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RetailWire Discussion: Most loyal customers aren't profitable

A recent Harvard Business Journal article suggests that few customers are profitable — and of the ones that are, most are not loyal.

June 7, 2009

What follows is an excerpt from one of RetailWire's recent online discussions featuring commentary from its "BrainTrust" panel of retail industry experts.

The authors of Why Loyalty Matters certainly value customer loyalty. But they also contend that only 20 percent of a firm's customers are actually profitable and most of a company's profitable customers are not loyal.

In an article on harvardbusiness.org, the two authors — Timothy Keiningham, global chief strategy officer at Ipsos Loyalty, and Lerzan Aksoy, associate professor of marketing at Fordham University — wrote that instead of stockpiling loyal customers, both B-to-B and B-to-C businesses should be asking:

1. Which loyal customers are good for their businesses,
2. How they should hang onto them, and
3. How to get more customers like them.

The authors note that the simple solution to improve customer loyalty in tough times is to offer off-price deals, a strategy that has proven to improve loyalty in the past. But they also note that it's a flawed strategy.

"This doesn't mean we should not find ways to be more efficient so that we can pass cost savings on to our customers. But price-driven loyalty is always the lowest form of loyalty. It means that we aren't offering differentiated value to our customers," the authors wrote.

Keiningham and Aksoy said that's why it's essential to determine which loyal customers are profitable. Unprofitable loyal customers tend to be loyal either because of unprofitable pricing or exchange policies or they ask for excessive services they're not willing to pay a fair price for.

By comparison, profitable loyal customers are driven by key differentiating aspects to a business' products or services.

"The key to a successful loyalty strategy is to become crystal clear as to what these are, and to focus on tangibly improving these elements," wrote the authors. "It is also imperative that we actively let customers and prospective customers know that these are the things the company stands for and that the firm is committed to being best at. By doing this, our best customers will have the necessary information to clearly articulate why our organizations deserve their loyalty in good times and in bad."

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Discussion Questions for the BrainTrust panel:

Do you agree that most "loyal customers" are actually unprofitable customers? If so, what are the challenges of having customer loyalty programs account for that? What do you think of the suggestions cited in the article for honing in on profitable, loyal customers?

RetailWire BrainTrust comments:

I don't agree with the authors' premise, that most loyal customers are in fact unprofitable. If you start with the assumption that loyalty is defined only by price-sensitivity, you might draw the same conclusion ... but there is a lot more to developing the top 20 percent of customers who drive the majority of retailers' sales.

First, start with the definition of loyalty as commitment to a particular retailer. Customers who are most motivated by price in their shopping decisions are also most likely to jump from store to store based on who offers the best deal at any given time. Good customer relationship management (CRM) is built on customer service, having the most relevant merchandise content for the target customer, and developing techniques to drive a bigger "market basket."

It's not all about price, even though a narrow definition of a "loyalty program" might be limited to extra discounts or special rewards. It's really about developing the level of commitment to drive top-line sales and take market share from competitors.

- Richard Seesel, Principal, Retailing In Focus LLC

Virtually all loyal customers are profitable, when you factor in time ... the long-term benefits of word-of-mouth far outstrip any pros/cons specific to a round of discounting.

- James Bickers, Editor, Retail Customer Experience

I searched myself on this one and realized that the only retailers that have my loyalty are actually e-tailers. And the reason I'm loyal to them is product selection with shipping and return policies coming in a squeaky close second. I'm one of those who can't stop talking about Zappos' free shipping both ways and no-longer-surprising express shipping upgrades ... Aha! I've come to expect them! Does that make me an undesirable loyalist when they've baked that into their model and I buy 90 percent of my shoes on Zappos (with traditional retailers getting my impulse business)?

- Carol Spieckerman, President, newmarketbuilders

Of course, the pivotal issue here is how one defines a "loyal customer." Is it someone who shops at a certain frequency (say, at least once a week)? Someone who spends more than a certain level per quarter? Someone whose purchases span a wide range of categories (implying that they don't cherry pick by channel)? Someone who shops predominantly at your store? Or merely someone who carries your loyalty card?

The problem with focusing on a single definition of loyalty is that in many ways, it's a red herring. The world shouldn't be divided into the "loyals" and the "disloyals" — rather, retailers and manufacturers alike should slice the shopping population differently for different objectives.

Job 1 is to determine your goals. Once you have determined *what* you want to achieve, only then should you take a good look at the customers with whom you are succeeding (and whose with whom you aren't), try to determine what motivates them, and amplify the aspects of your offering that matter most. The real thesis of the article should not be that most "loyal" customers are unprofitable, but rather that most *customers* are unprofitable. Loyalty programs are simply a tool for collecting data on who's who and for directing targeted incentives at specific subsets of the populations to try to nudge their behavior in a particular direction.

If your current loyalty program is merely an undirected way to reward shoppers who have a particular piece of plastic on their keychain, then you are wasting a huge opportunity to understand and strengthen your brand.

- Ben Sprecher, Founder and President, Incentive Targeting, Inc.

In our work with shopper card data, we have learned that it is most important to generate profitable volume on an aggregate basis. It can be problematic to focus only on loyal customers. It is better to think of a customer base as a portfolio of different groups. Not unlike a product or stock portfolio, some groups are very profitable, but contribute low volume. Others offer high volume and loyalty, but may not be as profitable.

It really takes a mix of shoppers to achieve profitable volume overall. While loyal shoppers may be a part of the mix, they are not always the total solution.