Customer Loyalty Bad? Never!

26 April 2010 at 06:30 Leave a comment

I read a good Harvard Business Review blog post that discussed when customer loyalty can be a bad.  The article is worth perusing, even though the authors have missed the point of loyalty.  Customer loyalty is never bad.

The argument the authors ought to start with relates to unprofitable customers.   Mr. Keiningham and Ms. Aksoy write:

“If typically most loyal customers in a firm aren’t profitable, how exactly does a customer loyalty strategy ever generate a positive return on investment? Instead asking whether you have enough loyal customers in your customer base, you need to ask yourself three more complex questions: 1) which loyal customers are good for the business, 2) how do we hang onto them, and 3) how do we get more customers like them.”

Ah ha!  The important issue is customer profitability.

“Unprofitable loyal customers tend to be loyal for one of two reasons: 1) they are driven by unprofitable pricing or exchange policies, or 2) they demand an excessive amount of service that they are not willing to pay fairly to receive.”

If customer loyalty stems from #1, your company has a straightforward sales problem.  If loyalty comes from #2 then your company should stick to its guns and deliver a level of service that is profitable.  And if your company encounters #1 or #2 consistently you can be sure you have either an unviable business model or a management team that requires a wake-up call.

Mr. Keiningham and Ms. Aksoy definitely get one point right – some customers can damage your business. (In fairness, the reverse is also true well – some businesses damage customers!)

The pivot point:  don’t start by asking which loyal customers are profitable; start by understanding which customers are profitable.  Then either make profitable customers loyal or make loyal customers profitable.

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Entry filed under: Customer Loyalty. Tags: , , , , .

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