Customer loyalty? Where it matters and where it doesn’t

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Snapshot : Customer loyalty divides opinions in marketing. Some argue retaining loyal customers is easier and cheaper than acquiring new ones. But others argue customers are never truly loyal and loyalty doesn’t drive sales. For us, it’s all about context. In this article, learn how to identify where customer loyalty matters and how to encourage your customers to stay loyal.

Customer loyalty follows trust, awareness, consideration and trial in the brand choice funnel. In those first four stages, you’re trying to persuade non-buyers to buy.

But, at the loyalty stage, the challenge is different. You’re now trying to persuade buyers to buy again.  

The loyal target audience are in a different frame of mind from customers earlier in the funnel. They’ve been there, seen that, done that and already bought the product.

So what, if anything, do you do with customers who’ve already bought? 

The brand choice funnel - trust - aware - consider - trial - loyalty - repeat purchase

Big management consultants like McKinsey and Bain promote customer loyalty heavily. They argue retaining loyal customers is a key measure of brand strength and makes marketing spend more efficient.

But many advertising experts (see for example the adverting planning book How Not to Plan) argue customer loyalty is over-rated. Professor Byron Sharp in his book How Brands Grow for example shows that true customer loyalty is rare. There’s little evidence loyalty drives sales growth. He argues brand grow by bringing in new customers.

For us though, customer loyalty isn’t a question of whether or not you go after it. It’s about how much you go after it, and how much effort you put into it. Remember loyalty customers are customers too. They can buy your products again. And there are relatively easy things you can do to keep them coming back for more. 

It’s all about context.

When to focus on customer loyalty

Your business context is made up of external – category, customers and competitors – and internal factors – positioning, brand identity and marketing plan – that shape your marketing decision making.

If that context means you’re entering a new category or launching a marketing innovation, then the loyalty question is easy. You don’t have any. Focus 100% on acquiring new customers. 

You need actual buying customers before you have to worry about loyalty. The more well-established you are, the more you’ll have to think about loyalty. How much you need to think about it depends on :-

  • frequency of purchase
  • level of engagement in the purchase
  • uniqueness and relevance of the brand benefit. 

Frequency of purchase

In frequently purchased categories (e.g snacks, cleaning products), customers usually buy familiar brands. They trust familiar brands. Familiar brands are easy choices.

No deep thinking. No deep brand engagement. Customers buy what they already know. 

This habitual buying is a form of loyalty. But it’s the weakest kind of customer loyalty, because it comes from passive laziness rather than active choice.

Lazy buying habits are good for market leaders, who have high distribution and brand awareness. 

Overhead shot of a load of red coloured snacks including Doritos and Skittles

But for everyone else in the market, the challenge is to break those lazy habits and get customers to try something different.

So you end up with this competitive battle, where you try to attract customers from other brands, while they try to attract your existing customers. 

This is the battle for customer loyalty.

It can bring aggressive sales promotions and price discounts to encourage brand switching. It can bring new innovations launch with new features and benefits. Remember, no brand or product lasts forever. They all have a natural life cycle.

Level of engagement

Customer loyalty plays a more important role in categories with high levels of engagement. Highly engaged customers spend more time researching before they buy, and want to stay connected afterwards.

With high engagement, loyalty is more of an active choice by the customer than a passive habit. That’s good for brands. But that choice isn’t always a permanent one. Like any relationship, if you want customers to have a lifelong relationship with your brand, you need to listen to them and do things to maintain that relationship.

Take cars or mobile phones for example. Both attract highly engaged customers who stick with brands. 

But customer circumstances can change. They might decide on a different car if their financial or family situation changes for example. They might choose a different phone if a new one comes out with a new killer benefit. 

It’s only by keeping close to these customers that you see these changes coming, and can carry out loyalty activities that’ll prevent these customers switching to competitors.

Front on image of the bonnet and grille of a black Audi car

Unique and highly relevant products

Your competitive strategy also has an impact on customer loyalty. 

As per our recent article on e-Commerce competitive strategy, there’s three main competitive strategies, known as Porter’s generic strategies

Cost leaders focus on price and cost. They believe price drives brand choice, and customers are “loyal” to the brands that offer the best value. 

But this approach is easy to copy and makes selling all about the price.

Sale sign in white on a red window with outline of a person walking past in the background

Brands focus on sales promotions and price discounting. Customers are loyal to the price point, not the brand. When competitors cut prices, customers switch brands.

