UK: ON THE LOYALTY BANDWAGON. - Loyalty marketing is de rigeur - it may also be misplaced.

Last Updated: 31 Aug 2010

Loyalty marketing is de rigeur - it may also be misplaced.

It's a truism that the cost of acquiring a new customer usually far exceeds the cost of keeping an existing one. (Studies by Bain and Co suggest that a 5% increase in the rate of customer retention can produce a dramatic increase in profit, in certain cases as great as 85%.) Hence the enormous current interest in customer retention programmes. Yet some experts maintain that most 'loyalty marketing' is misplaced and self-defeating.

It is certainly changing the way that many businesses think and act, however. Calculating the potential value of a customer, as opposed to the value of each transaction, entails a wholly new approach to marketing and customer service decisions. Shocked by their initial inability even to make such calculations, companies are overhauling their internal accounting and data management systems, and combing through transaction records, sales enquiries, invoices and receipts, in search of long-neglected treasures. To understand groups of people - via expensive market research - is no longer enough. Their individual names, job titles and behaviour patterns need to be known if long-term relationships are to be established.

Sophisticated marketers in sectors such as cars, computers and travel are using loyalty schemes to bypass the middlemen, dealers and travel agents, and to communicate directly with end-users. They then apply the 80:20 law to target the 20% of customers who generate the biggest chunk of revenue. The advantages are obvious. 'The value of loyalty schemes lies in their creative use of the knowledge gained from customer databases,' says David Perkins, a former sales and marketing director at British Midland who is currently managing director of Carlson Loyalty Marketing. 'Nobody would be doing it if they weren't making money out of it,' he adds.

Nevertheless, the loyalty bandwagon is in danger of running out of control. Many of these schemes, according to Tim Denison, research fellow in marketing at Cranfield School of Management, 'are not particularly effective'. As schemes proliferate, what began as a 'reward' turns into an 'incentive' - or bribe. As companies try to out-bid each other's incentives they risk slipping into loyalty wars - price wars by another name. And as consumers learn to shop around for the best schemes, marketers risk fuelling the very promiscuity they set out to combat. 'Until companies invent a means of introducing switching costs for customers, the future benefits of many loyalty schemes will be very marginal,' warns Denison. 'They could end up in a lose-lose situation.' If they do it will be the fault of their own muddled thinking. Some marketers confuse retention with loyalty: a customer may return again and again, not out of any loyalty but out of sheer habit. Others assume that greater customer satisfaction must bring increased loyalty. But as British Airways' head of customer relations, Charles Weiser, points out, this isn't necessarily the case. Defection rates among BA passengers who declare themselves satisfied are the same as among those who make complaints.

The biggest mistake is to believe that a loyalty scheme and loyalty marketing are the same thing. Anthony Rees, director of marketing at J Sainsbury says: 'We make products available at a price and quality that ought to be attractive in their own right.' Fred Reichheld, a Bain director and head of its loyalty and retention practice, spells out the difference: 'The guts of increasing retention is not a six-month promotion. It's a systematic series of changes, probably meaning modifications to products, services, pricing and how employees are rewarded.' Well thought out loyalty schemes have their place. But the things that keep customers coming back tend to be the things that attract them in the first place - high quality, suitability, excellent service, innovation and value for money.

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