The how and why of customer loyalty programs

Graphic of sphere containing words loyalty and other related words
Man pointing to image to the left

Customer loyalty programs can bring immense value to your organization ...
if done right

Customer Satisfaction and Customer Loyalty:graphic of Customer Loyalty spelled out with intersecting scrabble pieces

  • Are these fads or key business principles?
  • What are they worth to your business?
  • What is more important: Satisfaction or Loyalty?
  • How can you measure them?
  • What do you do to improve?

and many more questions ...

How much effort do you expend learning about your customers and figuring out how to get them to be your best ambassadors?

Sam Walton, CEO of Walmart, certainly implied that he placed a high priority on keeping customers happy when he said:

"There is only one boss. The customer.
And he can fire everybody in the company from the chairman on down,
simply by spending his money somewhere else."

Picture of man walking away with suitcaseAccording to the Loyalty Research Center at , neither loyalty or satisfaction can be claimed just because a customer is making  repeat purchases.  Repeat purchases could be due to an existing contract or other considerations and be masking an underlying desire on the part of your customer to find another supplier as soon as they can.  "In a nutshell, loyalty means a customer WANTS to do business with you and does."  According to their article, a "loyal" customer will:

  • recommend your products and services to others
  • continue purchasing your products and services, at minimum, at the same level
  • purchase other products and services you offer
  • believe your products and services are superior to others offered in the marketplace
  • provide your company with opportunities to correct problems and not use these as a basis for compromising the relationship

The article further shows how the "return on loyalty" can be calculated and fed into budgeting to support loyalty activities.

What is the return on investment if you make efforts to satisfy customers and make them loyal?

Picture of Thailand Bank NotesAn article at proposes a framework to fully capture the value of customer loyalty, including referrals, increased purchases and more.  This article used consumer sales (as opposed to business-to-business sales) for explaining the framework, but similar logic could be applied to b-to-b sales.

The Globe and Mail article at quoted Dylan Bolden of the Boston Consulting group as saying ROI for loyalty programs can go as high as 25% - when done right.

However, having a loyalty program does not, in itself, guarantee you loyal customers or a successful business.  According to a McKinsey study quoted in the article at , organizations with customer loyalty programs do NOT necessarily grow faster than those without, and in some cases, grow slower.  Just having a loyalty program is not enough; having an effective, relevant (to the customers), differentiated loyalty program is needed.  When companies do develop good loyalty programs (explained in the article), revenue and value can improve.

So how do you do it right?

What can we do to measure and build the loyalty of our customers? 

Answers typically given include:Picture of Bouquet of flowers

  • Over service the customer - strive to deliver more than promised
  • Hold client appreciation events - and follow up with the customers after the event
  • Create a community with your customers - and listen carefully to their feedback
  • Hold lunch and learn events to keep customers current on trends, developments
  • Ensure regular contact with customers via 1-on-1 discussions, email, newsletters, twitter, facebook, ...
  •  ... numerous other activities that reflect a focus on understanding and staying connected to the customer ...

and of course,

  • Regularly survey your customers to see how well you are doing

But how do we know what activities have the most impact on loyalty?

Graphic of Feedback buttonAnd if we do survey:

  • how many questions should we ask in each survey?
  • what questions do we ask, in what sequence?
  • to whom do we ask the questions / who actually answers the survey?
  • are we looking for point-in-time answers or trends?
  • what decisions do we make based on the answers?
  • what actions do we take based on the answers?

Help is available.

You may have heard of a metric called Net Promoter Score  or, more recently, Net Promotor System (NPS) ( ).  NPS was introduced in 2003 by Fred Reichheld of Bain & Company as an indicator of the loyalty and advocacy customers show for a company. 

Image of net promoter score

The metric now goes from 0 to 10 with 0-6 being detractors, 7-8 being passives and 9-10 being promoters.  NPS has spawned a lot of consultants to help companies determine how loyal their customers are and what companies could do to improve the loyalty of their customers.  If you want to try implementing NPS without outside help, Reichheld authored a book called "The Ultimate Question 2.0" (second edition) which you can use to understand NPS and develop your own loyalty programs.

NPS is one methodology; there are others.

One idea has been suggested to get your team thinking about how to anticipate customer needs and pro-activley implement programs to keep customers loyal:

  1. Pull your team together for a planning session
  2. Tell the team to start with the assumption that all customers are satisfied
  3. Ask the team to identify things that could happen that would make customers less satisfied
  4. Create a prioritized list of the potential dissatisfiers and how to prevent the problems
  5. Check the list with customers
  6. Put processes and systems in place to prevent the issues from happening, with checkpoints for where things stand

Step 5 - check with customers - is like most other customer interactions: it can only be relied on to give you honest feedback if you have a good relationship, based on mutual trust.

A key to keeping customers happy is setting expectations accurately up front. This includes developing a common understanding for things like budget, service levels, deliverables (by each side), and schedules.  This clarity applies to any written contract and any advertising or promotional material.

What about price?  What happens when the customer has an idea of what they want and are willing to pay and you have a different idea?  You may think you know what they need (you are, after all, the expert in your field, right?).  The customer may want something different because they have an different understanding of what can be done or how much things cost.  Their wants do not align with their needs (by your understanding) and therefore there will be a disconnect in the perceived value of what you are offering, resulting in an unhappy customer.  Again, setting expectations up front will go a long way to alleviating this problem.

A special challenge / opportunity for understanding and managing customer loyalty exists when you sell/service/support through channels of distribution.  Who "owns" the customer?  How do you keep connected to the customer so you understand what they want and make sure they get what makes sense?  This is a conversation with numerous dimensions, so will not be covered here, but it is something to keep in mind.

LoseDice_noBGOf course, loyalty is a 2-way street.  There may be some customers you do NOT want to keep.  Maybe they make incessant demands that cost you more than they contribute.  Maybe their needs are not aligned to your product designs and trying to service them will be frustrating for both parties.  This is an important part of keeping customers happy: know what you are good at and which customers need that.  Teach your sales people to properly qualify prospects and focus your product designs on the market segments that make the most sense for you.

Graphic of Steps to ProfitThere is no one-size-fits-all answer to this question, but there are proven methodologies to help so learn, apply and succeed with increased loyalty.

And of course, Howard Schultz, CEO of Starbucks, reminds us that we will not have happy customers if we do not have happy employees when he says:

"You can't expect your employees to exceed the expectations of your customers
if you don't exceed your employees' expectations of management."

Can customer loyalty programs bring value to your business?  Yes.  But it takes time, energy, commitment and dollars to make it work for you.


Posted in Marketing, Sales.

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