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Customer Experience

September 26th, 2009

The 6 key factors that influence customer loyalty

7

Customer loyalty is widely accepted as being worth nurturing, but what are the main business factors that directly influence the loyalty of your customers?

There are six major factors that play key roles in influencing the loyalty and commitment of customers:

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In this article, we’ve drawn guidance from many of the 36 chapters of The Loyalty Guide Volume II, to offer practical insights into the workings of customer loyalty programmes and the ways in which they can positively influence shoppers’ behaviour toward the company. The result is that customer retention is not only increased but customer lifetime value and profitability are also likely to increase significantly thanks to longer-lasting and more relevant customer relationships.

Factors influencing loyalty
Looking in more detail at the major factors that influence consumers’ loyalty – not only to retailers but also to suppliers in all sectors, including business to business (B2B) – the six key areas of focus identified in the report can be summarised as follows:

1. Core offering
The companies that boast the highest levels of fiercely loyal customers have built that loyalty not on card programmes or gimmicks, but on a solid, dependable, core offering that appeals to their customers. These companies have focused intently on what they know appeals to the type of customers they want to attract, and have determinedly concentrated on delivering what is expected every time. North American retailer, Nordstrom (www.nordstrom.com), is well known for the loyalty of its customers. It built this loyalty by understanding what its customers wanted and then empowering its employees to deliver those needs consistently.

Clearly, the data from a good loyalty programme should help the operator to improve this core offering by tailoring and moulding it more closely to the customers’ needs and desires.

Elements of the core offering that have a large role in building customer loyalty include:

    • Location and premises
      Location and premises clearly play a part in engendering loyalty. The Three L’s of retail – “location, location and location” – are undoubtedly important, and attractive and functional premises are equally so.
    • Service
      Whether selling services or products, the level of service perceived by the customer is generally key to generating loyalty. It can be argued that some customers buy only on price, so all that is necessary to retain their loyalty is consistently low prices. To certain extent that is true. But in most cases, any loyalty shown will be only to the prices instead of the business. Should a competitor offer even lower prices, those customers are likely to defect. Companies that have adopted a policy of every day low prices (EDLP) can be more vulnerable to competition than those who have built their customers’ loyalty on superior products or service.

The UK supermarket chain Asda has chosen EDLP instead of a loyalty programme as a strategy, with great success. Why has this worked so well? Because Asda offers great levels of service and a comprehensive range of products as well as low prices. In other words, it differentiates itself from other supermarkets that rely purely on EDLP to draw and keep customers. Asda’s customers are loyal not only to low prices but to the whole shopping experience. (For complete details of Asda’s loyalty strategy, see section 22.6.2 in The Loyalty Guide Volume II.)

    • The product or service
      The products or services offered must be what customers want. The days when businesses could decide what they wanted to sell or supply, and customers would buy it, are long past. The customers’ needs and wants are now paramount. If you don’t meet them, someone else will.

2. Satisfaction
Clearly, satisfaction is important; indeed essential. But, taken in isolation, the level of satisfaction is not a good measure of loyalty. Many auto manufacturers claim satisfaction levels higher than 90%, yet few have repurchase levels of even half that. The situation is stacked against the business: if customer satisfaction levels are low, there will be very little loyalty. However, customer satisfaction levels can be quite high without a corresponding level of loyalty. Customers have come to expect satisfaction as part and parcel of the general deal, and the fact that they are satisfied doesn’t prevent them from defecting in droves to a competitor who offers something extra.

The point is that, while high levels of customer satisfaction are needed in order to develop loyal customers, the measure of customer satisfaction is not a good measure of the level of loyalty. The two are not measuring the same thing.

3. Elasticity level
Elasticity expresses the importance and weight of a purchasing decision – effectively the level of involvement or indifference. This applies to both the customer and the business.

    • Involvement
      The customer’s involvement in the category is important: the more important your product or service is to the customer, the more trouble they have probably taken in their decision to do business with you, and the more likely they are to stick with what they have decided. Most customers would be highly involved in the category when choosing a new car, a new jacket, or a bottle of wine. However, when choosing a new pair of shoelaces, involvement is not usually high. Businesses dealing in commoditised products and services cannot expect high involvement and need to earn loyalty in other ways.
    • Ambivalence
      The customer’s level of ambivalence is also important. Few decisions are clear cut. There are usually advantages and disadvantages to be balanced, and vacillation is unstable. Again, we see that the more commoditised a product or service, the more difficult it is to cultivate loyalty. It is only when points of differentiation are introduced that the customer has a valid reason for consistently preferring one particular supplier.

4. The marketplace
The marketplace is a key factor in the development of loyalty. The elements most closely involved are:

    • Opportunity to switch
      If the number of competing suppliers is high and little effort is required to switch, switching is clearly more likely. Conversely, the more time and effort invested in the relationship, the more unlikely switching becomes. The level and quality of competition has a significant effect on how easy it is for a customer to switch from any one particular supplier. When competitors are offering very similar products at similar prices, with similar levels of service, some means of useful differentiation has to be found in order to give customers a reason to be loyal.
    • Inertia loyalty
      This is the opposite of ease of switching. Most banks enjoy a high level of inertia loyalty simply because it’s often so difficult and time-consuming to change to a new bank and transfer direct debits and standing orders.

