Don’t be misled by thinking of loyalty as a collection of warm fuzziness and good feelings. Neither is it a synonym for customer satisfaction, nor for frequency of purchase transactions (although these are often associated with it). In the business context, "loyalty" measures specific behavioral elements over an extended period of time to assess the quality and durability of the relationship. Examples of these would be willingness to refer others and willingness to purchase again.
Segmentation marketing is a must in our recessionary climate. (The first part of the sentence comes out of the blue-needs better linkage or replace it altogether.)It has never been as important as it is today for a successful marketers to uncover what drives their customers’ loyalty and purchase decisions, and then to use that information to help increase their loyalty levels to build long-term relationships. These loyalty factors also play a role in which prospects you target as customers.
The phrase, "you can’t be all things to all people" has never been more true than in today’s tough business-to-business climate. In fact, those who have tried rarely were able to provide superior service to anyone. Consider what happened to IBM prior to its transformation into a services firm. As the company continued to proclaim the universality of its marketplace, millions of dollars of replacement part and add-on business went elsewhere. Might not a more focused strategy have enabled Big Blue to retain customer loyalty over the full life cycle of its equipment?
A decade into this new millennium, one major rule stays the same: the single most important set of decisions any business-to-business enterprise can make are those involving selection — both of the products and services you will provide, and of the customers for whom you will provide them. In fact, recent research holds that it is a costly mistake — a diminishing of your resources and skills — to try to retain each and every customer. Contrary to the traditional wisdom of acquiring as many customers as possible, a critical skill we need to learn is how to identify and disengage with customers who are not profitable to serve. Let your competitors have them.(I think you have several sentences in this paragraph that you could highlight in the text – as is done in magazine articles.)
Targeting the right customer in the first place is the first half of the loyalty equation. Some customers are inherently price-driven — constantly on the prowl for a better deal, and ready to drop a supplier at a moment’s notice should someone else shave margins a little more. No matter how hard you try to please these customers, they will never be loyal to any supplier, no matter what value they receive, and are therefore worth very little in the long run in terms of profitability.
Other customers, however, inherently understand the high value of dependable, lasting relationships with key suppliers. Purchases are not random events for these customers; they are planned through long-term partnering, and as such are immune to momentary price advantages. It is these groups that are worth your ardent pursuit.
Selectivity, then, by this definition, requires that you use segmentation to align your core competencies with your customers and prospects. Your "bundle of skills and technologies" must match up to the segment or cluster of accounts already grouped by needs and buying behavior in a way that makes economic sense. It demands that we keep our focus on long-term loyalty between the company and its customers, rather than frequency of one-time transactions. It advocates a "marriage" vs. a series of one-night stands.
That’s not a strategy that comes easily to people brought up under more traditional school of marketing, which counted volume of sales transactions in isolation, and measures gross market share, rather than analyzing the lifetime value (versus cost) of each customer. And it can seem especially threatening to short-term thinkers, pressured by the demands of the next quarterly report to stockholders. And, with business slowed, unemployment still high, farmer’s incomes projected to drop nearly 38%, it takes a moment to step back and see that investing now will pay off in the long term even if an explanation to stakeholders is required.
Nevertheless, segmentation-enhanced selectivity is essential to a long-term view that places value creation as the fulcrum for ongoing success — especially in a world of parity products, right-sizing and/or consolidation, and easy duplication of product and service offerings.
What characteristics, identifiable from a distance, let you flag potentially loyal customers? That will vary, of course, depending on the profile of your business — your core competencies, goals and service philosophies. But the likelihood is great that many of them will look a lot like the firms who are currently your most valued customers.
The planned process begins with defining your business design: What products and service values are you set up to deliver efficiently and effectively? Within the broad universe of potential customers, which are the most logical targets for this set of capabilities?
Next, you can define the word "customer" to incorporate a quantifiable concept of profitability. In this context, a "customer" is a company that does X $ in volume with you, which includes Y number of different products, within Z time duration.
The next two steps are segmentation and grading. The two are entirely different processes that together create a very powerful economic model for customer selection, the purpose being to invest an appropriate amount of resources relative to profit potential.
Needs-based segmentation is the clustering of customers (and later, prospects) according to common sets of needs and purchasing behaviors as they relate to your organization’s external service values. Define the four to six reasons that most customers buy from you (which typically account for 80 percent of all decisions to purchase from your company). You then list the external service values that are most important to each customer. With this input, your marketing database can divide your customer list into one or more segments, each consisting of a group of customers who share a common set of needs and way of doing business.
Ideally, grading is done only within a segment; it’s the realization of economic value within that segment. It’s also a means of estimating the revenue available from that segment, and of understanding its unique needs, so you can talk to them as a group, via the lowest contact medium within the grade. There is, however, significant value in grading your entire customer file and investing in them proportionate to their level of commitment to you and potential revenue.
