Tuesday, August 21, 2007

The Ugly Side of Customer Loyalty

Yes, Virginia, there is an ugly side to customer loyalty. Customer loyalty is often viewed as the ultimate goal and without blemish. After all, what could possibly be wrong with customer loyalty. Well, there is a dark side to customer loyalty and when that dark side appears it usually occurs through unintended or uncontemplated use of customer information.

The good news is that customer information has great value within an organization. With the development of analytic and statistical models companies can learn a lot about their customers. Companies can segment the customers into groups based on customer value or by market segment or any one of a number of other demographics. This is the beatiful side of customer loyalty. The knowledge gained from the customers helps the company fine tune its product and service offerings to better meet the customer needs and hence become more efficient with a corresponding improvement in profitability.

HOWEVER, there is a dark side and one that should be considered whenever there is customer information to be mined. One way to turn to the dark side is to create analytic models that describe how much pain a customer can take before they stop doing business with you. An example would be the current status of airline service today. An analysitic model indicates how much more an airline can take away in terms of on-board service before the customer says ENOUGH - I won't fly this airline anymore - they have cut too much. The airline model seems to be testing how much service can be eliminated before there is customer defection.

Another dimension of the dark side is when the customer data base is used to segment customers so that some customers or customer segments receive better treatment than others. Marketing departments like to segment customers and find segmentation one very effective way of improving company performance and better meeting the needs of the various customer segments. While this makes sense to the company, it also becomes apparent to the customers who are not receiving the better treatment because they are in the segment that receives less value (or pays higher prices). If they have little chance of moving up to become one of the customers in the "privileged" group and reap the benefits of being "privileged", the consequence might be customer defection. Those nifty analaytic models can often be inferred by a savvy customer base and those customers may choose to take their business elsewhere when the "hand writing on the wall" tells them they are not privileged and may never be.

The bottom line is customer data is extremely valuable and should be examined carefully before any use is made of the information. Unintended consequences can bring unintended surprises such as increased customer defections.

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