Our last blog showed the compelling economic reasons why almost everyone wants to build a loyal customer base. However, while everyone may want customer loyalty, store owners would be advised to step back and ask a few questions before they initiate a campaign to make customers more loyal. Building loyalty requires more than an affinity card and, while loyalty is always a good thing, the return on investment on a loyalty campaign is not always guaranteed.
Question 1: What’s the Goal?
In its most basic form, the goal of loyalty programs is to grow the bottom line. But there are many different ways that greater customer loyalty can make that happen. Briefly put, in addition to repeat sales (see Economics of Customer Loyalty for details), we expect heightened profitability due to:
- the ability to sell complimentary and supplementary products (share of wallet)
- the lower cost of servicing the account
- the potential for referral sales
- the premium that customers would pay to switch suppliers
The potential to realize these gains is not the same for everyone. For example, given its physical footprint, a small community pharmacy does not have the same capacity as a big-box pharmacy to add complementary products and services. Similarly, stores that maintain a social networking site may be in a better position than others to promote featured items and to spur referral sales.
The same is true of the cost savings associated with loyalty programs. Some programs reduce costs by enabling the pharmacy to reduce their advertising expenditures. For example, they may find that if they can get loyal customers to come to the store weekly out of habit, they can replace weekly flyers with in-store specials. Other pharmacies might replace their radio or TV advertising with social networks or direct email with loyal customers who agree to online contact. Others still could use statistical analysis of customer data to identify which products or consumers respond best to which form of advertising: the amount spent doesn’t necessarily decrease, but the enhanced targeting may increase the productivity of that expenditure.
As you can see, you really cannot begin to map out a customer retention strategy until you know, in detail, how you expect loyalty to increase your profitability.
Question 2: Sustaining Loyalty – What’s In It for Them?
Loyalty is a reward that customers give us in return for something we give them. Many believe that consistent performance of whatever you did to win the first sale is the key to customer loyalty. This is only partially true. Consistency is a necessary condition for loyalty but it is not, by itself, sufficient to make it happen.
Loyalty requires your customer to have three sentiments toward your store and its marketing:
- I get it. I know what you offer.
- I want it. I understand how what you offer would improve my welfare.
- I cannot get it anywhere else. No one else can do a better job than what you do for me.
If you cannot get past questions 1 and 2, then loyalty will be a moot point since you’ll never make a first sale on anything other than a discounted price. If you do get past those questions, the new focal issue is “Why do they stay with me?” The answer to which is, “because they cannot get it any other place.”
In other words, the goal is not to “buy” loyalty with cards or other promotional giveaways. Those things can all be done by anyone who has deep pockets (i.e., the customer can get it any/everywhere else). Instead, we need to build on our status as the incumbent seller to do things that competitors could never know to do because they don’t currently know/sell to that customer.
Thus, the second key consideration is what new services or benefits will you be able to give loyal customers that cannot be offered by someone trying to win an initial sale from them.
Question 3: Is It Really Worth It?
Loyalty management takes a lot of work. To be frank, not all customers are worth the effort. No matter how well you do things, there will always be some customers who cherry-pick specials and want nothing more than low price. And sometimes you can’t move them to higher ground because it isn’t that they don’t want more, it’s that they cannot afford more or simply do not need more.
This means the potential to grow your loyal customer base is finite. It also means these less-loyal buyers may be substantially different – in character or in needs – from your current loyal customers. In these cases, trying to increase loyalty will require doing something different from what you now do, and doing it for a customer who is unlikely to reward your efforts.
Thus, the third key consideration is who you expect to become more loyal. This consideration gains even more significance if you combine it with question 2 (above) and ask “Will this work with them?”
Getting Intimate
As you can see, there is nothing automatic about customer loyalty. The rewards don’t necessarily merit the inputs and effort required. However, reviewing these considerations will save you from making well-intentioned but inappropriate decisions and will raise the likelihood of success if you feel that greater customer loyalty is worth pursuing.
