“Loyalty” is an old-fashioned word describing being deeply committed
to one’s country, family, or friends. It came into marketing with
the term brand loyalty. But can people be loyal to a brand? Tony
O’Reilly, former CEO of H. J. Heinz, proposed this test of brand
loyalty: “My acid test . . . is whether a housewife, intending to
buy Heinz tomato ketchup in a store, finding it to be out of
stock, will walk out of the store to buy it elsewhere.”
That some people will be exceptionally loyal to some brands is
incontrovertible. The Harley Davidson motorcycle owner won’t
switch even if convinced that another brand performs better. Apple
Macintosh users won’t switch to Microsoft even if they could gain
some advantages. BMW fans won’t switch to Mercedes. We say that a
company enjoys high brand loyalty when a sizable number of its customers
won’t switch.
Brand loyalty is roughly indicated by the company’s customer
retention rate. The average firm loses half its customers in less than
five years. Firms with high brand loyalty may lose not more than 20
percent of their customers in five years. But a high retention rate may
indicate other things than loyalty. Some customers stay on because of
inertia or indifference or being held hostage to long-term contracts.
Building loyal customers requires a company to discriminate.
We are not talking about racial, religious, or gender discrimination.
We are talking about discriminating between profitable and unprofitable
customers. No company can be expected to pay the same attention
to an unprofitable customer as to a profitable customer.
Smart companies define the types of customers they are seeking who
would most benefit from the firm’s offerings; these customers are the
most likely to stay loyal. And loyal customers pay back the company
in long-term cash flows and in generating a stream of referrals.
Some companies believe that they win customer loyalty by offering
a loyalty award program. A loyalty program may be a good
feature as part of a customer relationship management program, but
many loyalty schemes do not create loyalty. They appeal to the customer’s
rational side of accumulating something free but do not necessarily
create an emotional bond. How can frequent-flier miles win
customer loyalty in the face of canceled flights, overcrowded planes,
lost baggage, and indifferent cabin crews? Some programs are disloyalty
programs, as when an airline says the points will be lost unless
the customer flies within two months.
Companies should reward their loyal customers. Too often,
however, companies give a better deal to new customers than to their
old customers. Thus a telecom company may offer brand-new handsets
and a reduced-price call plan to attract new customers while old
customers are stuck with outdated handsets and pay more. Why not
offer a trade-in plan for old equipment and a call plan that cost less
each year that the customer stays with the company? State Farm Mutual
Automobile Insurance does this, where each year the insured automobile
owner gets a reduced rate if there are no claims.
While every company should aim to build loyal customers, loyalty
is never so strong that customers can resist a competitor who
shows up with a much stronger value proposition that gives customers
everything they now have and more.