Finally, you need to analyze the lifetime value (LTV) to you of customers in each of these segments of your market. Within this, understand that LTV has more to do with how you treat your customers after you’ve acquired them than with the method of acquisition. Given what it costs you to acquire, supply and service this customer, the anticipated length of time you’ll retain its loyalty, the revenue that this will generate, and how much profit will it bring to you over the next X years (expressed in Net Present Value terms)?
With this information in hand, you can identify the types of customers who currently provide you with the lion’s share of your profits — and, by extrapolation, which characteristics you should look for in acquisition targets to achieve maximum profitability. This will then allow you to make intelligent decisions about resource allocation to acquire and nurture more of this kind of business.
A loyalty focus suggests that customer selectivity should be a matter of building up, rather than cutting back. Start with your best, most loyal customers (in terms of dollar volume, relative to wallet share; variety of product offerings purchased; and number of purchasers with whom you deal at the account). Fence these off and concentrate on understanding their needs and what constitutes value for them. You are now well-positioned to focus on them, opening a dialogue, and creating a "learning relationship" in which there is both an economic and an emotional benefit.
Database marketing and analytics (aka, BI or Business Intelligence) provide the tools to find these answers. Marketing databases are designed to help you understand as much as possible about your customers, so you can build sustainable, mutually profitable relationships with them. Analytics is a creative art even more so than statistical manipulation. Inasmuch as databases are also the repository for "institutional memory," recording all contact and transaction information as it occurs, sensitive use of BI can reap a huge harvest. Creatively examining data, looking for relevant trends across segments, allows account histories and resulting insights to be built on and shared throughout your company, far into the future. Compare this to the proprietary, fragmented possessions of many diverse individuals who still refrain from sharing and building what in reality is a customer knowledge management repository. Today when these individuals depart so does the customer information they hold.
The other half of the loyalty equation, of course, depends on what you do to earn it. Customer loyalty is most often a response to perceived value received. What creates that perception can vary from one group of customers to another — and indeed, from one individual firm to another. Until you know how various types of customers define that "value," understanding both their priorities and their concerns, you’re flying blind.
Relationship marketing demands ongoing dialogue with your customers — especially with those who have demonstrated long-term loyalty. Note that complaints can be at least as valuable to your long-term success as praise. Armed with such information, you are able to do less of what aggravates your customers, and more of what pleases them — targeting specific activities to various segments of your market, and sometimes even to markets of one. The most successful companies have long known this intuitively, and acted upon it. But now, with database marketing in place, that process can be managed far more effectively — though it will always be 75 percent art and only 25 percent science.
Providing outrageous, "knock-your-socks-off" product/service delivery to these top-tier, most loyal customers will strengthen your internal service values. Your employees will feel better about themselves, and begin delivering higher levels of service, even beyond top-tier customer groups.
A note of caution: Be careful about basing your acquisition strategy primarily on price concessions. If that’s your definition of "value," it’s likely to become theirs as well. Ironically, in some industries programs designed to target "ideal" customers have, themselves, converted those customers into undiscriminating price-shoppers. An extremely practical tool by which to judge the appropriate investment into so-called ideal customers is to perform defection analysis. One enlightening analysis demonstrated that the Board of one Global 200 firm should sell a particular business unit rather than match a competitor’s market coverage model. The insight came from understanding that their company was losing its best customers and retaining only their own worst while picking up their competitor’s worst.
Consider the airlines’ "frequent flyer" programs, aimed at lucrative business travelers. Initial introductions were enormously successful as relationship-builders. But as "me-too" programs proliferated, any competitive advantages in terms of customer loyalty evaporated — leaving only the liability of a lot of free travel vouchers. The lesson to be learned is that price-cutting is a game everyone can play (and probably will, once someone else initiates it).
Sustainable competitive advantage in wooing customer loyalty demands deeper understanding of what those customers really want — and then responding to their concerns by adding customization, convenience, and solutions relevant to them. No better tool could exist for us to use than those of social media. Yet, clearly, these tools are so young in their development that we’re not quite sure how best to test, trial and implement them and which ones to incorporate into our conversation with customers.
From that beginning, as a natural offshoot, your service delivery system will improve for more and more of your selected customers, present and potential. You will be investing necessarily-limited resources where they will have the most powerful impact on your future profitability — and in proportion to the level of commitment those customers have demonstrated to you. Our experience has been that using the preferred medium within a segment often improves the perceived level of service delivery while decreasing the cost of doing business as a percent of revenue. Your employees and channel partners will experience renewed enthusiasm as they find themselves increasingly able to provide true value, on their customer’s terms. And, you will be well-positioned to segment your universe of potential customers, pursuing like companies to build a growing base of loyal customers.
This strategy, mightily enhanced by the insights of business analytics, the inclusion of social media as additional communications channels, and database marketing provides, is at the heart of building customer loyalty.
Nick Poulos –