Becoming Royalty With Loyalty

Friday, November 29, 2013

Guest Blog: Isaac Griffiths and Jack Reid define customer loyalty and outline six compelling reasons why retaining customers is so important.

What is Customer Loyalty?

Loyalty can be seen as quite a difficult concept to pin down with multiple competing definitions jostling for attention. Some would view loyalty as an idea that can be viewed in purely objective terms, while others may see it as subjective idea that cannot possibly be distilled into a simple number at the bottom of a spreadsheet. Customer loyalty can refer to a number of different concepts and there is no set definition which is commonly accepted. When the term is used it can refer to several things:

  • Repeat purchase – a customer buys the product again as it performed as desired previously.
  • First Choice brand – a customer values the product or service higher than substitutes available.
  • Emotional attachment – a customer can form an emotional attachment to the brand (this can be due customer interaction e.g feedback or many other factors).
  • Positive attitude –a customer can hold a positive attitude towards a brand, this can be built through marketing and positive experiences with the product or service.

However it is important to remember that examining each type of loyalty individually does not give the full picture. Loyalty encompasses a multitude of areas and concepts that must be taken into account when trying to understand consumer behaviour.

Why is customer loyalty important?

So now we have covered the issue of what is customer loyalty we can address the issue of why is customer loyalty important anyway? Luckily Buchanan and Giles (1990) have put together six reasons of why loyal long term customers have a tendency to be more profitable than new customers, the six reasons follow as:

  • Regular customers place frequent, consistent orders and, therefore, usually cost less to serve;
  • Longer-established customers tend to buy more;
  • Satisfied customers may sometimes pay premium prices;
  • Retaining customers makes it difficult for competitors to enter a market or increase their share;
  • Satisfied customers often refer new customers to the supplier at virtually no cost;
  • The cost of acquiring and serving new customers can be substantial. A higher retention rate implies that fewer new customers need be acquired, and that they can be acquired more cheaply.

How to measure customer loyalty

As mentioned in the previous section loyalty means different things to different people, it can be seen as no surprise that a number of different approaches have been adopted in trying to measure it. Bowen & Chen (2001) have described three of the most common approaches adopted in the attempt to measure loyalty:

  • Behavioural measurements
  • Attitudinal measurement
  • Composite measurements

Behavioural measurements (or the quantitative approach) would view repeat purchase of a product as an indicator of loyalty. This approach has the advantage of being a simple way to measure customer loyalty. However it is flawed in that it only really takes into account repeat purchase as the only measure of loyalty and ignores other factors, such as emotional attachment. For example, an office worker may repeatedly buy his lunch from the same shop, but this may simply be a matter of geographical convenience, and he would switch his custom to another shop should an alternative open nearby as he may have no emotional attachment to the shop.

The second approach, attitudinal measurements (the qualitative approach), try to measure emotional attachment, positive attitude, and whether the brand is the customers first choice. While being a slightly more advanced approach than simple behavioural measurements attitudinal approaches are still far from perfect. This is as while a customer may hold a product in high regard they may feel that the product is too expensive to use on a regular basis.

The third approach, composite measurements, attempts to bridge the gaps between the quantitative and qualitative approaches and therefore eliminate the flaws associated with them. Composite measurements approaches therefore use both attitudinal measurements and behavioural measurements, and can thus measures all types of loyalty.

How is the concept of customer loyalty used in practice?

One example of a customer loyalty scheme is the use of loyalty cards. Loyalty cards are now prevalent in businesses as diverse as supermarket conglomerates to small independent barbers’ shops. Sainsbury’s Nectar card can be seen as a successful use of a loyalty card. As most readers will be familiar with, the principle behind the nectar card is that customers can scan their cards and collect points every time they shop; these points can then be exchanged for vouchers for use in-store or other alternative ‘prizes’. This creates an incentive for customers to shop at Sainsbury’s rather than using competitors. On top of this all purchases made with a Nectar card are recorded, stored, and analysed. This facilitates the tracking of customer’s spending habits allowing Sainsbury’s to offer tailored offers to individual customers, which are likely to cause a repeat purchase.

Customer loyalty schemes are also not all about the use of incentives to keep the customers coming back to you, but also about installing a whole way of thinking in your business that places the customer as your primary focus. This can be difficult though as while a manager may understand the importance of customer loyalty, difficulty in quantifying, and therefore measuring customer loyalty, means that the importance of keeping customers can often be underestimated by employees. The fast food outlet Domino’s in the US has attempted to get around this by calculating that a single customer who comes regularly over a 10 year period is worth $5000. Then by emphasising this figure to their employees Domino’s has been able to demonstrate the value of customer loyalty to their employees. 

Bibliography

Bowen, J., & Chen, S.-L. (2001). The relationship between customer loyalty and Customer satisfaction. International Journal of Contemporary Hospitality Management, 213-217.

Gilles, B. a. (1990). Value managed relationships: The key to customer retention and profitability. European Management Journal, 523-526.

Please note that the views expressed in guest blogs do not necessarily reflect the views of The Richmond Marketing Consultancy.