The six key factors that influence customer loyalty
Customer loyalty is widely accepted by marketers as being something that's worth nurturing, with many renowned analysts and researchers repeatedly showing the value of loyalty programmes in terms of greater spending and satisfaction, more profitable customer behaviour, reduced defection levels, and unique competitive advantages. But what are the main business factors that directly influence the loyalty of your customers?
According to Peter Clark, co-editor of The Wise Marketer and co-author of The Loyalty Guide report series, there are six major factors that play key roles in influencing the loyalty and commitment of customers:
Figure 1: Factors that influence customer loyaltySource: The Loyalty Guide II (TheLoyaltyGuide.com)
In this article, we've drawn guidance from many of the 36 chapters of The Loyalty Guide Volume II, to offer practical insights into the workings of customer loyalty programmes and the ways in which they can positively influence shoppers' behaviour toward the company. The result is that customer retention is not only increased but customer lifetime value and profitability are also likely to increase significantly thanks to longer-lasting and more relevant customer relationships.
Factors influencing loyalty Looking in more detail at the major factors that influence consumers' loyalty - not only to retailers but also to suppliers in all sectors, including business to business (B2B) - the six key areas of focus identified in the report can be summarised as follows:
- Core offering The companies that boast the highest levels of fiercely loyal customers have built that loyalty not on card programmes or gimmicks, but on a solid, dependable, core offering that appeals to their customers. These companies have focused intently on what they know appeals to the type of customers they want to attract, and have determinedly concentrated on delivering what is expected every time. North American retailer, Nordstrom (www.nordstrom.com), is well known for the loyalty of its customers. It built this loyalty by understanding what its customers wanted and then empowering its employees to deliver those needs consistently.
Clearly, the data from a good loyalty programme should help the operator to improve this core offering by tailoring and moulding it more closely to the customers' needs and desires.
Elements of the core offering that have a large role in building customer loyalty include:
- Location and premises Location and premises clearly play a part in engendering loyalty. The Three L's of retail - "location, location and location" - are undoubtedly important, and attractive and functional premises are equally so.
- Service Whether selling services or products, the level of service perceived by the customer is generally key to generating loyalty. It can be argued that some customers buy only on price, so all that is necessary to retain their loyalty is consistently low prices. To certain extent that is true. But in most cases, any loyalty shown will be only to the prices instead of the business. Should a competitor offer even lower prices, those customers are likely to defect. Companies that have adopted a policy of every day low prices (EDLP) can be more vulnerable to competition than those who have built their customers' loyalty on superior products or service.
The UK supermarket chain Asda has chosen EDLP instead of a loyalty programme as a strategy, with great success. Why has this worked so well? Because Asda offers great levels of service and a comprehensive range of products as well as low prices. In other words, it differentiates itself from other supermarkets that rely purely on EDLP to draw and keep customers. Asda's customers are loyal not only to low prices but to the whole shopping experience. (For complete details of Asda's loyalty strategy, see section 22.6.2 in The Loyalty Guide Volume II.)
- The product or service The products or services offered must be what customers want. The days when businesses could decide what they wanted to sell or supply, and customers would buy it, are long past. The customers' needs and wants are now paramount. If you don't meet them, someone else will.
- Satisfaction Clearly, satisfaction is important; indeed essential. But, taken in isolation, the level of satisfaction is not a good measure of loyalty. Many auto manufacturers claim satisfaction levels higher than 90%, yet few have repurchase levels of even half that. The situation is stacked against the business: if customer satisfaction levels are low, there will be very little loyalty. However, customer satisfaction levels can be quite high without a corresponding level of loyalty. Customers have come to expect satisfaction as part and parcel of the general deal, and the fact that they are satisfied doesn't prevent them from defecting in droves to a competitor who offers something extra.
The point is that, while high levels of customer satisfaction are needed in order to develop loyal customers, the measure of customer satisfaction is not a good measure of the level of loyalty. The two are not measuring the same thing.
- Elasticity level Elasticity expresses the importance and weight of a purchasing decision - effectively the level of involvement or indifference. This applies to both the customer and the business.
- Involvement The customer's involvement in the category is important: the more important your product or service is to the customer, the more trouble they have probably taken in their decision to do business with you, and the more likely they are to stick with what they have decided. Most customers would be highly involved in the category when choosing a new car, a new jacket, or a bottle of wine. However, when choosing a new pair of shoelaces, involvement is not usually high. Businesses dealing in commoditised products and services cannot expect high involvement and need to earn loyalty in other ways.
- Ambivalence The customer's level of ambivalence is also important. Few decisions are clear cut. There are usually advantages and disadvantages to be balanced, and vacillation is unstable. Again, we see that the more commoditised a product or service, the more difficult it is to cultivate loyalty. It is only when points of differentiation are introduced that the customer has a valid reason for consistently preferring one particular supplier.
- The marketplace The marketplace is a key factor in the development of loyalty. The elements most closely involved are:
- Opportunity to switch If the number of competing suppliers is high and little effort is required to switch, switching is clearly more likely. Conversely, the more time and effort invested in the relationship, the more unlikely switching becomes. The level and quality of competition has a significant effect on how easy it is for a customer to switch from any one particular supplier. When competitors are offering very similar products at similar prices, with similar levels of service, some means of useful differentiation has to be found in order to give customers a reason to be loyal.
- Inertia loyalty This is the opposite of ease of switching. Most banks enjoy a high level of inertia loyalty simply because it's often so difficult and time-consuming to change to a new bank and transfer direct debits and standing orders.
- Demographics According to Jan Hofmeyr and Butch Rice, developers of The Conversion Model (which enables users to segment customers not only by their commitment to staying with a brand but also to segment non-users by their openness to switching to the brand), more affluent and better educated customers are less likely to be committed to a specific brand. They say that the commitment of less affluent consumers to the brands they use is often unusually strong - possibly because they cannot afford to take the risk of trying a brand that might not suit them as well. They also suggest that younger consumers are less committed to brands than older consumers.
Interestingly, these differences carry over into cultural groups as well: they find that French-speaking Canadians are more likely to be committed to a brand than English-speaking Canadians, and Afrikaans-speaking South Africans are more likely to be committed than English-speaking South Africans. In their excellent book, Commitment-Led Marketing, they show how commitment norms for the most frequently used brand of beer vary from country to country. At the two extremes we see both Australia and the UK (58%) and South Africa at 83% - a considerable difference.
- Share of wallet As markets become saturated and customers have so much more to choose from, share of wallet becomes increasingly important. It is cheaper and more profitable to increase your share of what the customer spends in your sector, than to acquire new customers. After all, that's what loyalty is really about. Totally loyal customers would give you a 100% share of their spend in your sector.
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