Most Loyal Customers Aren’t Profitable
By Tom Ryan
The authors of Why
Loyalty Matters certainly value customer loyalty. But they also contend
that only 20 percent of a firm’s customers are actually profitable and
most of a company’s profitable customers are not loyal.
In an article on harvardbsuiness.org,
the two authors – Timothy Keiningham, global chief strategy officer at
Ipsos Loyalty, and Lerzan Aksoy, associate professor of marketing at Fordham
University – wrote that instead of stockpiling loyal customers, both B-to-B
and B-to-C businesses should be asking:
- Which loyal customers are good
for the business,
- How do we hang onto them, and
- How do we get more customers
The authors note that
the simple solution to improve customer loyalty in tough times is to offer
off-price deals, a strategy that has proven to improve loyalty in the past.
But they also note that it’s a flawed strategy.
"This doesn’t mean
we should not find ways to be more efficient so that we can pass cost savings
on to our customers. But price-driven loyalty is always the lowest form
of loyalty. It means that we aren’t offering differentiated value to our
customers," the authors wrote
Mr. Keiningham and Ms.
Aksoy said that’s why it’s essential to determine which loyal customers
are profitable. Unprofitable loyal customers tend to be loyal either because
of unprofitable pricing or exchange policies or they ask for excessive
services they’re not willing to pay a fair price for.
By comparison, profitable
loyal customers are driven by key differentiating aspects to a business’
products or services.
"The key to a successful
loyalty strategy is to become crystal clear as to what these are, and to
focus on tangibly improving these elements," wrote the authors. "It
is also imperative that we actively let customers and prospective customers
know that these are the things the company stands for and that the firm
is committed to being best at. By doing this, our best customers will have
the necessary information to clearly articulate why our organizations deserve
their loyalty in good times and in bad."
Why Loyalty Matters is
scheduled to come out in June 2009.
Do you agree that most "loyal customers" are actually unprofitable
customers? If so, what are the challenges of having customer loyalty
programs account for that? What do you think of the suggestions cited
in the article for honing in on profitable, loyal customers?