Ladder of Loyalty

Almost 70% customers defect when they feel that the organisation doesn’t care for them
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We trace the evolution or the journey of a customer with an organisation using the concept of the ladder of loyalty. As the name suggests, customers move up the ladder through relationship levels. They begin as prospects and then gradually become partners. So, as you can see, at the lowest rung we have a prospect.

A prospect is, typically, the target customer for any marketing effort. You may recall that marketing starts with segmentation, targeting, and positioning; so, a prospect is a target.

Now if your marketing efforts have been successful, you will convert this prospect into a customer. When does a customer become a client? A prospect becomes a customer when the prospect buys for the first time, and a customer becomes a client when the customer is satisfied with the offerings, happy with the experience, and decides to come back and buy from you.

So, a customer becomes a client, and a client can continue to just buy from you and be retained as a client. But some of these clients actually become a supporter.

What does that mean? A supporter is a client who proactively supports your organization, for example, a supporter may actually say positive things about your offering to his friends, to colleagues, relatives; and when you get positive word of mouth that’s the greatest thing that you can get from a supporter or a client.

When does the supporter turn into an advocate? An advocate is more proactive in terms of engaging with the organization. Many advocates actually help the organization, and the marketing team develop new products. This is very common in the software industry.

This is also very common in the Business to Business (B2B) markets where some of the business customers actually become your beta sites, where the new product concepts are tested. And finally, a few advocates become partners. These partners are actually involved in decision making on behalf of the company.

This is much more common in B2B markets or business markets, and some of the examples include Walmart and Procter & Gamble or IBM and FedEx. They enjoy a partnership relationship because they win in the market place when they work together. So, in the ladder of loyalty essentially, we see the journey of a customer from a prospect to a partner.

We have discussed two frameworks: the marketing pyramid and the ladder of loyalty. Now let’s discuss what’s the kind of connection between these two frameworks.

You will notice that in both the frameworks, we have marketing at the bottom and Customer Relationship Management (CRM) at the top. In the marketing pyramid, marketing plays an important role in attracting and satisfying customers, and that’s shown at the bottom of the pyramid.

Marketing, sales, service, the product, the experience—all of them play an important role in attracting and satisfying customers. Once customers are satisfied, you have better chance of retaining them, and that’s when CRM plays a role.

CRM also helps you in identifying those customers— the retained customers— with whom you would want to enhance the relationship. So, the marketing pyramid actually has two components–broad components, that is, marketing and CRM.

Likewise, the ladder of loyalty has two parts: at the bottom, you have marketing and CRM sits on top of marketing. So, there is a close connect between marketing and CRM, and both the frameworks highlight this close relationship between CRM and marketing.

I’m sure you know the efforts that companies are putting behind engagement with customers. Why are they engaging with customers? They want to make sure customers stay with them, but did you know that even satisfied customers defect.

When the quality movement first started, the core theme of this quality movement was zero defects. The same concept of zero defects is used in CRM, and we call it zero customer defections. The most important reason that customers have articulated is classified as perceived indifference. Almost 70% of customers defect when they feel that the organisation doesn’t care for them.

Around 14% of customers defect because they are not satisfied with your offering. Around 10% or 9% customers defect because they find the competitive offers better. Other reasons include friendships, they have shifted away, and all of that, and they are classified as market defectors.

So, if you think back about reasons why you would have changed or shifted from one company to another, it’s most likely you have experienced a service failure. When customers defect, it has a huge impact on the firms’ overall profitability.

However, customer defection is not easy to measure because customers do not defect all of a sudden. For example, if you are a customer of a bank and you have experienced bad service, you may not withdraw all your deposits. You may simply stop or reduce the transactions that you do with the bank.

You may have a separate bank account with another bank and you would shift most of your transactions, but you leave this account idle. It’s just the transactions drop, and when transactions drop, it’s easy to classify this customer as a live customer or as a customer who is retained, but the customer is not generating profits for you.

So, in many cases, companies do not even realize that a certain customer has defected. They have just reduced the transactions, they have just reduced the usage, they may have reduced the frequency of interactions.

Now that you have understood the concept of customer lifetime value and you can actually calculate the lifetime value of customers, let’s also look at some nuances.

We assume based on all the discussions that every customer who is loyal is also profitable. In general, customers who stay with a business for the long term, are more profitable than the customers who are short term customers.

But longitudinal studies have also started showing that customers who are long term may be less profitable sometimes, and at the same time you have short term customers who generate a lot of profits.

The study actually shows that while a large percentage of customers is profitable when they stay for long term and are low in profitability when they are short term customers, we also have significant numbers of customers across services, who are long term but less in profitability as well as short term but generating higher profits.

So, if you, in your business, find that you have customers for off-diagonal, what are the strategies? What do you do to deal with such customers? What surprises most people is the fact that you may have long term customers who are low in profitability. They may be generating lesser margins for you.

While at the same time, businesses also have customers who stay for a very short period of time but give very high margins. So, let me illustrate this with an example from the hotel industry. Hospitality industry uses a term called as FIT, Free Individual Traveler. Many of these customers walk in at the last moment, they wouldn’t have booked or made an advance reservation and they end up paying the rack rate.

They may never come back to you and rack rates are usually very profitable, very high margin. So, these customers would part of the set of customers who are actually high in profitability but short term customers.

On the other hand, you have long term customers who have been doing business with you for a long time, staying with you, but are generating less profits.

This typically happens in B2B or business context where long term customers also negotiate a better deal. They are familiar with your service, they incur less operation cost, but they also want a part of the savings. Or they negotiate for a better deal because they are generating so much volume for you.

When the customer has low spending power, the customer doesn’t generate enough profit potential. And, sometimes the customers’ needs do not match the offerings.

So, while they stay with you for long period of time, it is not that they are spending much with you. The strategies include, for such customers, trying to cross sell when there is a good match between the offerings and the customer needs, but the customer is actually buying the same services from your competitors.

So, you are trying to increase the spending that the customer does with you. You would also want to focus on reducing the cost of retention. So, in effect, for such customers, for those customers who are being long-term customers, but have been generating low profitability, you may want to focus on reducing the cost of retention and increasing the revenue by trying to cross sell.

Now along the expected lines, you have customers who are high in profitability because they are long-term customers. They are generating lot of profits because the products or your offerings match their needs. And you must ensure that you continuously communicate with them, you interact with them, and you enhance the loyalty, and increase their positive predisposition, increase the attitudinal loyalty.

So, these customers will stay with you for a longer term; they have been profitable generating higher than average profitability, and they continue to be retained by you. As expected, there would be several short-term customers who are low in profitability.

Sometimes the profitability is low because these customers have needs which are not met by your offering. The challenge for such customers is really to reduce the cost of retention. You should not spend too much time, effort, and money in communicating with these customers.

The key here is really to cease investing in these customers. You would want to reduce or actually stop investing quickly because that’s just a cost that you are going to incur without any profit potential.

The ladder of loyalty starts with a prospect who gets attracted to your offering and becomes a customer, and once the customer is satisfied and comes back and buys from you, this customer becomes a client. CRM plays an important role to convert this client into a supporter and then advocate and finally a partner.

Organizations benefit from CRM by focusing on customer retention. Once a customer is satisfied with an organization’s offerings, they increase their purchases over a period of time.

These satisfied customers refer others to the organization. This serves as a positive word of mouth, which can have a very strong impact on an organisation’s reputation.

Shabir Ahmad is a UPSC aspirant from Raiyar Doodhpathri

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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