customers accumulate more points when buying more, it will encourage them to buy repeatedly from your company.

The key factor in this system is the cost of points to your company. The points shouldn’t cost too much for your company and at the same time should be attractive to customers. Take into account your company’s margin and customer need for the product/service when deciding the real value of points for specific products/services. For high margin products, you can afford to give high value for your points. For example, if your margin is $7 for a $10 product, you can afford to give points worth $3. It will be an attractive deal for your customers. For high-frequency products give fewer points and for low-frequency products give high points. Doing this will reduce the cost for your company while still giving customers equal benefits across all products. For example, if you run a baby product retail store, give fewer points for diapers as it is bought frequently. Give more points for a stroller as it is bought rarely by a customer.

How to build customer loyalty in a natural way?

“The best loyalty program is where you treat me as a human being and I come back” - Unknown

Customer loyalty is not different from any other form of loyalty. A person becomes loyal to another person or an entity with whom he has a connection. This connection makes the two parties feel like a single entity, devoid of the selfishness of the individual parties. This connection is the essence of loyalty. This connection is sometimes natural. For example, people from a city will naturally have a connection with that city’s sports team. In most other cases this connection is earned through trust. For example, a person becomes loyal to a friend he trusts. The friend earns this trust by behaving in a selfless manner. Behaving selflessly is the only way to earn trust. For a company to earn a customer’s trust it should behave in a selfless manner. This is the natural way for a company to earn its customers loyalty.

Example of selfless behaviour leading to customer loyalty

Apple puts tremendous attention to the quality of its products. It makes their products long lasting. Customers see this as selfless behaviour from Apple as no other company cares to make long lasting products. Customers trust the company because of it. This trust makes them loyal to Apple. They enjoy buying from Apple as its loyalty makes them feel like they are part of Apple. This is why Apple’s customers buy from the company repeatedly even when they don’t need to.

Most companies struggle to show selfless behaviour not because they are selfish companies but because they think short term. Most companies are naturally selfish as their ultimate motive is profit. This doesn’t mean they have to behave in a selfish manner towards their customers. The difference is short term thinking. A company which operates in the short term will treat its customers as a means to an end. It will look at customers only as a source of profit. Customers naturally get this message when they interact with the company and end up not trusting the company. Therefore for a company to naturally build customer loyalty, it has to think long term.

Example of selfish behaviour arising from short term thinking

A clothing retail shop might have a strict two-day return policy in an urgency to see profits every month. Customers will see this policy as selfish as it capitalises on their mistakes in buying wrong clothes. But a retail shop which thinks long term will have a longer return period, like a month. This is because they don’t have an urgency to see profits every month. Customers will see this policy as selfless as it doesn’t punish them for their mistakes.

How can your company think long term?

If the strategic thinking of your company is short term then it will be an uphill task trying to build customer loyalty. Ideas for changing the strategic thinking of a company are outside of the scope of this article but you can still take measures which will reduce bad experience for your customers. Doing this will make your company stand out from most other companies who give a bad experience to their customers. These measures may not directly make customers loyal to your company, but they will give improve customer satisfaction. Satisfied customers may become loyal to your company because you provide the best experience among all your competitors. Some measures which will reduce the bad experience for your customers are :-

Providing great after-sale support

Customers are sensitive to a company’s behaviour after the buying process. They will see a company as selfish if the company doesn’t show interest in solving customers’ problems after the buying process. Your company can easily stand out from other companies if you handle customers’ after-sale complaints with active interest.

Using technology

Use customer relationship management (CRM) tool to help your company build relationships with customers. Using CRM tools will give your customers a personalised experience when interacting with your company. It will make them feel respected.

Using self-service/AI

Use self-service and artificial intelligence (AI) tools to remove employees out of the equation when interacting with customers. The unpredictability in the behavior of employees leads to a bad experience for customers. By using self-service and AI you can give a consistent experience to customers. The bank ATM is an example of self-service. It removes the unpredictability in the customer-bank teller interaction. Similarly, AI tools remove unpredictability in employee behaviour by taking over conversations with customers. For example, you can use a chatbot to handle customer queries. This chatbot will be able to have complex conversations with customers. It will be much faster in resolving customer queries compared to a human support agent.

How to measure customer loyalty?

The simplest measure of customer loyalty is customer lifetime value (LTV). It is the average total revenue received from a customer throughout his relationship with a company. Whenever you implement measures to improve customer loyalty you should see an increase in LTV as a result.