Overestimating loyalty

Let’s get a few things straight. Just because someone is a member of your loyalty program doesn’t make them loyal. Just because a customer takes advantage of loyalty program discounts or redeems reward points doesn’t mean they are loyal either. Just because your brand is a consumer’s preferred choice is not a reliable indicator of their loyalty. And owning a large share of wallet, or garnering high rates of customer satisfaction, does not guarantee loyalty either.

By now, hopefully we understand that loyalty goes beyond behavior. Loyalty is an emotion. Loyalty is what allows a brand to command a price premium in the face of similar competition. Loyalty is why we stay when an organization has the inevitable screw up. Loyal customers aren’t always looking around for a better option or shifting their spending to a competitor when they dangle a sexy offer. Loyal customers trust us. Loyal customers drive our profitability. Loyal customers amplify our story.

When I was at Neiman Marcus, analysts–and the private equity investors that eventually bought us–were very impressed that we generated over half our revenues from our InCircle Rewards loyalty program. Alas that statistic was largely meaningless. Many of those customers were far from loyal, as subsequent events proved out. Sears (another of my former employers) makes a big deal about having some 80% of its sales come from their Shop Your Way program. If you think most (or many) of them have even a modicum of loyalty to Sears, I’m afraid you are very wrong.

One of the key things to understand about truly loyal customers is that they perceive switching costs to be high. In the good old days–i.e. before the internet–switching costs were often high due to scarcity of choice, access, information and risk amelioration. Today, with a nearly infinite assortment of products and services available online, 24/7 shopping, a multitude of user review sites and liberal return polices, perceived switching costs, in many cases, have plummeted.

The rise of digitally driven business models is fraying traditional bonds. The potential for new concepts to dramatically lower the cost-to-serve customers (think Uber or Netflix) and these brands’ willingness to spend freely–and often uneconomically–to acquire new customers (think every venture-funded dotcom business) is shifting the balance of power between industry incumbents and the upstarts that seek to peel away their loyal base. The potential to deliver a radically re-designed shopping experience can fundamentally redefine the basis for customer relationships.

This means the loyalty we take for granted can often be eroded very quickly. And overestimating loyalty is now not only common, it is increasingly dangerous.

We overestimate loyalty when we confuse behavior with emotion.

We overestimate loyalty when we don’t understand switching costs.

We overestimate loyalty when we can’t see how an outsider can attack our vulnerabilities and eliminate friction in our shopping experience.

There are plenty of examples of brands that had a large and seemingly loyal following that evaporated virtually overnight (I’m looking at you Blackberry and Blockbuster).

Label customers as “loyal” with considerable care. Understand the roots of their loyalty deeply. Dissect your vulnerabilities objectively and relentlessly.

Most importantly, work hard to eliminate the friction from your customers’ experience. If you don’t, be sure someone else will.

And overestimate loyalty at great peril.

HT to Nicole for helping advance my thinking on this topic

Dating the wrong customers 

In most industries, the smart marketer wants to cultivate long-term, enduring relationships with her customers. For most of us, the end-game, best case scenario is to create customers for life–or for at least a very long time.

Imagine if, however, in our personal lives, we had a strong desire to get married, but we only went out with people who made it clear that they had no interest in a long-term relationship.

Imagine if the person we were romantically captivated by insisted that we bribe them each time just to go grab coffee, see a movie or have dinner with us.

Imagine if their decision to go on a date with us any given Saturday night was determined by how well our offer stacked up against the competing bribes they were getting from other suitors.

Now faced with this intensely competitive and highly promotional dating market you might determine that you should go on a lot more dates to increase the odds of finding just the right guy or gal. Or you could choose to make your bribes larger. Or you could decide that, in addition to your bribes increasing, you’d add some perks or value-added features to make your dating game more unique and competitive.

By now, hopefully it’s pretty obvious that the best answer is not to endlessly spin to win the hearts of a person who fundamentally does not meet our needs, nor is there any gain in fighting a battle we can never win.

So why is it so hard to see that, all too often, we are dating the wrong customers?

A dim signal amidst the noise

We’ve all been taught that successful brands need a unique value proposition and that we must craft a distinctive positioning. And certainly most organizations spend a lot of time honing their business models and churning out sales programs and marketing campaigns designed to one-up the competition and compel the customer to choose us.

But what if hardly anyone is listening? What if only a fraction of our efforts command any sort of attention? What if despite all our strategizing, designing, testing and refining most of what we put out there evaporates in the ether like so much steam from our morning coffee?

Unfortunately, for most of us, there is no what if? There is only what is.

Consumer choices are expanding, sometimes literally exponentially. Competition is only getting greater. The information available to the average person is overwhelming. The distracted, multi-tasking consumer is the norm. We all face a tsunami of stuff.

And, more and more, much of what we do is only a dim signal amidst the noise.

noise

Many companies confronted with this emerging reality respond by throwing more and more out there to see what sticks. Batch, blast and hope email strategies. Greater promotions and discounts. New or revamped–but still largely undifferentiated–loyalty programs. Vague investments in “building the brand.”

Prepare to be disappointed.

If you want to boost your signal you’ll need to do a better job of customer selection. You’ll have to deploy a unified “one brand, many channels” customer experience. You’ll need to learn how to treat different customers differently.

And everything you do must be amplified by being more relevant and more remarkable than whatever commands your customer’s attention.

In the meantime I hope you enjoy your coffee.