Much research has emerged recently proclaiming that investment in loyalty and retention leads to diminishing returns. This research is usually backed by statistics highlighting the number of loyalty programs to which consumers belong and the lack of engagement in same. There usually follows a conclusion that marketers should forgo investment in loyalty in favor of investment in engagement, CX, or some other technology-driven marketing trend. New research from McKinsey follows this pattern; while the research does uncover a solid connection between brands that fall within a shopper's "initial consideration set" and market share growth, the authors' simplistic definition of "loyalty" leaves out the importance of customer relationships as a key driver of frequency, retention, and advocacy.
By Rick Ferguson
Let us first take as a given the premise of the McKinsey research
, titled "The New Battleground for Marketing-Led Growth": By vastly increasing consumer knowledge, options, and decision points, technology has fundamentally made building loyalty harder. In those halcyon days of yore, marketers essentially had only two ways to reach customers: through broadcast advertising and direct marketing. Now, consumers also encounter brands through web browsing, through social media, and through their mobile devices. This expansion of marketing information has left consumers dramatically more promiscuous while marketers scramble to capture their attention – often through rampant discounting and one-off promotional campaigns.
This reality drives much of McKiney's research and analysis, which highlights the key ways in which these changes have increased the importance of insterting your brand into the consumer's initial consideration phase as often as possible. A few key points from the McKinsey research emerge:
Innovative marketing approaches encourage promiscuity. Traditional loyalty and sales incentives, McKinsey argues, are no longer sufficient to discourage "shopping around" as aggressive brands disrupt the loyalty cycle through digital targeting. "Powerful new currents are disrupting established patterns of behavior," McKinsey argues. "And consumers, including those you may have thought loyal, are considering someone else's offerings more often than you realize."
"Shopping" often trumps "loyalty." Because so many brands now rely on digital targeting to reach customers, McKinsey's research uncovers the dramatic shift in shopper promiscuity with stats like these – of 27 shopping-drive product categories, consumer behavior breaks down thusly:
13% of customers are loyalists, who don't shop around
29% shop around, but ultimately repurchase from the same brand
58% switch to a different brand
Reaching those 58 perecent of switchers, McKinsey argues, drives more growth than retaining those 13 percent of loyalists.
Being "top-of-mind" is critical to success. McKinsey argues that reaching those 58 percent of promiscuous shoppers is now tantamount to marketing success. McKinsey found that brands in a shopper's "initial consideration set" are twice as likely to get the purchase as brands considered later in the customer journey. Seven in ten brands purchased by those 58 percent of switchers are part of those customers' initial consideration set.
Marketers should switch from retention to consideration-based marketing. McKinsey's research has found that this new shopper-driven promiscuity should lead marketers to consider shifting spend from loyalty rewards to consideration-based marketing that drives your position in a shopper's initial consideration set. McKinsey has even coined a new stat – Customer Growth Indicator (CGI) – that finds a strong correlation between initial consideration and market share growth. Money quote:
"Loyalty-based marketing doubles down on a narrow selection of high-value consumers and then spends on incentives to retain them. By contrast, marketing geared to growing initial consideration will exploit a more diverse and wider set of consumer segments, many with limited or perhaps even no experience with the brand. The name of the game is expanding your window for growth potential, which is likely to demand quite different approaches for shoppers who have and have not previously engaged with the brand."
There's no doubt that consideration-based marketing is more important than it's ever been. McKinsey's argument that loyalty marketing "doubles down on a narrow selection of high-value customers," however, betrays a misunderstanding of how loyalty marketing works. Here are a few key arguments in defense of loyalty marketing:
Loyalty marketing focuses on customer potential. Loyalty marketing focuses not just on that narrow 13 percent of loyalists; it focuses also on those shoppers within that 58 percent of promiscuous shoppers who have the potential to become loyalists. By capturing first-time purchasers within your loyalty marketing ecosystem, you can reduce the volume of marketing noise that leads to promiscuity and focus customer attention on you.
Loyalty is an outcome of relationships. McKinsey's definition of loyalty as "repurchase" is too simple by half. Loyalty is not an emotion that can be created simply by encouraging repurchase. Loyalty is rather an outcome of strong customer relationships driven first by your core product-price-experience offering, and second by your demonstration of these core relationship values:
Trust. Consumers are loyal to brands that live up to their brand promise.
Commitment. Consumers are loyal to brands that demonstrate relationship commitment through marketing personalization and relevance.
Reciprocity. Consumers are loyal to brands that reward and recognize them for their loyalty.
Properly practiced, loyalty marketing delivers on these three core relationship drivers. It is this activity that leads to loyalty – and it is the opportunity to build relationships with key segments within those 58 percent of promiscuous shoppers that can break the pattern of promiscuity and deliver greater return for your marketing dollar.
There's no doubt that consideration-set marketing drives short-term growth. Longer-term growth, however, requires an equal focus on long-term customer relationships. McKinsey advocates a world in which all customers are promiscuous, with every purchase up for grabs. It's a world in which marketing is driven solely by margin-killing discounts and short-term promotions designed to momentarily shift attention from your competitors while they're trying to do the same to you.
To me, that sounds like marketing dystopia. Consider instead a world in which consideration-set marketing is but the first step in a long-term, value-added customer relationship driven by trust, commitment and recriprocity. Consideration-set marketing will certainly improve marketing efficiency, but loyalty marketing also improves marketing effectiveness. Technology may encourage shopper promiscuity – but shoppers will always hope to fall in love.
Rick Ferguson is CEO and Editor in Chief of the Wise Marketer Group