Consumer Insights on Real Loyalty

From the September 5th edition of The Wise Marketer:

For real loyalty, see the customer’s point of view.

Even though customer loyalty has become a hot topic, with all the new technology available to businesses, the truth is that most firms still approach the subject from the wrong perspective, basing their loyalty initiative on “what’s in it for me?” rather than “what can I do for the customer?”, according to Don Peppers and Martha Rogers of Peppers & Rogers Group (co-authors of the book, ‘Rules to Break and Laws to Follow’).

What we mean by this is that most businesses, even today, craft their customer-loyalty programs and policies based solely on the business value that their more loyal customers might be able to provide for them. Think of all the programs and policies designed to appeal to gold and platinum customers, or to reward high spending customers, or to provide incentives for repeat customers. These kinds of programs are designed with pure financial goals in mind – getting high-potential customers to buy more, or to continue their patronage longer, or to cost the business less to serve. These kinds of goals are natural for any business, so it shouldn’t be surprising to see them designed into the architecture of most companies’ loyalty programs. However, if a business focuses exclusively on such ‘me-oriented’ financial goals, its efforts to generate more customer loyalty are likely to be clumsy and largely ineffective.

The purpose of any loyalty-improving initiative (or virtually any other marketing initiative) is to get customers to behave differently. As a business, you want a customer who otherwise would have defected to remain loyal; and you want a customer to buy more who, without the marketing initiative, would not have done so. But changing a customer’s behavior requires understanding not what value the customer represents to your business, but what the customer needs from your business, or, another way to say it: the value your business represents to the customer.
You have to understand the customer’s own point of view. Crafting a marketing plan of any kind that does not reflect and respond to your customers’ needs is doomed to failure, and this defect afflicts many current customer-loyalty initiatives.

The big problem for many marketing departments is that customers often have quite different needs. In fact, different customers might buy exactly the same product for the same price at the same time for completely different reasons. Lego, for instance, once told us that three ten-year-old boys might buy the same Star Wars Lego set at the same store on the same day for one of three completely different reasons. The first boy might want to put the set together and then act out the part of Luke Skywalker or Darth Vader. The second boy might have little interest in this kind of role playing, instead focusing on the process of decoding the diagram and instructions in his new Lego set, taking great pleasure in the meticulous construction involved. And the third boy might not want to put anything together that someone else has already diagrammed, preferring to use the pieces to assemble something quite different, based on his own imagination. The point is that if Lego could know which boy had which needs (i.e. what each boy’s different point of view was), then it could sell a wide range of additional products and services to each different boy – story books, videos, and maybe costumes to the role player, for instance, or extra diagrams to the constructor.

Time after time, in category after category, research shows that customers are widely different, not just in terms of their value to the business, but in terms of what they need from the business. So rather than differentiating customers solely based on their values, an effective loyalty program will treat different customers differently, based on their needs. Customer needs are what you have to understand if you want to alter a customer’s behavior. Stated another way, this means “taking the customer’s point of view” — that is, seeing things from the customer’s own perspective.

After all, the customer may not care, and may not even know, how valuable she is to your business. But she definitely cares about her own needs. From the customer’s point of view, she wants her own problem solved, and her problem will likely be similar to some other customers’ problems but quite different from many others’.

For example, consider one US client of Peppers & Rogers Group in the health insurance category. Needs-based customer research shows that healthcare customers vary considerably in their involvement with and approach to managing their own health. Some customers may have chronic conditions or problems, while some have weight loss objectives or fitness needs. Some will be passive and largely uninvolved in their own health conditions, while still others may be primarily concerned with family members, and so forth. Knowing which customers are which is essential to increasing each customer’s loyalty. Taking the customer’s perspective requires understanding which needs are of primary concern to which customers. So, rather than a simple loyalty program that builds points or credits for standard behaviours, our suggestion for this client was that the company try to gain greater insights into the deeper, more personal motivations that individual people have when it comes to caring for their own health. Then, by differentiating the way the company relates to and treats different customers, based on their individual needs, the health insurance company would be able to increase the loyalty of these customers, individually.

This strategy is a classic illustration of how to develop a “Learning Relationship” with each customer — that is, a relationship that gets stronger and stronger with each customer interaction or purchase. Basically, to develop a Learning Relationship with a customer, an organization needs to make it easy for the customer to “teach” the company what he or she values and will pay for. Then the company remembers this, and feeds it back to the customer in the form of more and more tailored products or services – products and services that meet that particular customer’s needs more and more particularly, as the customer continues to teach the company. As this kind of relationship develops, the customer will become ‘invested’ in the company. Over time, the customer becomes more and more loyal, not just because he feels the company is taking his own interests more seriously, but also because it will be more difficult for him to get the same level of personalized service from any other provider without first going to the trouble of re-teaching the new provider what his tastes and preferences are — something he’s already taught the original provider.

Some product and service categories, like healthcare, are characterized by wide differences in how customers consume or use the product, while other categories are more commodity-like, so that few differences in customer needs can be discerned. Any time your customers are characterized by having widely different needs, simply remembering those needs can provide a great service and convenience for each individual customer.

