LOYALTY
ISN'T ENOUGH
The
July issue of the Harvard Business Review has an interesting article
called the The Mismanagement of Customer Loyalty. The authors studied
four large companies
in different countries and found a weaker than expected relationship
between customer loyalty and profitability. Their findings have led them
to challenge
the widely held views that longterm customers cost less to service and
are prepared to pay more.
But don’t panic. There is no need to throw away your CRM software and fire
all your customer relationship managers. In my view, the results from this
research simply confirm that it is not enough to have loyal customers; you
must have profitable customers who are loyal. This is an important lesson for
all of us to learn, especially those who are inclined to use discounting, special
offers and lower prices as their main competitive weapon. There is simply no
point encouraging unprofitable customers to come back with repeat business.
In fact I’m not even sure about why you would want to do business with them
in the first place, but that’s another story.
This research highlights the necessity of knowing the profitability of your
customers. This, of course, is different from knowing how much your customers
buy from you or how much gross revenue they produce. You must have some idea
of their net worth to you after you take into account the costs of providing
your products and services, servicing their accounts, maintaining a relationship
with them, and even the costs of just doing business.
Furthermore, this study also found that not only do long-term customers not
pay higher prices, they often demand bigger discounts. They also don’t necessarily
rave to others about how much they value the products and services they get
from their long-term suppliers. I wonder if this is more a reflection on how
we treat loyal customers. In my experience, even companies with loyalty programmes
put more effort into hunting new customers than looking after existing ones.
Also, many companies rely on their loyalty programme to keep their existing
customers, instead of working to developing strong relationships and business
partnerships. Then, of course, most companies won the business in the first
place by discounting and therefore have set a precedent that is very hard to
change.
But perhaps the real problem behind this disturbing finding is that we simply
do not know how to persuade our customers to pay more. Repeat customers know
that their business is worth a lot to their supplier and therefore will try
to leverage that into lower prices. What suppliers need to understand is that
if the customer is coming back for more, then they must see the value in what
the supplier has to offer. It is the supplier’s job to convert that perception
into higher prices, or at least be able to fend off attempts to extract discounts.
When I was with one of my long-term customers the other day, the senior manager
joked that since they had given me so much business over the last few years,
I should be giving them a better price. “But I now know so much more about
your organisation,” I replied, “that I am able to help you even more effectively
than I did in the beginning. Thus, I should be charging you more!” He laughed
and we agreed to leave my fee as it was.
The moral of the story is that, unless you are a notfor- profit organization,
you need to know the profitability of your customers and stop doing business
with unprofitable customers, be they first time purchasers or repeat customers.
Otherwise you will soon become a not-for-profit organization.
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