Losing Loyalty

The CMO Council in association with Pointer Media Network recently published a white paper entitled "Losing Loyalty: the Consumer Defection Dilemma." In the white paper they present some startling statistics based on an analysis of the individual buying patterns of more than 32 million consumers in 2007 and 2008 across 685 leading CPG (consumer packaged goods) brands. All consumers tracked in the study were consistent shoppers who shopped at least twice in every eight weeks.

Some of the more dramatic statistics are:
1. Only 48% of high loyal consumers in 2007 remained highly loyal in 2008.
2. Only four out of ten brands retained 50% or more of their highly loyal consumers from year to year.
3. About one-third of all highly loyal consumers in 2007 completely defected to another brand in the same category in 2008.
4. Some of the major brands could have increased revenues by 20% in 2008 if they had eliminated brand defection.

These statistics indicate that much of the lost loyalty is due to churn rather than defection. They make the point that the two leading drivers of loyalty churn are variety and value. Consumers seek new experiences in terms of product attribute and are likely to try new products which may include switching brands. During this economic downturn, consumers are interested in saving money and are more likely to switch brands if lower cost alternatives are available.

Customer churn and defection can be found even in the best economy. However, the current economy is driving churn and defection to unforeseen high levels. The report suggests that both manufacturers and retailers need to take direct actions to increase loyalty, retention and customer value. This translates into a marketing strategy with a focus on better communications to their high value customers to demonstrate the real value of their products. This may include incentives, rewards and targeted advertising.

The bottom line is that churn and defection are always present. it just so happens that this economy is exacerbating the magnitude of churn and defection. The good news is that companies that survive and prosper in this economy, will be well positioned when the economy turns around. The bad news for those companies that do not manage the churn and defection well in this economy, may find that their lost customers have found new loyalties.

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.