Not loyal? But they shop here every week.

Jun 27, 2005

By John Hennessy

DM Direct Newsletter, published an interesting take on loyalty by N. Ramasubraman (Ram). Mr. Ram is a practicing loyalty manager from India. He works for Surfgold, which is a pan-Asian loyalty management company.

Mr. Ram makes the claim that just because you measure high customer retention rates, you may not have high levels of loyalty. Instead you might have passive loyalty.

Passive loyalty or inertia loyalty occurs due to a variety of reasons and under a number of different scenarios where the customer is exhibiting repeat buying behavior – not out of choice but because he is forced to do so. In such a scenario, retention rates could be really misleading as an indicator of future potential for business. What are the cases of passive loyalty?

  • Situations of quasi-monopoly: Where there is only a single shop in a location and you have to buy your products there.

  • Habitual buying: When you buy your cigarettes from the vendor next to the railway station.

  • Risk minimization: This is typical of products that you buy on someone’s recommendation, such as medicine.

  • Switching hassles: You would like to switch brands but you feel the cost of switching is way too high and that the benefits are not high enough.

  • Lack of a decent alternative: Think about it: when you use the postal service or water utility, are you doing so out of volitional loyalty?

In each of the above cases, the retention rate will tell us that the customers are highly loyal to the brand and that going by their past behavior, they are likely to buy the brand again in the future. But the truth is that the customer is there because he does not have a choice. Now, would you call that loyalty? At the first opportunity he gets, he is going to walk out, leaving you with your carefully calculated indices and metrics.

Mr. Ram doesn’t suggest completely ignoring customer retention levels, he recommends adding an opportunity-to-switch index to get a better read on true loyalty.

Moderator’s Comment: Are retailers aware of why their
regular customers choose to shop in their stores, on their Web sites or through
their catalogs?

It’s very important to understand why your customers reward
you with their business. The answers you get from some of your customers may
not be the ones you want to hear, but if you want to forge a stronger relationship
with your customers, you need to ask.

John Hennessy – Moderator

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6 Comments on "Not loyal? But they shop here every week."

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Art Turock
Art Turock
15 years 8 months ago

The Gallup organization has done some fascinating research here to look at emotional connections, the kind of sticky, heart-felt loyalty that Harley Davidson, the Red Sox, Whole Foods, or Starbucks generate as brands.

The four variables of emotional connection in increasing intensity are

-Confidence. The brand consistently delivers on its promise. Without this confidence in the functional delivery, there isn’t even a chance at intensifying emotional connection.

-Integrity. The brand treats customers fairly and, when a mistake happens, the correction exceeds expectations.

-Pride. The brand engenders a sense of belonging for customers, where there may be a congruence of values.

-Passion. Customers would agree that the world is a better place because the brand exists and would feel “something missing” if the brand ceased to exist. The strongest level of emotional connection.

When you see these elements, there is a far distance to passive loyalty–out of convenience, no other choice, or habit.

Tom McGoldrick
Tom McGoldrick
15 years 8 months ago

The “passive loyalty” Mr. Ram describes is a real phenomenon. People are very much creatures of habit and will continue to shop somewhere even if not terribly satisfied with the products or service. Whenever you study satisfaction levels and shopping behavior, a surprisingly large group of people can be identified who are only moderately satisfied, or even dissatisfied, but who continue to be customers.

This is part of the reason that willingness to recommend is often cited as a better metric for both loyalty and satisfaction than a direct overall satisfaction question or an intention to repurchase question on a survey. Most consumers will stop recommending your business to friends long before they stop being your customer. It is easier to withhold a recommendation than find a new store. In addition, no one wants to make a recommendation and then be embarrassed by the outcome.

James Tenser
15 years 8 months ago

Mr. Ram’s comments echo some fine work by consumer behaviorist Richard Oliver, who defines dimensions of loyalty that include behavior (simple re-patronage) as well as affect (feeling an emotional connection).

While Ram’s ideas may not be new, they are certainly on target. One may re-patronize an establishment without feeling good about it. This situation may occur due to high switching barriers, lack of viable alternatives, or force of habit.

Commuters may loathe the Long Island Rail Road but still ride it every day to work. Most of us hate switching banks. Many of us shop at the nearest supermarket at least part of the time, even when there is a better store across town.

The important takeaway is that retailers and service providers must go beyond measures of re-patronage to understand their customers’ loyalty. The only way to understand how customers feel about your firm is to ask them. Their behavior alone doesn’t tell the whole story.

Carol Spieckerman
15 years 8 months ago

Well, of course this depends on the retailer…and who you call a “retailer.” Starbucks (retailer or restaurant?) has a pretty good idea why their customers frequent their stores, Wal-Mart knows a lot about what people do once they get in their stores but is taking stabs at understanding, and altering, their motivations for going. It just occurred to me the similarities between this topic and a presentation I gave at the License show this past week…only I was talking about vendors! I can say with certainty that the vast majority of retail suppliers don’t know why retailers keep buying their products and they are quite vulnerable as a result.

Bill Bishop
Bill Bishop
15 years 8 months ago

Ram makes a great point, and it certainly pertains to a lot of grocery shopping. Retailers are putting a tremendous amount of effort into trying to understand why people shop their stores, but as Ram suggests, it’s not always conscious-choice process, i.e., it’s sometimes just following established behavior that there’s no reason and/or easy way to change.

This diagnosis suggests that more emphasis should be placed on the points of leverage that will actually change shopping behavior, e.g., stimulate an additional trip and/or stimulate a shopper to start using a store to buy something that they had previously purchased at another store or, even better, never purchased at retail.

This focus on changing the larger dimensions of shopping behavior should also yield a higher return on investment for the effort.

Who do you know–if anyone–who’s doing this type of thing successfully?

John Rand
John Rand
15 years 8 months ago

Whether retailer or manufacturer, understanding this “passive loyalty” would seem to me to be a critical measure of vulnerability.

I suggest that high share companies that don’t know or understand this (or didn’t) are the ones who get hammered when a competitor enters what they thought was their space. The grocery channel comes to mind on the retailing side. Pet food manufacturers, soup companies, and household products all have examples of suppliers who had this happen to them.


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