In today’s hyper-competitive markets, customer loyalty takes on new importance for numerous reasons. Markets are competitive because in many there are multiple competent vendors with quality products. Also, the number of net new customers is falling to the rate of population growth; for example, if you have a smartphone you might be reluctant to buy another as long as the current one is working.
This means that for any vendor to show decent growth, strategies that take away a competitor’s customers become very important. Therefore, so do strategies for retaining them and that’s where loyalty comes in.
It also doesn’t help that so many products are sold as services today either. The rise of the subscription business model means lots of customers understand that they can find another vendor if the current one lets them down. According to a 2015 report from Accenture, attrition imposes high costs on the global economy (1). In 2014, the last year for which we have data, customer attrition amounted to $6.2 trillion dollars.
To put that into perspective, there are only 3 economies with bigger GDP’s (gross domestic product) on the planet, the U.S.A, European Union, and China. So effectively the fourth largest GDP is wasted if you consider that churn represents a re-establishment of a status quo with no real advancement because a customer simply trades one vendor or brand for another in a churn.
Winning and Losing Customers
The significance of churn is often lost on people simply because customers are won and lost individually and as long as a vendor has a net increase in revenue or units shipped or similar measures, we tend to de-emphasize or even ignore churn. But should we?
Right now, even the best companies selling subscriptions have churn rates of ten percent or less. Some churn is unavoidable especially if a customer leaves a demographic—they age out, or outgrow a product or a service, for example. These things can’t be helped and you might call this acceptable churn. But if there’s acceptable churn then there has to be unacceptable churn too and the GDP numbers are mostly about the unacceptable variety.
Unacceptable churn is insidious—it happens when we’re not looking. One moment a customer is exhibiting loyal behavior using a product or service or perhaps even increasing exposure to it and accumulating points. But the next moment the same customer is gone.
Vendors have tried all manner of ways to retain customers and reward programs head the list. But customers accepting rewards for making purchases are often only exhibiting loyal-like behavior without any consideration of the real thing. One study by IBM, Travel loyalty – Discount discontents (2) showed that upwards of two-thirds of travel customers would churn out of a vendor situation if they could find a better price. But that’s not real loyalty, which can be defined as a customer having a vested interest in seeing the vendor do well.
Truly loyal customers aren’t in the relationship for discounts or coupons; they like the products and services and they preferentially select one vendor over another. Vendors that have figured out how to encourage customers to be loyal have discovered that engagement is a key to success. Importantly there are 2 types of engagement, the kind initiated by vendors, and the type that comes spontaneously from customers. Engagement by customers is significantly better and the quest for greater customer loyalty stems from figuring out how to prompt such engagement.
Earning spontaneous loyalty through engagement is the work of modern loyalty programs and it has less to do with accumulating points, miles, or discounts than you might think. It’s also the subject of my new book, You Can’t Buy Customer Loyalty, But You Can Earn It. I’ll be providing more loyalty insights here soon.
(2) Travel loyalty—Discount discontents, How loyalty programs can deepen engagement, improve profits, and drive brand allegiance
Travel loyalty—Discount discontents, How loyalty programs can deepen engagement, improve profits, and drive brand allegiance, © Copyright IBM Corporation 2015 IBM Global Business