Keywords: customer loyalty, customer retention, competitive advantage, business growth

Transcription

1 CUSTOMER LOYALTY AS AN OPPORTUNITY TO CREATE PROFITABLE GROWTH IN THE GLOBAL BUSINESS ENVIRONMENT RaŃiu Monica Paula Romanian-American University, Bucharest, 1B, ExpoziŃiei Bvd., Bucharest, Telephone: , Negricea Costel IliuŃă Romanian-American University, Bucharest, 1B, ExpoziŃiei Bvd., Bucharest, Tlephone: , E- mail: Abstract: Customer loyalty is a major goal for customer service and management leaders, and gaining and keeping loyal customers is increasingly recognized as the key to business growth. The growth comes from loyal customers increased purchases over time, their willingness to pay premiums for additional service and referrals. With the continued growth of new competitors and the increasingly knowledgeable and demanding consumer, creating and maintaining customer retention represents an absolute imperative for companies. Companies that are loyalty leaders build loyalty systems around targeted customer group, tailoring the value proposition, processes and employee behaviors to best service these segments. These companies define and measure loyalty results just as carefully as profits, with implications for their employee, marketing and customers strategies. Our paper focuses on the real meaning of customer loyalty, conditions that must be fulfilled in order to achieve customer loyalty, advantages provided for companies, the relationship between loyalty and competitive advantage, and recent developments in customer loyalty. Keywords: customer loyalty, customer retention, competitive advantage, business growth The importance of creating and maintaining customer loyalty is not new. Most corporate leaders think that it costs more to find a new customer than to keep and grow an existing one. Companies realize heavy investments in customer satisfaction efforts, rewards programs and CRM initiatives and infrastructure, and loyalty remains a major goal for almost every economic field. Loyalty can be defined as the willingness to make sacrifices and investments to strengthen relationships. The greater loyalty a company a company inspires among its customers, employees, suppliers and shareholder, the greater its profit potential. When stakeholders thrive, an organization strives. Gaining and keeping loyal customers is increasingly recognized as the key to profitable growth. Some important research over the past decade shows that companies putting customer and employee loyalty at the centre of their business model beat the average costs in their sectors (fields): their average costs are 15 percent lower, and they post 2,2 times the rate of growth. The cost benefits of retained customers come from the amortization of initial acquisition costs and lowered ongoing customer-service costs. The growth comes from loyal customers increased purchases over time, their willingness to pay premiums for additional service and referrals. With the continued growth of new competitors and the increasingly knowledgeable and demanding consumer, creating and maintaining customer retention represents an absolute imperative for companies. Companies that are loyalty leaders build loyalty systems around targeted customer group, tailoring the value proposition, processes and employee behaviors to best service these segments. These companies define and measure loyalty results just as carefully as profits, with implications for their employee, marketing and customers strategies. Loyalty leaders (which include service companies such as Enterprise Rent-A-Car, manufacturers like Harley- Davidson and financial service firms like mutual fund company Vanguard) focus on relationships. They get close to customers, employees, vendors and channels, and work thoughtfully with their partners, especially in tough times. There are some basic principles that mark strategies of loyalty leaders and define mutually beneficial relationships. Vanguard and Harley are among a number of loyalty leaders showing the way to continued growth and prosperity. 1156

