Snapshot : This week we look at the two very different views of customer loyalty in marketing. One says it’s a sign of brand strength and that loyal customers drive future sales. The other argues customers never stay loyal and you should prioritise new customers instead. Which is right depends on your business context. Read this article to learn where, when and how to get the most out of customer loyalty.
Customer loyalty has one big difference from the other stages in the brand choice funnel.
With trust, awareness, consideration and trial, it’s about persuading customers to buy. But with loyalty, it’s all about persuading customers to buy again.
They’ve already tried your brand, so they’ve got a different perspective to your current non-buyers. They trust you, know how you are, and have direct experience of what you offer.
Keep customers loyal and it’s a sign of brand strength. It costs you less to retain customers than it does to acquire them, so your marketing spend is more efficient.
But many advertising experts, like Les Binet and Sarah Carter in their book How Not to Plan, argue customer loyalty programs are a waste of time and money. To be fair, they may be a little biased because that’s time and money you’re not spending on advertising.
But, even unbiased experts like Professor Byron Sharp in his book How Brands Grow shows customer loyalty is quite rare. Brands that focus on bringing in new customers usually grow faster.
Advertising and loyalty programs - you can do both
We find these arguments a bit odd, as there’s no reason you can’t do both. Advertise to bring in new customers and have loyalty programs to keep existing customers.
Yes, you’ll probably spend more on advertising, but that’s because you’ll have more customers to go after there. But we’ve worked on many CRM programs over the years, and they’ve always paid for themselves.
How much time and money you should spend on customer loyalty really comes down to context.
When to focus on customer loyalty
Your business context shapes how you make marketing decisions. It’s a combination of :-
- external factors – customers, category and competitors.
- internal factors – your positioning, brand identity and marketing plan.
You only look at customer loyalty when you have an existing base of customers. Customers who’ve bought and you want to buy again. 3 factors usually drive the importance of that re-purchasing behaviour :-
- 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 laziness rather than active choice. If competitors can disrupt this laziness and make a better offer, these customers won’t stay.
Habit driven buying tends to favour 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 that 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 aggressive customer moves. You can lock in customers by offering rewards for continuing to buy the products they already buy.
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. That’s a 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, and 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.
So, mobile phones for example. If you like the service, you buy an upgrade of that brand the next time.
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.
Cost leaders focus on price and cost. They believe price drives brand choice. Customers stay “loyal” to the brands that offer the best value.
However, customers are loyal to the price point, not the brand. If competitors go under your price, customers will switch.
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 less about price, and are more likely to stick with their favoured brand.
You may have fewer customers overall with these approaches, but you’ll have more loyal customers. They’ll be far less likely to be lured away by competitor activities.
Customer loyalty and sales growth
Having loyal customers is clearly worthwhile. 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 your loyal customers. It’s all about finding the right balance of activities to do both. In our experience, on average business spend around 20-25% on loyalty, but we’ve seen it as low as 10% and as high as 40%.
Your existing loyal customer base are a business asset. Like all assets you need to invest in them to maintain the value of that asset.
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.
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 on what these customers do.
Most of this data comes from your loyal customers. They’re the ones you interact with the most. If you pick up 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 so did those brands in time.
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 two 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 how 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 need to feel there’s something in it for them to keep buying.
Relationship-building is the key to building customer loyalty. That means 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 you to reach, and more hurdles to overcome.
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.
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 much bigger and 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.
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 that 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 tells you 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 customer loyalty programs to keep them buying. Your business case is based on the additional 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 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.