Competitors provide a key customer loyalty metric

Competitors provide a key customer loyalty metric

Loyal customers are the objective of every marketer, and a wealth of loyalty schemes around the world are trying different models and techniques to help nurture and reap the benefits of long-lasting customer relationships, according to Nag Ramasubramani of Accentiv, India.

Indeed, a wide range of models are currently being used to measure and quantify the loyalty of customers, ranging from simple recency and retention rates to models of greater complexity (such as RFM and CLV) to measure behaviours as diverse as defection and increases in spending. But, asks Ramasubramani, are these models able to measure the true loyalty of a customer?

To answer that question, you first have to define what a loyal customer is. Ramasubramani suggests that a loyal customer is expected to exhibit at least the following characteristics:

1. Loves the brand;  
2. Stays with the brand and does not defect easily;  
3. Stays with the brand despite competitor offers, price increases, negative word of mouth, or even product failures;  
4. Actively promotes the use of the brand by friends.

So, if we want to measure whether or not a customer is truly loyal to a brand, we need to have measures that can capture these behaviours. There are already some tools that measure some of these behaviours. For example:

Marketers also have models for measuring behaviour with regard to a customer's desire to stay loyalty despite motivations to the contrary. More precisely, there are already a number of accurate ways to measure when customers defect from the brand. Such tools and techniques - such as recency - can identify when a customer has probably left the brand.

Models such as RFM measure visible signs of consumption and are therefore able to capture customer behaviour in terms of increasing consumption in terms of a variety of parameters (such as recency, frequency, monetary value, and of course engagement). But, while these are fairly comprehensive and provide a way to measure increasing loyalty, they are not measuring loyalty in the face of 'counter pulls'.

There is, however, a technique that is focused on measuring the extent of loyalty in the face of competitive pull, whether in the form of reduced prices, attractive 'freebies', bundled offers and so on: the Vulnerability Index.

The Vulnerability Index measures the ratio of loyalty programme members not repeating their existing purchase behaviour during competitors' campaigns, compared with the total base of programme members. This gives you an exact measure of the proportion of 'core loyal customers', which comprises those who are not succumbing to competitive pulls.

There are several factors that need to addressed in preparing to maintain and calculate such an index:

1. Competitors' incentive campaigns may or may not be launched nationally. Often they are regional in nature and, in the case of retail, they may be focused on a specific store.  
2. Competitors' communications may not be in the mass media, which can make them difficult to track.  
3. Different regions may have different competitor offers at different times.  
4. More than one competitor will probably have a campaign running.

It is therefore critical to get the right market intelligence channels in place. Unless you have very strong market intelligence, mapped almost to the level of individual outlets, it can be very difficult to construct an accurate vulnerability index. But, if you have this in place, the steps for constructing the vulnerability index are simple and easy to follow:

1. The first step in developing the index is to map the competitive activity in detail, including the competitor name, their offer, the duration of the offer, and the offer's focus area.  
2. Once we have details of the campaign and the focus area, we generate the list of loyal customers (programme members) in the focus area.  
3. Map their repurchase cycles based on their observed frequency and their last purchase date.  
4. Isolate all customers whose repurchase dates fall within the campaign period. This becomes your observation set (OS). The sub set of customers who are directly under competitive pressure and are vulnerable to shift.  
5. Now define the observation period depending on the industry- the observation period should begin with the campaign launch date and extend to one purchase cycle after the last date of the competitors campaign. This is a judgemental call as individual purchase cycles vary. You might define a period of 15 days after the campaign, for example.  
6. Watch the purchases by vulnerable customers closely for the observation period, and map all those customers whose purchases drop significantly during that period. This set of customers represent your main vulnerability, and are called the 'vulnerable set' (VS).  
7. Now calculate the vulnerability index, using the formula:            VI = (VS / OS) x 100  
8. Repeat this exercise over a quarter across several stores and several regions and we will have a comprehensive view of the vulnerability of our customers in the face of competitive activity.

Of course, it is possible to run a reactive campaign while the competitive activity is going on but this would not give us an accurate picture of the vulnerability.

The index gives you an exact idea of the proportion of our customers who are succumbing to competitive pressure and so some idea of the level of loyalty in these customers. If the index is high, you know that there is something to worry about. If the index is low, you can assume with some degree of certainty that your customers are exhibiting robust loyalty to the brand.

The index also helps compare your stores in different regions in terms of their ability to retain customers. It therefore also helps in developing marketing strategy based on clear insights into actual customer behaviour.

Nag Ramasubramani is the senior vice president of loyalty marketing and strategy for Accentiv, a division of Accor Services (for more information, click here).