Friday, January 16, 2009

The Loyalty Effect

If the title of this post sounds familiar, that's because it's the title of a well-known book by Bain & Company fellow, Fred Reichheld. While I'm not planning on talking about Fred or his book, I do want to dig into the concept of customer loyalty -- a topic that is more important to marketers now more than ever for two simple reasons:
  1. The current economy sucks.
  2. We now live in a "search and click" economy
I know I don't need to say anything more about the first item other than the fact that many companies I've talked to are taking a 15-25% haircut on their marketing budgets in 2009. That means that all of a sudden, companies can't afford to acquire as many customers as they could even six months ago. With fewer new customers comes lower revenues and more importantly, fewer new customers to replace those older customers that have moved on due to natural attrition.

Compounding the "economy" issue is the fact that with the mainstream adoption of Google and price comparison sites such as Shopzilla or Froogle, it's now easier than ever to find the absolute lowest price for anything online. This "search and click" mentality has created a level of price transparency that has never before existed and thus has pushed price sensitivity to an all time high. Not only can you NOT afford to acquire enough new customers, you're going to continue to lose your existing customers at an exponential rate moving forward.

Yes, that news is depressing but in the immortal words of singer, Prince, "I'm here to tell you... there's something else." No, not the afterworld but a solution of sorts called "social marketing"otherwise known as the convergence of engaging content, social tools and expert community oversight.

Before I tell you more about social marketing, let's go back to the title of this post and dig into something as a marketer, you probably understand. That's right, I'm talking about customer loyalty. Your company may pay lip service to the idea of customer loyalty. Who knows, you may even have a customer loyalty program (good on you if you do) but realistically, there's a good chance that you're not doing enough proactively to make your customers feel like they want to be loyal.

To be honest, author, Fred Reichheld, does an infinitely better job than I ever could of providing the formulas and case studies behind why loyalty matters. But for the sake of this post, this quote by fellow "loyalty" zealot, Jill Griffin, from one of her many articles on this topic sums up the power of customer loyalty succintly:
Keeping customers who are highly valued can greatly improve profit, Fred Reichheld says in his ground-breaking book, "The Loyalty Effect." Presenting extensive data across a wide array of industries, Reichheld shows why as little as a 5 percent increase in retention can improve a company's bottom-line profitability between 25 percent and 85 percent, depending on the industry.
Wow! Who wouldn't want to increase their bottom line by 25-85%? All it takes is as little as a 5% increase in retention. The problem is, retaining customers these days just isn't that easy. I made that point earlier when I mentioned the "search and click" phenomena (which in the spirit of full disclosure is the part of the title of Jill's latest book).

Enter the concept of "social marketing." And rather than try and "philosophize" to you on why creating engaging content and wrapping it with social tools can help you dramatically improve your customer loyalty (and thus your retention), I'm going to share some real numbers from a recent MarketingProfs case study based on their interview with director of web services at Sony Electronics, Mildred Center (disclosure: Sony is a client of my employer, Powered). Some of the results are quite eye opening:
  • Increasing consumer loyalty and advocacy: The [social marketing] program has a 90% user satisfaction rating, and 78% of users report that they are more likely to purchase a Sony product as a result of Backstage 101. Sony's NPS (Net Promoter Score) for 2008 came in at 44%, with 59% of users classified as "promoters" who are likely to recommend Sony electronics to a family member, friend, or coworker. [This score stacks up against most companies whose NPS efficiency is in the 5-10% range.]

  • Providing increased value to the Sony Electronics business: The number of users claiming to have purchased a Sony Electronics product grew to 36% for the first half of 2008 (prior to the launch of Digital Darkroom andFrontline Community), compared with 20% for the first half of 2007, and Center reports that sales on the Sony Web site "continue to increase month over month." In addition, survey completion is up 12% this year, providing Sony with valuable additional consumer insight. And retail syndication along with the addition of Backstage 101 to the company's CyberScholar site are allowing Sony to better support its retail relationships.

This isn't rocket science but it does run counterintuitive to the way most companies do business. While your company may provide "content," it's likely to be focused on your company's products and services. [See recent post on Hubspot for another company doing a great job providing value-add content] That's not to say that your site shouldn't include that type of information, but that's not always what customers care about.

In Sony's case, they have tutorials on how to take better digital photos, irrespective of whether you use a Sony or a Canon camera. In addition to these tutorial (which you can rank, review and tag) Sony's online communities allow members to upload their own photos for others to rate, discussion boards and other social features that allow photo enthusiasts to communicate with one another.

So what are you waiting for? As I mentioned in an earlier post, there is no better time than now to be thinking about engaging your customers with a goal of creating deeper loyalty and greater retention. It's a new way of thinking but one that provides demonstrative results.

Is your company focused on customer loyalty and retention? If not, what's stopping you?

Cross-posted on

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