Customer loyalty is a powerful but elusive force that's hard to measure even though it can be profoundly important to the health of a business. To succeed in today's marketplace it is critical for companies to focus their efforts on customer loyalty strategies, which translate directly into increased profits, according to research published by US loyalty consultancy Parago.
According to Parago, as consumers become more media-savvy, the mass-advertising marketing model is no longer enjoying the kind of success it once did. It is also no secret that different customers want different things from a company, and the challenge today is to deliver different things to different customers. Consumers want to be recognised and rewarded for their loyal patronage and it is becoming central to the value proposition they expect from a product, service, or brand. Effectively, consumers are now saying "Give me a reason to be loyal". They want marketers to know enough about them to give them what they want and make their purchasing experience more satisfying.
In its survey and analysis of loyalty in the US during 2004, Parago set out to answer some complex and compelling questions regarding customer loyalty: What are customers loyal to? How does that differ by age, and by income? What do customers like, want and expect as part of the recognition and reward they get for their loyalty? What do customers find compelling and valuable about a loyalty programme, and why? Where and when do they feel neglected?
Four loyalty trends
The nationwide survey asked 1,150 consumers a series of questions that identified buying behaviours and overall attitudes toward loyalty programmes. From these responses, the company uncovered a number of trends, four of which are particularly noteworthy:
- Referrals are king
One of the most powerful yet surprisingly underutilised tools is the referral programme. For generations, companies have witnessed the incredible power of satisfied customers recommending products or services to someone they know. However, most companies do not actively pursue referrals, thinking customer advocacy is a phenomenon that occurs naturally, and is perhaps not something that can be encouraged. This hands-off approach to referrals is now being pushed aside for something more proactive.
In 2004, one-quarter of all Americans tried some form of low-carbohydrate, Atkins-style diet - a concept that spread largely through word-of-mouth and referrals. It is a powerful marketing vehicle, and one that has not gone unnoticed by marketers. With the recent success of various word-of-mouth and referral marketing campaigns, the concept is beginning to occupy a larger space in the collective consciousness of the marketing community. Recently, the Word Of Mouth Marketing Association was established and several companies focusing solely on word-of-mouth marketing have sprung up. When you consider the cost of acquiring customers via traditional marketing efforts is often quoted as being four times what it is to acquire customers through referrals, you can begin to see the dramatic effect referrals can have on a company's bottom line.
- Wealthy consumers are more loyal
High-income households exhibit greater loyalty and are influenced more by loyalty programmes. Even more influential than age, gender or geography, household income proved to be most indicative of the strength and impact of customer loyalty. High-income households (US$125,000 or more per annum) are significantly more likely to participate in a customer loyalty programme, make purchases based on brand loyalty, and be less impacted by price or discounting.
In total, 94% of high-income households said their membership in a loyalty, rewards or frequent customer programme had a strong to moderate influence on their purchasing decisions, compared with 78% of all consumers overall. Further analysis showed a strong correlation between loyalty and income: as income increases, so does the importance and impact of loyalty programmes. For those businesses that target higher income households, loyalty programmes have become a profitable way to provide additional value, recognition, special perks, and rewards to their most desired customers.
Similarly, active participation in customer loyalty programmes increases as household income rises. Among loyalty programme members, 92% of high-income households are actively enrolled in an airline frequent flyer programme, compared to 51% of loyalty programme members overall. Hotel programme membership showed similar income-dependent results, with 78% of high income households enrolled in a hotel reward programme (compared to 35% of the general population). While only 13% of the general population belongs to a car rental loyalty programme, 48% of high-income households are members of a car rental programme.
- Consumers want more loyalty programmes
Demand for retail loyalty programmes is on the rise. When asked to name a brand or category they felt needed a loyalty programme, survey participants had no shortage of responses, identifying over 800 brands, services, and categories they felt needed a loyalty programme. Across all categories, consumers indicated they wanted to see more loyalty programmes from fuel retailers, grocery stores, restaurants, clothing stores and mobile phone companies.
Consumers identified well-known brands such as Wal-Mart, Target, Home Depot, Sears and K-Mart as all needing to recognise and reward customer loyalty. While many retailers offer a co-branded credit card with perks or rewards attached, consumers only receive rewards for using that card, so few consumers participate. Other major retailers, such as Best Buy, have developed programmes such as RewardZone that reward consumers for being loyal shoppers regardless of their chosen payment method. Eight of the top ten companies that Americans said needed a loyalty programme were major retailers. In other words, consumers do want retailers to know who they are, and provide rewards and recognition for their patronage - or risk losing their loyalty altogether.
- Consumers want to be loyal
Consumers said they will gladly spend more time and money to participate in relevant loyalty programmes. Frequent flyer programmes are having their intended effect and American consumers said they value the rewards these programmes offer. Consumers are willing to fly at earlier times and pay premium prices for tickets on their frequent flyer airline rather than use an alternative airline. According to the survey, 93% of US consumers would be willing to depart one hour earlier than needed for a flight if it meant they could fly on their preferred frequent flyer airline. Moreover, 67% said they would pay US$25 more (or 5% more) for a ticket on their frequent flyer airline rather than use a competitor airline.
But why are they willing to pay a premium for something as price-competitive as an airline ticket? According to Parago, it depends on who you ask. Among females who travel mostly for leisure, 74% said they participate in the frequent flyer programme primarily to receive free miles for travel. However, among most males - and especially those who travel primarily for business - the special treatment (such as first-class upgrades, perks, and faster check-ins and boarding) is more important to them than free travel. Among males aged 26 - 35 who travel mostly for business, 67% said the special treatment they receive was more important than free miles. Likewise, 54% of males aged 56 - 65 and 52% of males from high-income households said they prefer perks to miles.
The study also identified 25 brands that are 'top of mind' for the consumers surveyed, and revealed specific loyalty to Coke, Pepsi, Starbucks and Dr. Pepper (in the food & beverage category); Wal-Mart, Target, Best Buy, Sears and Home Depot (for retail stores); Ford, Chevrolet and Chrysler/Dodge (for automobiles); and Dell, Sony and Hewlett Packard (for electronic goods).
Among its most significant findings, brand loyalty was found to be closely tied to single high-value consumer purchases (such as cars, computers, and electronics) or high frequency purchases that represent a significant portion of consumer spending (such discount stores, home improvement, supermarkets, and dining).
Despite low involvement?
Additionally, driving customers to be highly attached to 'low involvement' purchases (such as canned drinks or snacks) represents something of a breakthrough in terms of brand loyalty, and it came as no surprise to Parago that Coke and Pepsi lead the category.
Although Wal-Mart finished first in named-brand loyalty, the report suggests that Starbucks' high level of customer loyalty is perhaps more enviable because it is not as vulnerable to pricing; the true Wal-Mart loyalists appear to be more heavily focused on low prices, making them more susceptible to alternatives that are seen as being of a higher value.
"Regardless of industry, product or service, different types of customer prefer different rewards and benefits," the report's authors note. However, the report also warns: "The key is to know who your customers are and what they want, then provide them with the right mixture of rewards and benefits - or risk losing high value customers to a competitor who listens better."
The full report of the survey and analysis can be obtained directly from Parago.