2 After more than a decade of analysis, researches have discovered that leaders who build long-term relationships follow five basic rules: Saying clearly the way of practicing For example, at Vanguard (which is the world s fastest-growing and second-largest mutual fund) the manager considered it was extremely important to explain the principles the management team would live by, that he published them in a booklet, which has become the basis for leadership training and evaluation at Vanguard. Never profit at the expense of customers and partners At Harley-Davidson, management insists on win/win solutions, not just profitable solutions; for instance, when it was time to build a new plant, instead of abandoning their unions to build in a right-to work state, Harley invited the presidents of its two main unions to join the site-search committee. In return, the unions have cooperated with new productivity initiatives. This same commitment to win/win solutions kept Harley from developing a direct sale Web site for popular Harley merchandise, since that would steal sales from Harley s dealers. Rather, the Harley site describes merchandise, and then lets buyers to choose a dealer near them to service their needs. Focusing on customer with real long-term potential Vanguard has a very clearly set defined set of target customers who appreciate the value of low-cost, long-term investing. The firm limits exchange activity in order to discourage market timers. Vanguard focuses on clients with clear potential for long-term and mutually beneficial relationships. Simplicity This characteristic marks the strategies of all loyalty leaders who typically organize their companies into teams that are much smaller than their competitors. Smaller teams keeps decision-taking simple, improve responsiveness and accountability and are vital for building loyalty. Loyalty leaders also keep their value proposition simple and easy to understand. This means making it easy for customers to find what they want and for shareholders to assess the wisdom of corporate moves and reward good strategy. Rewarding the right results Some loyalty leaders formula refers to pay employees a share of the profits they help to generate. With this reward system and transparency over when and how the money is made, profits do tend to take care of themselves. For example, Vanguard developed a Partnership bonus plan for employees that offer rewards based on their contributions to the company s operating efficiency and the performance of Vanguard funds relative to the to its competitors. Loyal customers are offered a special treatment at Vanguard who recently introduced Admiral Shares for many of their funds. These shares reward loyal customers with even better value. There also too many companies today, which penalize loyal customers with mediocre service and high prices if they were foolish enough to remain loyal to them. It is the case of cellular phone companies where loyal customers are probably paying far above market rates if they remain loyal to them over the past few years. This will never happen with Vanguard s loyal customers. Another example: when the chairman and CEO of Enterprise Rent-A-Car realized that some branch managers were focusing on short time profitability at the expense of customer service, the company developed a rigorous measure for customer satisfaction by branch and used it as a basis for promotions. Loyalty leaders see employee loyalty as bedrock for building customer loyalty. They consider that superior loyalty fuels growth and reduces costs. To foster the kind of employee loyalty that fuels such customer loyalty requires aligning people processes like recruitment, training and performance management around loyalty objectives. It also requires role models. Staff loyalty. It is a fact: firms with high levels of customer loyalty have also earned high levels of staff loyalty. It is almost impossible to build strong customer loyalty with a staff that is in constant turnover. It s necessary to build staff loyalty because customers buy relationships and familiarity. They want to buy from people who know them and their preferences. Key rule of loyalty is to serve your employees first so that they, in return, can serve your customer. In today s economic climate, companies have come to discover that people are their greatest assets. There is a genuine need to invest in people. Staff and customer loyalty, efficient communication and team motivation have become major corporate issues facing companies of all sizes. The 80/20 rule. In building customer loyalty, the 80/20 rule is alive and correct: 80% of the company s revenue is being generated by 20% of the customers. All customers are not created equal. Some represent more longterm value to the company than others. A smart company segments customers by value and monitors activities closely to ensure high-value customers get their fair share of special offers and promotions. Unlike many firms that simply measure overall redemption, these savvy loyalty builders pay close attention to who redeems. Ensure that customers are moving through loyalty stages. Customers become loyal to a company and its products and services one step at a time. By understanding the customer s current loyalty stage, the marketing 1157

