Why read this? : We explore the opposing views about customer loyalty in marketing. Learn why some say it’s a sign of brand strength, and that loyal customers drive future sales. And why others argue customers never stay loyal, and new customers should be your priority. Read this to learn where customer loyalty matters, and where it doesn’t.
Customer loyalty differs from other stages in the brand choice funnel. Trust, awareness, consideration and trial are about persuading customers to buy. Loyalty is about persuading customers who’ve already bought to buy again.
These customers already know your brand. They’ll have a different perspective to those who haven’t yet tried you. They know who you are and what you do. You’ve got a history with them.
Big management consultants like McKinsey and Bain argue you should set up customer loyalty programs to nurture these customers.
Strong brands have loyal customers, they say. They argue it costs less to keep customers than get new ones, so your marketing spend is more efficient.
But many advertising experts, like Les Binet and Sarah Carter in How Not to Plan, argue customer loyalty programs are a waste of time and money. To be fair, they may be biased because that’s time and money you’re not spending on advertising.
But, even unbiased experts like Professor Byron Sharp in How Brands Grow shows customer loyalty is quite rare. Brands which focus on bringing in new customers usually grow faster.
Advertising and loyalty programs - you can do both
We find these arguments odd, as there’s no reason you can’t do both. Advertise to get new customers. And run loyalty programs to keep existing ones.
You’ll probably spend more on advertising, because there’s more customers to go after. But every CRM program we’ve worked on has always paid for itself. That’s not to say they work for every business. But the context of some categories makes them well-suited to customer loyalty.
When to focus on customer loyalty
Business context shapes how you make marketing decisions, and is a mix of :-
- external factors – customers, category and competitors.
- internal factors – your positioning, brand identity and marketing plan.
If you’re entering a new category or launching a marketing innovation, then by definition, you have no loyalty. You go after early adopters and focus 100% on acquiring new customers. Simple.
You only look at customer loyalty when you have an existing base of customers. Customers who’ve bought before, and you want to buy again. There’s 3 areas to consider with these customers :-
- frequency of purchase.
- level of engagement.
- uniqueness and relevance of the brand benefit.
Frequency of purchase
Some categories have a high purchase frequency. Snacks and cleaning products, for example.
In these categories customers usually buy brands out of habit. They buy brands they know, because buying a familiar brand is easy. No need to think deeply. Just buy what you bought last time.
This habit driven buying is arguably a form of customer loyalty. But, it’s driven by passive mental laziness rather than active choice. If competitors can disrupt this laziness and make a better offer, these customers will switch.
Habit driven buying favours market leaders. They’ve got high distribution and brand awareness. Market leaders are a safe choice for people who aren’t very engaged in the category.
So, the challenge / opportunity for the rest of the market is to disrupt those buying habits. Create brands which offer something better. Run sales promotions and price discounts to persuade customers to switch.
Customer loyalty programs which incentivise customers to stick with their existing brands can be a way to defend against these competitor moves. You lock in customers by rewarding them for staying loyal.
It doesn’t have to be complicated. Get a stamp when you buy a coffee and get a free coffee on your tenth stamp, for example. A simple customer loyalty program for a high purchase frequency product.
Level of engagement
Customer loyalty is more important in categories with high levels of engagement. Customers actively research brands in these categories before buying. They think deeply about which brands to buy. Buying is based on active choices, not passive habits.
With this high engagement comes high expectations of what the brand will do for them after they buy. There’s more of a relationship between the customer and the brand.
Take mobile phones, for example. If you like the way your device works, you tend to buy a newer version of the same brand when you want a new phone.
Cars are another good example. Your next choice of car is often based on your experience with your current model. It’s pretty simple. Keep customers happy and they stay loyal.
But as in any relationship, if you let the other person down, you break their trust. That’s hard to win back.
Customer loyalty programs in high engagement categories make sense. They keep you close to the customer, and help you meet their needs. That makes them more likely to buy you again.
Unique and highly relevant products
How you choose to compete in the market also influences customer loyalty.
There’s 3 main competitive strategies, known as Porter’s generic strategies. (see our e-Commerce competitive strategy article for more on this).
