It costs less to retain existing customers than it does to attract new ones.
Loyal customers are profitable.
They purchase from a business more than once.
They tell their friends.
Businesses do not need to invest as much into marketing to attract new customer leads.
We all want loyal customers, right?
This article explores the relationship marketing strategy and tactics businesses can use to encourage loyalty from their target customers.
What is Loyalty?
The mass-marketing approaches of the ’60s and ’70s ignored the role of customer loyalty as an essential parameter of marketing activities. There has long been a shift from this transaction based-approach into a relationship-based strategy.
The focus changes from acquisition to retention. The new goal is to enhance customer loyalty by focusing on existing customers' lifetime value, considered just as important as attracting new customers.
Loyalty is the ongoing trust in a person or thing, fostering strong feelings of support or allegiance. A person feels a strong sense of belonging to that relationship. In business, this feeling of loyalty a customer feels to a brand or business yields a deeply held commitment for consistent future consumption. Often, companies use repeat purchases as an indicator of loyalty.
I use the term customer loyalty in this article instead of brand loyalty to emphasise that loyalty is a feature of people rather than a brand's characteristic.
“Customer loyalty is difficult to define. In general, there are three distinctive approaches to measure loyalty: behavioural measurements; attitudinal measurement; and composite measurements.” (Nyadzayo & Khajehzadeh, 2016)
Loyalty pays off
Customer loyalty is profitable. One study found that:
“when a company retains just 5 percent more of its customers, profits increase by 25 percent to 125 percent…” (Bowen & Chen, 2001).
Loyal customers provide more repeat business and are less likely to shop around; this higher retention of existing customers reduces marketing costs.
When a brand has generated loyalty from customers, its customer base becomes less sensitive to competitors' marketing efforts. It makes sense that business focus their energy on strengthening relationships with customers to enhance their loyalty.
A relationship marketing strategy is:
“A core service around which to build a customer relationship, customizing the relationship to the individual customer, augmenting the core service with extra benefits, pricing services to encourage customer loyalty, and marketing to employees so that they, in turn, will perform well for customers.” (Berry, 1983)
Relationship marketing attracts, develops, maintains, enhances customer satisfaction and fosters customer retention.
The focus is the customer's lifetime value rather than the value of a single transaction –the underlying assumption being that establishing and maintaining relationships with customers will foster customer retention. Businesses use strategies to bond with their customers to enhance their commitment.
As you can see in the model above, trust is a component that comes before loyalty.
Trust is one of the foundations of relationship marketing, and it is a customer’s willingness to rely on a specific business or brand. Trust reduces uncertainty and vulnerability, giving customers a good reason to stay in a relationship as they can value relationships that they do not have to monitor.
Building a relationship is based on the formation of a bond. This bond is the psychological, emotional, economic, or physical attachment that binds parties together. The strength of this bond can determine a customer’s commitment and loyalty to a brand.
Some customers will only bond with the company based on price.
The first level of relationship marketing relies primarily on pricing incentives to secure customers’ loyalty, where businesses bond with customers to save money. Service providers often reward loyal customers with special price offers.
This advantage is unsustainable, and customer bonds based on price will never foster true loyalty.
Practising higher levels of relationship marketing gives the more significant potential for sustained competitive advantage.
Level two is a social bond, and level three is a structural bond.
Structural bonds provide solutions to significant customer problems, as discussed by Berry (1995):
“When relationship marketers can offer to target customers value-adding benefits that are difficult or expensive for customers to provide and that are not readily available elsewhere, they create a strong foundation for maintaining and enhancing relationships.” (Berry, 1995)
Targeting Profitable Customers
Some customers will be more profitable to a business than others. Some customers are more ‘loyalty-prone’ if they receive good service, which means they are happy to use one brand or company.
Other customers are ‘deal-prone’, always on the lookout for alternative and discount offers.
These types of customers are stayers and switches. Stayers have the possibility of lifetime value, as their motivation is to reduce their available choices and repeatedly use certain suppliers to simplify the process. It reduces the perceived risks of consumption.
Switchers do not exhibit loyalty and have a repertoire of brands from which they regularly choose.
Having systems to recognise customers' characteristics is vital to help us target customers who are more likely to stay.
Customer satisfaction is one of the most important criteria for customer loyalty.
When satisfaction levels are high, the potential for loyalty is high; and when satisfaction is low, there is a meagre chance of retaining customers. Satisfaction is a popular measurement that marketers use to determine how happy customers are with their company’s services and products.
Businesses can use research, such as customer surveys to determine how happy their customers are and improve their experiences. Happy customers are more likely to tell their friends about their experience, as there is a relationship between being highly satisfied and the likelihood of spreading positive word of mouth.
The same also goes with loyalty — loyal customers are more likely to spread positive word-of-mouth and recommend your business to others.
Tools to enhance customer loyalty
The cost of replacing defected customers is significantly higher than the price of retaining them. There are several tools a business can use to enhance customer loyalty; I will discuss four options: Loyalty programs, benchmarking performance, CRM, and branding.
A popular strategy for maintaining customer loyalty is through loyalty programs. For example, a popular one is the coffee card at your local café, often getting the tenth coffee free. This strategy only tends to work if the frequency of consumption is high.
Loyalty programs provide financial and relationship rewards to customers, and there are two aims:
- One is to increase sales revenues through increased purchase levels and/or expanding the range of products consumed.
- The second is a defensive aim, to build a closer bond between the brand and current customers, to maintain them in the existing customer base.
The second strategy for enhancing customer loyalty is by benchmarking service quality. Improving service quality should increase customer loyalty.
Relationship marketing and service improvement go hand in hand. Businesses should do everything they can to keep improving their customer experience. This service quality adds more value to the core product, enhancing customer satisfaction, strengthening relationship bonds, and increasing loyalty.
Benchmarking the level of performance, you expect from your staff and/or systems helps ensure keeping the level of quality high.
Use customer surveys to analyse your services and take the results of your loyal customers.
Use this as internal benchmarks for customer service quality. Benchmarking sets a minimum standard of service quality. Holding your business to a strict standard does not ensure every customer will return, but there will be an increase in loyalty.
Furthermore, often dissatisfaction is because of a negative customer service experience rather than the product or service itself.
CRM — Customer Relationship Management
Advances in technology have removed many barriers for businesses to maintain relationships with clients or customers over the past thirty years.
CRM manages all of your company’s relationships and interactions with customers and potential customers. Email database management, for example, enables businesses to be in contact with customers regularly. Because past experiences impact customer satisfaction, a CRM's quality can mediate how customer satisfaction translates into loyalty.
When customers perceive a higher quality of CRM, this strengthens relationships.
“CRM quality comprising of trust and commitment is crucial in building and maintaining long-term relationships and enhancing customer loyalty.” (Nyadzayo & Khajehzadeh, 2016)
The fourth way to increase customer loyalty is by investing in your branding and the image you portray in customers' minds. Your brand can be a mediator of the link between satisfaction and loyalty.
A strong brand “increases customers’ trust of invisible products, while helping them to better understand and visualise what they are buying.” (Berry, 2000)
The more customers connect with your brand, the more they trust you. Research has shown (see Nyadzayo & Khajehzadeh, 2016) that a stronger brand image can lead to better customer relationships and enhanced loyalty. Just look at Apple around ten years ago!
In conclusion, customer loyalty is an ongoing positive relationship between a customer and a business, resulting in increased profitability. It costs less to retain customers than it does to attract new ones.
The article has explored practical strategies that businesses can use to enhance their customer loyalty through relationship marketing.
Thank you for reading.
I hope you learnt something new!