Brand who differentiate or focus find a unique position in the market, not directly related to price. 

They offer a benefit relevant to a specific market segment e.g. highest quality, best level of service or most exclusive.

They position themselves around that benefit and win those customers by being the most relevant

That benefit tends to be longer-lasting and more defendable than price, so customer loyalty can often be higher for brands who follow these approaches.

Red tulip in a field of yellow tulips showing the impact of standing out and looking different

The key business question then comes down to the long-term value of that segment. There’ll be less buyers overall than if you just go after price, but they’ll pay more and be more loyal.

Does customer loyalty work or not?

Loyal customers are undoubtedly valuable. If passive buying habits drive customers to your brand or customers are highly engaged and don’t switch, that’s clearly a positive for your brand. You hold on to these customers with little effort needed. 

But there’s still that “loyalty doesn’t work” argument we mentioned.  

But that argument is about loyalty not being the best way to grow your business. It argues the value of loyalty has been over-rated, not that you should never do it. It’s a general principle, not an absolute rule. 

Think about it. 

If you don’t keep customers loyal, and they switch to competitors, you need even more new customers you need to grow. But if you keep a base of existing loyal customers, you need less new customers to grow.

What does “not working” really mean?

For us, it’s not so much about loyalty “working” or “not working”. You need new customers to grow. But keeping existing customers loyal gives you a solid base of sales. It’s about how you prioritise and balance activities for new and existing customers to get the best mix of customers in the future.

Customer acquisition and retention activities don’t have to be mutually exclusive. You can run them at the same time.

For example, run advertising to bring in new customers. If it’s not relevant for existing customers they’ll ignore it. But at the same time. run loyalty activities like e-mails to your CRM database. New customers will never see them until after they buy. 

It’s all about finding the right balance. 

The benefit of existing customers

Your existing customers are a valuable business asset. And like any asset, they need maintenance. 

Existing customers know you and know your brand. With the right digital data set up, you’ll also know them. You can contact them directly and track every interaction along their customer experience journey.

Targeted CRM activity helps maintain the relationship. Regular contact and engagement keeps them feeling positive about your brand. It keeps them feeling like you care. 

The leaky bucket

This regular contact helps you avoid what’s known as the leaky bucket of customers.

Imagine your business is a bucket you fill up with customers. Win new customers and your bucket fills. But lose loyal customers, and it’s like there’s a hole in the bottom of your bucket. The bigger the hole, the harder to keep your bucket filled. 

Regular contact to drive customer loyalty minimises the risk of a leaky bucket.

You need to work out how to find the balance between acquiring new customers and retaining existing customers. The right balance depends on your business context. In our experience, the average is around 20 – 25% on customer loyalty, but can be as low as 10% and as high as 40%. 

Customer loyalty is a measure of brand strength

However much you choose to focus on customer loyalty, you need to be able to measure the impact of any activities you do.

Quantitative research like brand health tracking can help. Digital data by tracking individual interactions can also help.

As a general rule, observing loyalty (do customers keep buying your products) works better than asking customers about loyalty.

No-one likes to admit to being disloyal, and customers often don’t know how loyal they’ll be. 

Increasing customer loyalty is a good sign that your brand health is strong and customers like it. This is particularly important for brands who differentiate or focus. Unique positions need customers who’ll stay loyal to them. 

Decreases in customer loyalty though is obviously not a good sign. It’s an early warning system for your brand that something’s changed.

It’s an early warning system

Finding out information about non-buyers takes time. You can carry out brand health studies and post campaign analyses but you can wait for weeks to see the results.

But you can find out information about existing customers much more quickly. You know who they are. You have regular contact with them. And your digital data systems give you immediate feedback every time you interact with the customer. 

Digital marketing gives you live data from loyal customers about your digital media, website, social media and CRM channels. 

E-Commerce selling through a D2C store tells you who customers are and what and when they buy.

You only get these immediate sources of customer feedback from loyal customers. These data sources help you quickly evaluate the impact of what’s happening in the market. 

If your competitor come out with something new for example and your loyalty rate starts to drop, then you know you’ve got a problem. 

Look at brands of the past like Nokia or Blockbuster.

They enjoyed high customer loyalty right up to the point where a competitor came out with something better. But then they weren’t set up to respond. They took loyalty for granted. 

Customers moved on. Loyalty vanished. As did those brands eventually.

Lots of mobile phones from the end of the 1990s and early 2000s

Retention is easier and cheaper than acquisition?