Cost leaders focus on price and cost. They believe price drives brand choice. Customers stay “loyal” to the brands which offer the best value.
However, customers are loyal to the price point, not the brand. If competitors better your price, customers will switch.
You have to plan in lots of sales promotions and price discounting to maintain customer loyalty.
Brand who differentiate or focus find a unique position in the market.
They base this position on a benefit relevant to a specific market segment e.g. highest quality, best level of service, or most exclusive.
The segment can be broad (differentiate) or quite niche (focus).
Their position helps them build customer loyalty by offering the most relevant benefit to a specific segment of customers.
This segment cares more about the benefit than the price. So they’re more likely to stick and not switch.
You may have fewer customers overall with these approaches, but they’ll be more loyal. They’ll be less likely to be lured away by competitors.
Customer loyalty and sales growth
Having loyal customers is clearly a good thing. You might get them because of passive buying habits. Or win them with unique competitive strategies in high engagement categories. Either way, you know their loyalty will help you with future sales.
But there’s still that “loyalty doesn’t work” argument we mentioned earlier. It argues you only grow sales if you win new customers.
And that’s true. But again, it’s not do one or the other. You can do both. Advertise to win new customers. Loyalty programs to keep existing customers happy. Because if you don’t maintain loyalty, you lose customers. And that means you need to win more new customers to grow your brand.
A solid base of sales
Keeping existing customers loyal gives you a solid base of sales. Your future sales will come from a mix of new customers and repeat sales from loyal customers. It’s all about finding the right balance of activities to do both. We’ve generally seen businesses spend around 20% of their marketing budget on loyalty. But we’ve seen it as low as 5%, and as high as 40%.
This investment’s important because it helps you avoid the risk of what’s known as the leaky bucket. You don’t want to bring in lots of new customers at the top of your funnel, but lose loyal customers at the bottom. Keep loyal customers in your brand, and your “sales” bucket fills up much faster.
Your existing loyal customer base are a business asset. Like all assets you need to invest to maintain the asset’s value.
Existing customers know you. They know your brand. You know them too. You know their name, address and shopping history if they buy direct from you. Or you know them through the data they share in your customer experience interactions.
Targeted CRM activity helps maintain the relationship. You contact them regularly. You interact to drive engagement, and make them feel special. These interactions let your loyal customers know you care.
Customer loyalty and brand strength
Customer loyalty is a good way to measure brand strength. Strong brands have more loyal customers.
You can measure this with quantitative research (e.g. brand health tracking) and by analysing your digital data to identify loyal behaviours.
Increasing customer loyalty is a good sign your brand health is strong and customers like it. Brands who differentiate or focus need loyalty to thrive.
But if loyalty’s going down, that’s an early warning signal you’ve got a problem with your brand.
An early warning signal
It takes time to find out information about non-buyers. Brand health studies and post campaign analyses can take weeks to give you results.
But you have information about existing customers that’s available right now. You can look at your digital data, and get immediate feedback about these customers.
You’ve got marketing data from your digital media, social media, website and CRM channel interactions. Then there’s e-Commerce data from your online retailers, and your D2C store if you have one.
Most of this data comes from your loyal customers. They’re the ones you interact with the most. If you notice declines in these numbers, you know you’ve got a problem you need to fix quickly.
Look at former big brands like Nokia or Blockbuster. They had high customer loyalty right up to the point where they didn’t.
A competitor (Apple and Netflix) came out with something better, and customers moved on. Loyalty vanished. As did those brands eventually.
Retention is easier and cheaper
Another common argument for customer loyalty is it’s much easier and cheaper to retain customers than to acquire them.
On the surface, that’s true. But it’s more complicated than that. Retention and acquisition work in different ways. And you need both to grow.
Retention is easier than acquisition
Don’t forget, retention and acquisition both sit in the brand choice funnel. They’re 2 different parts of the same overall process.
Acquisition is harder because it happens earlier in the customer’s journey.
You’ve got more hurdles to overcome. They don’t trust you, don’t know you (awareness) and don’t think you’re relevant (consideration).
But with retention, you’ve already gone past those hurdles. They trust you and know who you are. You were relevant enough for them to consider and buy your brand.