5. Demographics
According to Jan Hofmeyr and Butch Rice, developers of The Conversion Model (which enables users to segment customers not only by their commitment to staying with a brand but also to segment non-users by their openness to switching to the brand), more affluent and better educated customers are less likely to be committed to a specific brand. They say that the commitment of less affluent consumers to the brands they use is often unusually strong – possibly because they cannot afford to take the risk of trying a brand that might not suit them as well. They also suggest that younger consumers are less committed to brands than older consumers.

Interestingly, these differences carry over into cultural groups as well: they find that French-speaking Canadians are more likely to be committed to a brand than English-speaking Canadians, and Afrikaans-speaking South Africans are more likely to be committed than English-speaking South Africans. In their excellent book, Commitment-Led Marketing, they show how commitment norms for the most frequently used brand of beer vary from country to country. At the two extremes we see both Australia and the UK (58%) and South Africa at 83% – a considerable difference.

6. Share of wallet
As markets become saturated and customers have so much more to choose from, share of wallet becomes increasingly important. It is cheaper and more profitable to increase your share of what the customer spends in your sector, than to acquire new customers. After all, that’s what loyalty is really about. Totally loyal customers would give you a 100% share of their spend in your sector.


About the Author

TheWiseMarketer.com published by Pete Clark

Peter Clark is the Research Director of  Wise Research Ltd. and the publisher of:

Loyalty marketing... for real facts, figures, research, case studies, best practices, practical how-to's, technologies & examples, The Loyalty Guide III is the world's most complete report (900+ pages) that covers it all. Costing less than the average conference ticket, details of the report's contents, chapter samples, pricing, and ordering details are online now at www.TheLoyaltyGuide.com.

Peter Clark, Research Director, Wise Research Ltd.
Publisher of The Wise Marketer, The Loyalty Guide, and Using RFID

Wise Research Ltd UK

Mail: PO Box 505, Graaff-Reinet, Eastern Cape, 6280, South Africa

Head Office:  25 Shiremoor Hill, Merriott, Somerset, TA16 5PH, UK

Registered Office:  1 Cornhill, Ilminster, Somerset, TA19 0AD, UK

Tel: +27 73 072 5746

Fax: +44 845 280 1579                     

Email: pete@wiseresearch.co.uk                

 
THE LOYALTY GUIDE: The only complete report (900+ pages!) covering customer loyalty techniques, measurement, strategies, principles, best practices, detailed case studies, research, theory, know-how and market-by-market intelligence: http://www.theloyaltyguide.com

 Announcing the world's most comprehensive guide to maximising customer loyalty and profitability...
 
 Wise Research Ltd, publisher of the internationally renowned 'The Wise Marketer' online news and research service for customer loyalty professionals, is pleased to announce that its research team has recently finished work on the world's most comprehensive global guide to customer loyalty marketing. Rather than merely updating the first volume, this new report has a vast amount of new material, research, ideas, case studies and practical know-how.  

This 900+ page report's research programme started in late 2007 and the first copies of The Loyalty Guide III
 
shipped in mid-2008, with its contents being updated through a readers-only web site well into 2009. This is your chance to make best use of this all-new report by getting your copy hot off the press. Loyal customers – how to identify them, how to keep them and how to get them to spend even more.
 
Did you know that poor customer engagement is reported to cause up to 75% of lost sales, and that loyal customers buy more, and will often pay more for better service? And did you know that a good increase in customer retention can boost profit by up to 100%? Or that strong customer relationships are a key driver of sustainable business growth?       

More and more marketers are quite rightly focussing on their customer retention and loyalty initiatives. But simply retaining more customers is not the answer - leading loyalty marketers are selectively retaining those who provide most profit and not wasting money on those who don't. In many cases, up to 70% of customers cost more to serve than they provide in profits. Find out how, by gathering and using loyalty and transactional data cleverly you can stay ahead of the game.  

Yet another goldmine of loyalty information
 
 The Loyalty Guide III sits side by side with the popular Volume II (published in 2006), providing yet another goldmine of practical know-how and experience you can use to increase the profitability of your customer base. Not being a mere update (it has less than 10% cross-over), it's right up to date.       

As before, you'll get online access to working statistical models and formulae that you can use to model how a loyalty programme will affect your company's profitability. You also get charts, diagrams and dozens of web-based updates for a year after publication. This 900+ page report, bound in two parts, is a comprehensive source of facts, figures, market sizing data, trends, forecasts, and ideas for your proposals, presentations, and project tenders.  

Secrets and strategies for success
 
The Loyalty Guide III will show new entrants to the market the essential concepts and techniques underlying a successful customer loyalty programme. And it also serves a total guide to global best practices, and signposts the road ahead for even the most experienced relationship marketing specialist. And, if you place your order now, we'll express-courier the report to you right away.

 






 
 

 
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