Chapter 2 – Benefits of Loyalty.

The benefits of customer loyalty are all economic in the long run.  Some are easier to quantify than others, but if you take a long term, customer lifetime value approach to looking at your business, all can be quantified. 

Lifetime Value

Let’s take a look at lifetime value.  For the sake of this section let’s use a very simple example.  Assume that Duffy’s Depot is a retail establishment.  The average customer of Duffy’s Depot buys $1,000 in goods each year at an average gross margin of 35%.  Furthermore, the average customer stays with Duffy’s Depot for five years (I know this is oversimplified for you lifetime value fanatics, but bear with me or skip over this example – this is just to ensure everyone gets off on the right foot).

The lifetime value calculation involves discounting each of the future profit streams to present value.  It is a simple net present value calculation that most of us have experienced at some point in our education or careers.  If I use a 10% discount rate for my calculation, the numbers look like this:

Now, imagine you’re able to improve the retention rate and keep customers for six years, rather than just five.  The lifetime value improves as follows:

As you can see, the lifetime value has increased $197.56 – a 15% improvement.  If you’re also able to get a greater share of the customer’s business, the lifetime value improvement is even better.  Let’s assume that the average sales increase is 15%.  The new lifetime value, considering an improvement in retention and in share of customer is as follows:

The lifetime value has been increased by another $228.65.  The combined impact of both improvements is $426.21 – a total increase of 28% over the original lifetime value of $1,524.34.

That covers the impact of improvements in retention and share of customer.  Many people fail to look beyond that, but there are some extremely powerful benefits associated with customer loyalty that go beyond the obvious.

Cost Savings

Customers who frequently shop Duffy’s Depot over a period of time get to know what Duffy’s Depot is all about and the merchandise that’s available in the store.  They require less assistance because they are so familiar with the brand.   In some cases loyal customers know more about your brand than some of your employees do.  A loyalty customer’s questions are more relevant and to the point.  They come to the store with a fairly clear vision of what is available at Duffy’s Depot and what it takes to shop at Duffy’s Depot.  As a result, these customers are more efficient in terms of the way they use Duffy’s Depot resources to conduct transactions.  This is an important ancillary benefit to customer loyalty that is often overlooked.

Referrals

Customers who become familiar with Duffy’s Depot and its merchandise mention it to their friends and acquaintances.  People like to feel smart and “in the know.”  They like to have an opinion.  Loyalty customers won’t hesitate to make recommendations to friends and neighbors.

Complain Rather Than Defect

This is a subtle one, but it is a benefit I believe in from experiences with a variety of retail marketers.  Customers who are loyal and who are a part of a well-executed customer loyalty program feel like they are stakeholders in the retail brand.  When they have a bad experience they complain.  They make a phone call, they ask for the manager or they do something else to make sure their issue is addressed.  They believe in the brand.  They feel that it’s their brand.  They want to fix it.  They complain rather than quietly defecting.  This “second chance” opportunity is very important in today’s business environment in which customers are so fickle.

Channel Migration

Loyal customers are more likely to buy through alternative channels.  I’m talking principally about the Internet here.  Most retailers today sell through traditional channels (bricks and mortar stores, maybe a catalog) and on-line.  Loyal customers who are familiar with your brand are much more likely to buy through multiple channels, increasing their total consumption and reducing your cost of doing business with them.

Many companies fear that channel migration represents cannibalization.  I’ve seen an example of a traditional bricks and mortar retailer that had only a 10% overlap between their on-line and off-line customers.  I’ve also seen examples that suggest multi-channel shoppers buy more (in total, across all channels) than single channel shoppers.  This suggests that providing many ways for customers to buy your products may increase customer value.

Loyalty is about managing customers not products.  It’s also about making customers more important than channels.  In too many companies today there is an inordinate amount of time spent haggling about channel turf and product turf and inadequate time spent haggling about customers.   

Unaided Awareness

Loyal customers are much more likely to have your brand top of mind in your category.  This manifests itself in terms of an increase in share of customer and an improvement in retention.  But it also helps with referrals and it helps with “bring alongs” in which loyal customers actually bring other customers (friends, relatives) to your brand.  The combined impact of unaided awareness improvements shows up in many places.  I have seen dramatic improvements in unaided awareness due to customer loyalty strategies.

Greater Awareness of Brand Assets

Loyal customers tend to be more aware of some of the auxiliary benefits your brand offers.  It has been demonstrated that greater awareness of auxiliary benefits, or “hidden assets,” has an impact on retention and share of customer.  For instance, a retailer I worked with found that loyal customers were more familiar with their free delivery service.  This familiarity led to greater sales as a result of taking advantage of the free delivery.  A telecommunications company found that loyal customers were more aware of the services provided by their dedicated relationship managers.  These customers tended to stay with the brand longer because they felt they received better value.  The perception of better value was a function of understanding the services offered by the relationship managers and taking advantage of those services.

Turn Left Rather Than Turn Right

I use this to describe the subtle impact of a loyalty strategy.  At times, a brand choice is made at the last minute.  Do I turn left or turn right?  Do I shop Lowe’s or Home Depot?  Is it Barnes & Noble or Borders?  Is it Amazon.com or BN.com?  The subtle, psychological reluctance to defect created by a loyalty strategy often makes the difference.

As you can see, there are some tremendous benefits associated with customer loyalty.  Many are inter-related and virtually all can be quantified and measured.  But you can also see that a loyalty strategy is genuinely that – a strategy.  It’s in everything you do and it can have an amazing positive impact on your brand.