Another common argument for customer loyalty activity is that it’s much easier and cheaper to retain customers than it is to acquire them. 

On the surface this is true. But it’s more complicated than that. 

Retention is easier than acquisition

Retention isn’t easy. It’s just easier than acquisition because there’s less hurdles to overcome.

To get someone to buy, you need to get them over the hurdles of trust, awareness and consideration for example. If they’ve already bought though, the only hurdle is to get them to buy again. 

The key to this is to manage your interaction with the customer as an on-going relationship, rather than as a one-off transaction. 

So stay in contact with them after the purchase. Fix any problems that come up and keep them engaged with your brand. It’s not about continually trying to re-sell to them, but making them feel confident and comfortable to buy again when they’re ready.

This relationship management is “easier” than advertising to strangers, but it still takes time and effort. And it doesn’t come for free.

Retention is cheaper than acquisition

Many advocates of customer loyalty and CRM programmes point out the widely held claim that it costs five times more to acquire than retain customers.

But it’s not really a fair comparison. As we already said, acquisition / loyalty isn’t either / or. You need both. 

Customer acquisition grows your business. Activities like advertising and media have to cover all the customers who sit at the trust, awareness, consideration and trial hurdles and get them over each of those hurdles. 

Person holding 6 hundred dollar bills in front of them which have been set alight

With customer retention, you’ve got a much smaller pool of customers. And you only have the single hurdle of repeat purchase to get over. So, obviously, it takes less money to drive a CRM programme.

We know CRM software systems for small businesses that are free or low cost, for example. But we’ve also seen CRM solutions for bigger companies that can easily run into six or seven figures with on-going large maintenance spends.   

So, not always cheap. 

Customer loyalty activity needs analysis and a business case

You need to analyse customer behaviour and have a business case for your customer loyalty activity. This should cover how many customers it’ll reach and how much you need to spend. 

You need to factor in costs like content creation, database management and any special loyalty offers

Estimate how much repeat purchasing you think you can drive and what that’ll mean for sales. Calculate the sales and profit return against the cost of driving loyal repeat purchases.

In our experience, loyalty program spend is usually highly efficient. It focuses on a known group of customers who’ve already bought. There’s not the same wastage on customers who won’t buy that happens with advertising and media spends.

New growth opportunities with existing customers

Bear in mind you’ve already “got” those customers.  There’ll be a limit to how much additional sales you’ll get from this group. To get further growth from them, you need to look at setting up new additional product and service offers.

For example, you could set up reminder or subscription services to make their next purchase easier and faster. If you know what they’ve already bought, you can offer complementary products and services that improve their experience. 

You can also make loyal customers feel more special by giving them exclusive or early access to marketing innovation or unique experiences. 

For example, we used to work with a distillery that set up a partnership with a nearby exclusive boutique hotel to give unique access to distillery tours, special tasting evenings and unique whiskies not sold to the general public. This built loyalty, but also drove additional sales for the distillery and the hotel. . 

You see the big grocery brands do this sort of thing a lot. They create special offers for customers who are part of their loyalty schemes. So, they try to sell car insurance (eg. Woolworths Car Insurance) of offer flight discounts with specific travel companies (e.g. Coles and Flybuy points) for example. 

These are the types of business context where you get the most value out of driving customer loyalty.

Conclusion - customer loyalty

Clearly, it’s better to have customer loyalty than customer disloyalty. Loyalty’s a sign of strong brand health and that you’re doing a good job with customers. 

But loyalty only comes after you win new customers. Winning new customers is still what drives growth. But the more loyal your customers, the, the less your reliance on new customers to grow.

Customer loyalty activities can be easier and cheaper to do. They work on a smaller pool of customers and there’s less hurdles to overcome. 

Group of game pieces following one game piece with added caption - we love you

You get immediate feedback on activities because you know who these customers are. That data can work as an early warning system for your brand. 

But you still have to work hard to keep the relationship going. Customers needs to feel valued. If they feel valued by you, they’ll value you in return.

Check out our article on subscription models for a more specific view on what to do with loyalty, and our article on CRM for more on how to build customer relationships. Contact us if there’s a specific customer loyalty challenge you need help with. 

Photo credits 

Game pieces (edited) : Photo by Markus Spiske on Unsplash

Snacks : Photo by Fernanda Rodríguez 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

Money on fire : Photo by Jp Valery on Unsplash

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