Saturday, May 24, 2008

Growing Market Share by Using Customer Loyalty

The computer business is looking more like a commodity business every day. There doesn’t appear to be any real difference between computers and it appears that most customers just want to pay as little as possible. If this rings true to you, there is some good news that you might not have heard. The good news is that there are loyal customers in the market. They will buy products that cost a little more and even recommend friends and associates to companies that charge prices higher than the low “street” prices. How does this happen? Customers are not just born to be loyal. Customer loyalty evolves over time and it is the company that knows how to create loyalty in their customers that will not only survive but will have higher profit margins than their competitors who are fighting it out to be the lowest price on the street.

What Is Loyalty?

This article will discuss what it takes to create and manage loyal customers. The first question is what is a loyal customer. There are a number of different ideas of what a loyal customer is. Some of the suggestions are:
1. a loyal customer is one who buys everything he can from you – you have 100% of his pocket when it comes to products and services you offer. This doesn’t happen very often.
2. a loyal customer is one who buys from you more often than he buys from your competitor.
3. a loyal customer is one who thinks of you first when deciding to make a purchase of a product or service that you offer.
4. a loyal customer will not leave you when there is a problem. He will give you the “benefit of a doubt” and not defect to a competitor.
5. a loyal customer will recommend you and your products and services to his friends and business associates whenever there is an opportunity.

While this list in not all inclusive, one or more of the ideas might make sense to you. The key is that a loyal customer is more than a satisfied customer.

One thing that is never mentioned when people talk about customer satisfaction is that customer satisfaction is a passive state for the customer. It doesn’t take any effort on the part of the customer to be satisfied. The automobile companies have found that out. The results of new car customer satisfaction surveys usually indicate a very high level of customer satisfaction (often as high as 90%). The surprise caused the automobile dealers great concern was that high levels of customer satisfaction did not translate into loyal customers. While customers would give high marks to sales personnel, service personnel and the quality of the automobile, the loyalty (often below 50%) did not track the level of satisfaction. In fact, automobile manufacturers have found that there is a great difference between the level of customer satisfaction and the level of customer loyalty. For the automobile dealer, customer loyalty means coming back and buying the next car from the same dealer. The simple conclusion is that there is something more to loyalty than customer satisfaction.

A Loyalty Parable

There was a man in his late 30’s who had a small consulting business. He found out that by using a computer he could dramatically increase his productivity. He was able to write and edit his own reports, automate his billing and manage his business contacts more efficiently with the computer than when he had performed the same activities manually. He estimated that the computer freed up to as many as 5 hours each week. With those 5 hours he could make additional marketing calls, complete assignments sooner and get his invoices out more quickly. The computer was one of his best tools. Unfortunately he was not a computer guru and had to rely on an independent computer operation (U Need Me, Inc.) to support his needs.

UNM, Inc. wanted to build a loyal customer base so it examined each customer to determine how to make that customer loyal. The company decided to implement the following steps:
1. Know what the customer had in terms of hardware and software.
2. Know what the applications were that were most important to the customer.
3. Know the customer’s level of urgency if a problem were to occur.
4. Assist the customer in developing a back-up plan.
5. Make a point to call the customer periodically (at a frequency agreed to with the customer).

This company had as its strategy to know the customer and make sure that the customer was aware of its understanding of his business and priorities. Further, UNM did not strive to have the lowest price. What UNM wanted the customers to know was that it made a point of knowing the customer’s systems and his needs and that they were capable of handling any problem the customer might have.

There was a competitive independent computer operation (I Don’t Need You, Inc) that believed that price is everything. IDNY, Inc. made sure that its prices were the lowest around. Their strategy was that customers should come in and save a buck. This company took the following steps:
1. Minimize overhead by keeping a minimum number of personnel on the payroll.
2. Reduce overhead by hiring the lowest cost workers.
3. Keep the minimum inventory in stock.
4. Provide no extra services.

This company believed that customers are only loyal until there is a price difference. They also believed that the products they sold were price “elastic.” Thus, sales volume was directly related to price and by keeping their prices as low as possible, they would capture the market.

The question is whether both companies will survive. The second question is can each of them have loyal customers?

The Market

There is a place in the market for both UNM and IDNY! The fact is there are some people who are loyal to low prices and there are some people who are loyal to having their needs met. Each company will have a loyal following to some extent. The market generally will consist of three groups; namely, the group loyal to low prices, the group loyal to full service and the third group that floats between the other two groups and is loyal to neither of them.

You can think of this market as having two magnets. One magnet pulls customers who are price sensitive and the other magnet pulls customers who need/want full service. There are some customers that have a specific charge that will draw them to one magnet and others with the opposite charge that are drawn to the other magnet. Some customers have little or no charge and have no great affinity for either magnet. This is the market from which market share growth is obtained – the group of customers with no great affinity to one magnet or the other. It is the roll of UNM and IDNY to convince these customers that their magnet is the one best suited for them. Once these customers have been attracted to one of the companies, the next step is to create enough loyalty so that they will not return to the undecided group and become susceptible to the other magnet.

Growing Market Share

Since this blog has a focus of growing market share the old fashion way it is time to what this means. The old fashion way of growing market share was to build a customer base and continue to add customers without losing them. As noted in the previous paragraph this means adding customers from the undecided. The process of developing customer loyalty builds the barrier that keeps the customer from returning to the undecided group. It also means building loyalty to prevent existing customers from leaving to join the undecided group.

The “churn” of customers for a business is very expensive. There is the cost of acquiring new customers as well as the cost of ending customer relationships that are the major components of customer churn.

It is always amazing to me that companies plan on losing customers. Yet, there are many marketing studies that show that the cost of acquiring a new customer is many times the cost of maintaining a satisfied customer. If this is true, why do companies not work harder to keep their existing customers?

I have seen companies put a great deal of stress on the sales organization to get new customers and ignore the customer service organization that keeps the existing customers.

The Close

This blog was intended to get you thinking about loyalty as a way of growing market share. By describing the market as a tug of war between the various business strategies, it is easier to see that there is only a portion of the market available to grow market share. Not all customers in the market are available because some of them have loyalty to a specific business strategy.

The parable was intended to show that market has no one best strategy and that there are customers that are drawn to both types of strategies. The fact is there are more than just the two extreme strategies described in the parable. However, the point was to describe the market so that the undecided middle could be easily identified.

Of course, the key word throughout this blog was loyalty. In my next series of blogs I will show how market share changes as the retention rate changes. It is worthwhile to see the impact on market share of just aa slight change in retention rates. Most people when they talk about customer loyalty, they generally do not have the skills to create a prediction model that will forecast their change in market share as they change their retention rate. More later.

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