3 manager can better determine what s necessary to the next level of loyalty. There are six stages of customer loyalty: suspect, prospect, first-time customer, repeat customer, client and advocate. If the customer relationship processes and programs aren t moving customers forward, the marketing managers must rethink them. Customers must be served first, and then sold. Today s customers are smarter, better informed and more intolerant of being sold than ever before. They expect doing business with the firm to be as hassle-free and gratifying for them as possible. They believe that the firm earns their business with service that is pleasant, productive and personalized. And if the firm doesn t deliver what they expect, they will leave. Aggressively seek out customer complaints. For more companies, only 10% of complaints get articulated by customers. The other 90% are unarticulated and manifest themselves in many negative ways. With the Internet, an unhappy customer can now reach thousands of the would-be customers in a few keystrokes. It is very important to make it easy for customers to complain, and treat complaints seriously. It is also necessary to establish firm guidelines regarding customer response time, reporting and trend analysis. Employee complaint monitoring must be a tool for executive decision making. Responsiveness. Research shows that responsiveness is closely tied to a customer s perception of good service. The advent of the Internet has changed the customer s perception of responsiveness. Moreover, customers now arrive at Web sites eager to locate answers. Technology tools such as customer self-service, management and live chat/web callback are proving increasingly critical for companies as they address the demanding customer s responsiveness needs. Know the customer s definition of value. The loyalty password is value. Knowing how the customers experience value and then delivering on those terms is critical to building strong customer loyalty. Win back lost customers. Research shows that a business is twice as likely to successfully sell to a lost customer as to a new prospect. Yet, winning back lost customers is frequently the most overlooked source for incremental revenue in many firms. Most firms consider a lost customer a lost cause. It s imperative that firms create hardworking strategies not only for acquisition and retention but also for win-back. Every company needs a process for recapturing those high-value customers who depart (this is loyalty insurance). Use multiple channels to serve the same customers well. Give the frontline the skills to perform. Increasingly, for many companies, the employee frontline is a call center where agents interact with customers. These agents will be the loyalty warriors in the future. This means that these agents need to be equipped to write a well-written reply and navigate the company Web site as they are being helpful and friendly on a phone call. Collaborate with channel partners. In today s complex marketplace, a firm is often dependent on many suppliers to help serve its customers. Embracing these supply chain relationships for the greater good of the ultimate customer creates customer value that is hard for competitors to match. For example, a European manufacturer converted its customer data base program into a system that could be shared by all channel partners. By refusing to hoard the information, the manufacturer helped create a blended channel strategy that build greater customer loyalty throughout the distribution chain. Store data in a centralized database. Most firms lack a 360-degree view of their customers because they have no centralized database. Billing departments, sales divisions and customers service centers might have their own databases, with no effective means for creating a complete customer-information composite. To effectively implement a good customer loyalty strategy, data from all customer touch-points must be combined into a centralized database. Without it, the firm is greatly handicapped in its efforts to serve the customer. The recent developments in customer loyalty that were revealed by a noted speaker in this area, Sue Windham-Banister, PhD, Managing Vice President of Abt Associates Inc., specialized in strategic business planning and strategic marketing, with 25 years of consulting experience and developing loyalty programs for companies from health care, financial services and high technology - show that: 1. Customer loyalty has become an even more strategic imperative for the firms. As the economy shifts and revenues begin to decline, customer retention represents an absolute imperative for companies. 2. Customer acquisition is expensive. Declining revenues almost always translate into shrinking budgets and companies are not in the position to mount sizeable acquisition efforts. Hence, it is more cost effective to retain existing customers than capture new ones. 3. The firms need to better understand what competitive advantage they have that drives loyalty and what competitive disadvantages are pulling customers from them (see figure 1). Satisfaction Loyalty Customer Commitment Commitment and Competitive Advantage Attitudes Attitudes and Attitudes, 1158 Behaviors and Competitive Assessment

4 Figure 1. The Relationship between Satisfaction, Loyalty and Competitive Advantage So it is necessary for the companies to understand attitudinal drivers of loyalty. Most research shows that in most industries customers can be grouped by their underlying motives into one of three categories: emotive customers, who rarely reassess their purchase decision because they are convince their current product of choice is best for them; deliberative customers, who frequently reassess their purchase decision based on rational buying criteria; and inertial customers, who rarely their purchasing decision because of low involvement or the perceived cost of switching. In some industries (packaged goods and fashion retailers) it was also observed variety seeking customers, who change for change s sake. The incidence with which these attitudes appear varies significantly by industry and company, and the mix among customers is an important determinant the firm s ability to capture the opportunity and the most powerful loyalty approaches to employ. Satisfaction remains an important element of loyalty management but not the defining feature. Satisfaction on its own is not a strong indicator of loyalty and can be misleading. Research showed that satisfaction is often not correlated with customer migration nor is it actionable on its own. However, in specific situations or in combination with other factors, satisfaction does still play an important role. Some characteristics of loyalty marketing best practices. A firm can't have loyal customers without a great product. If the product doesn't connect with target customers, the best loyalty campaigns in the world won't be able to make the same kind of emotional connection. Great marketing makes great products look even better, attract more customers, establish more wallet and mindshare. The firm s marketing should serve to communicate a brand promise that the product was built to fulfill. Great marketing can't save bad products. And if the firm already has a great product, that means it has somehow managed to understand and react to a core customer need or desire. It means that the firm has done its homework, it understands customers better than they do. This isn't just about asking prospective customers what they want. It's understanding what they need and want - both today and tomorrow. There's a big difference. So, we can consider that the two most important things for any loyalty marketing strategy are: 1. A great product, that emotionally connects with the customers and fulfills a basic need or desire; 2. A deep understanding of the customer, an understanding that allows the firm to anticipate what they need better and sooner than they know themselves. Good brands and companies are marketing-centric, in that the above two vital elements don't emerge independently from a product development and research team. The marketing plan starts with the consumer, then the product, then the marketing. By focusing on understanding the loyalty motives of each customer segment, and matching the appropriate loyalty tools, companies can move to a new era of loyalty management in which they fight back the challenges of today s difficult environment, create meaningful increases in customer loyalty, and drive profitable growth. 1159

5 References: Frederick F. Reichheld Loyalty Rules! How Today s Leaders Build Lasting Relationships, Harvard Business School Press, Frederick F. Reichheld The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value, Harvard Business School Press, McKinsey Marketing Solutions The New Physics of Customer Loyalty