In the retail book category, for instance, there are hundreds of thousands of books available, and everyone has his or her own individual tastes for certain types, or authors, or genres. One of the secrets behind Amazon’s success is that there’s a big benefit for the customer when Amazon remembers that customer’s particular preferences and tastes and makes it easier for them to find the books they are more likely to be interested in on the web site. In counterpoint to that, consider the retail gas station category, in which people’s tastes aren’t widely different. There are only three or four types of gasoline sold at retail, and all people do pretty much the same thing with the gasoline they buy. But suppose you were to go into a gas station and be greeted with: “Welcome back. We’ve got a new shipment of 93 octane in, just the way we know you like it”. That would not provide much benefit, and you probably wouldn’t see it as a big reason to be loyal to that filling station. (Instead you might be loyal to a filling station only because they are friendly to you, and remember your name – much the same way any smart small business will do for everyone.)

Businesses want to get right to the business of making more profit, so they are extremely interested in understanding who their most valuable customers are, and often they don’t pay much attention to what is, in our view, the more important and difficult task, which is to understand different customers’ different needs. But with our own consulting clients, in financial services, telecom, retailing, and even in the government services category, any discussion about increasing customer loyalty will inevitably lead us to begin helping the client to better understand individual customer needs.

We try to categorize a client’s customers into different groups, based on their needs, in order to help the client come to grips with the kinds of strategies and offers that will lead them to change their behavior, and become more loyal. Simply describing these different needs-based groups can often go a long way toward helping a client better serve its customers. For a top European retail bank, for instance, two examples of these needs-based groups (in the bank’s “micro-individual” investment line of business) were:

1. Show me the money
Seeks extra income from investments, prefers shorter term commitments, gives importance to having extra information regarding investment options, values access, convenience and simplicity a lot, and prioritizes the maintenance of close contact with the bank. We recommended the bank send this group investment related brochures and product offers, giving them opportunity for close contact with the bank and with a dedicated Relationship Manager.

2. For the family
Values the family’s short and long-term needs, needs extra funds and money for immediate tasks, and gives importance to savings and future security. Savings account for children was a high response campaign for this group.
For a telecoms client in the Middle East, research showed that the first requirement to improve customer loyalty was simply to improve the level of customer service being delivered. But customers had differing needs from this service, related to their own situation, and their attitudes and preferences with respect to using the company’s services. So we devised with this client a “service promise” that had eight different features, including things like response time to service requests, online order tracking capability, and failure rates. Different aspects of this promise were important to different customers, and the communications of the promise to customers was tailored to each different customer’s needs.

When we create loyalty via differentiated customer treatments, the first step is to analyze the customer base, and to consider all the existing data, offers, and research in order to map the customer experience from customer’s eyes throughout each customer’s lifecycle.

Next, we try to identify the gaps between this current experience and what would be an ideal experience – that is, an experience where each customer’s needs are perfectly met and the relationship is strengthened in each interaction. Finally, we help the client lay out and implement initiatives to achieve this ideal state. These initiatives might include:

1. Gathering and analysing customer data, which may involve data mining, surveys, focus groups, internal and external interviews, and third party data sources;

2. Grouping customers based on their needs, usually combined with their behavioral trends and value, a process that will almost certainly require some statistical modelling;

3. Devising differentiated segment strategies in line with the company vision;

4. Defining initiatives to put the strategies into action, such as campaigns and communication plan, often running pilot programs and tests to ensure success and obtain quick wins;

5. Specifying the requirements for carrying out these strategies over the long term, usually including things like data, organization, reporting and monitoring, segment migration rules, and so forth.

We recommend that a company should identify and focus on between four and nine needs-based groups or segments, partly so that the management issues involved do not become too complex, but also as a way to persuade managers, employees, and others of the wisdom of this customer-differentiation policy. It isn’t hard to “tell a story” about a half dozen or so different types of customers, in order to build support for it at all organizational levels. Over time, however, a company’s customer differentiation efforts can become considerably more detailed and effective.

Tesco, for example, the UK grocery chain, monitors literally thousands of different segments of shoppers, based mostly on their transactional records — which, in the grocery category anyway, probably provide the most direct way to differentiate customers by their needs.

So here’s the main point: There are basically two ways to think about loyalty. In its most common iteration, loyalty takes the form of a rewards program that is essentially a bribe to a customer for his business. It’s the lowest form of “loyalty” — mere repeat business a customer gives to one of a collection of retailers or airlines or banks that he has a so-called loyalty card for. It’s faux loyalty, and it skips an important step — using the information that repeat business provides to learn more about a customer and serve him better. The second form of loyalty building doesn’t skip this step. Real loyalty is built when a business uses the information it gets from every interaction with a customer to understand his point of view, and provide for him a level of service or a product offering that is exactly right for that customer at that time, at the right price. It means remembering things about customers as well as for them, and making it better and better to do more business with you, with or without a formal reward.

Do you run a real loyalty program or a faux loyalty program?

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About Insights From Analytics

Integrated marketing professional who generates insights from analytics to increase revenue. Daily blog now resides at www.insightsfromanalytics.com/blog.
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