That doesn’t mean retention is easy, just that it’s easier than acquisition. To buy again, the buying experience and after-sales experience need to have been good. Customers have to feel there’s something in it for them to keep buying.
Relationship-building is the key to customer loyalty. You stay in touch with customers after the purchase. Fix any problems. Keep them engaged with relevant content and experiences. In sales terms, it’s about keeping them “warm”, so when they’re ready to buy again, you’re the obvious choice.
Retention is cheaper than acquisition
Customer loyalty advocates commonly point out the widely held claim it costs five times more to acquire than retain customers.
But it’s not really a fair comparison. As we already said, they’re both part of the same process. And you need both to grow.
Customer acquisition activities like advertising and media bring in new customers. You’ve got to spend more to find them and to persuade them to buy. There’s a bigger pool of customers for you to reach. And more hurdles to overcome.
With customer retention, the customer pool is much smaller. And you only have the single hurdle of repeat purchase to get over. So, obviously, it takes less money to drive a CRM programme.
How much you spend depends on the size of your customer base, and how sophisticated you want your loyalty activities. There are some free options for small businesses who just send out email updates, for example. But there’s also bigger, more expensive CRM solutions for companies with large customer bases and more advanced loyalty programs.
The business case for customer loyalty
Which brings us to the crucial question of the value of customer loyalty activities. For that you need a business case.
First, look at how many loyal customers you have. What do you think their repeat buying level would be if you did nothing? After all, some customers will stick with you no matter what.
Then, you do a sales forecast based on what you think a loyalty program would deliver. This sales uplift can come from many areas :-
- weight of purchase – they buy more of your brand.
- frequency – they buy more often.
- up-selling – they buy more premium versions of your brand.
- cross-selling – they buy other products in your range.
- word of mouth recommendation – they encourage others to buy your band.
Against these sales opportunities, you then work out how much a loyalty program would cost you :-
- content creation – for both online and physical production.
- database management – e.g. hosting, maintenance and security.
- promotional costs – e.g. price offers and producing promotional items.
- operating costs – e.g. admin and staff costs to run the program.
You compare your profit and loss with a customer loyalty program to one without. If the numbers look better with loyalty, then you go ahead with your loyalty program.
New growth opportunities with existing customers
Bear in mind, there’ll be a limit to how much extra existing customers will be willing to spend with you. They still need to find value in the “extras” you offer.
For example, you could offer subscription services to make their next purchase easier and faster. If you know what they’ve already bought, you can offer related products and services which improve their experience.
You can also offer loyal customers exclusive or early access to marketing innovation or unique experiences. This makes them feel valued and special.
For example, we used to work with a distillery which partnered with a nearby boutique hotel. Together, they gave loyal customers unique access to tour and accommodation packages, special tasting evenings and whiskies not available to the general public. Those customers loved the special experience. And it also drove extra sales for the distillery and the hotel.
Conclusion - customer loyalty
Clearly customer loyalty is better than customer disloyalty. It’s a sign of strong brand health. It shows you’re doing a good job with customers.
But remember where loyalty comes in the brand choice funnel. You need to win those new customers in the first place before you can look at loyalty.
So, you build your customer base first, then look at loyalty programs to keep them buying. Your business case is based on the extra sales you’ll get and the costs of running the program.
There’s lots of selling opportunities such as increasing the weight and frequency of purchase, and upselling and cross-selling.
Though there’s always a limit to how much a loyalty program can deliver, there’s also always a lot of value in keeping your loyal customers feel valued.
Check out our subscription models article for a more specific way of working with customer loyalty. See also our CRM article for more on how to build customer relationships. And get in touch if there’s a specific customer loyalty challenge you need help with.
Photo credits
Game pieces (edited) : Photo by Markus Spiske on Unsplash
Woman taking payment in a Coffee Shop : Photo by Patrick Tomasso on Unsplash
Audi Car Bonnet : Photo by Velito on Unsplash
Sale : Photo by Justin Lim on Unsplash
Red tulip / Yellow tulip : Photo by Rupert Britton on Unsplash
Marketing Dashboard : Photo by Carlos Muza on Unsplash
Mobile phones : Photo by Eirik Solheim on Unsplash
Hurdles : Photo by Jeremy Chen on Unsplash
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