Creating loyal customers - Segmenting for loyalty
In this blogpost, Customer Faithful's Founder Rick Harris argues that brand loyalty is not a binary function. This article illustrates how there are degrees and types of loyalty, and that the bond is stronger for some segments than others.
So in Part 1 of this blog, I described three ways for developing loyal customers, summarised as:
- Get Emotional, Beyond the Transaction - develop emotional customer benefits across the overall experience, not simply the transaction part where you take the money. This reduces the risk of a deal price-only relationship.
- Don’t Lock In, Lock Out - firms that use lock-in clauses in a contract to bind customers to their business (telecom, financial services) create inertia but rarely loyalty. Instead, it’s the brands that offer benefits that customer fall in love with - that wins true loyalty. They stay because they want to, not because they have to.
- Innovate around things that customers dislike most - rather than differentiate simply for the sake of it, target your innovation efforts on the pain-points in your customer experience. Look for ideas that fix customer dislikes, but don’t stop there. Build these changes into your business model too - in other words, seek out ways that the fix contributes to generating profit for the business, as well as pleasing the customer. By benefiting both company and client, firms have a vested interest in delivering these solutions every day, and demonstrating their brand value.
OK. That’s the refresher. And by following these steps, companies are more likely to keep their customers. However, just seeking to hold on to customers isn’t enough in the highly competitive world we live in today. It’s certainly isn’t enough to command loyalty, especially in industry sectors like retailing or credit cards, where customers usually deal with more than one company. Instead, firms should be segmenting their customers, based on whether their level of engagement and purchase is trending up or down.
Why is this so critical ? Because many more customers change their behaviour than defect altogether.
So, by monitoring and responding to customers ‘migrating’ from one loyalty segment to another, a business has the opportunity both to maintain and grow current ‘loyalists’ but also to try and manage those with declining interest. Back in 2002, McKinsey published a ground-breaking whitepaper across 16 different industries, exploring this concept of loyalty migrants. They identified 6 segments, and I’ll summarise them here:
- Emotive Loyalists - these are your top group; your die-hard fans that rarely even consider purchasing elsewhere. They firmly believe that your brand is right for them (think Apple, Harley Davidson, and for some folk, it includes long-entrenched FMCG brands like Colgate toothpaste - it often comes down to trust)
- Inertia Loyalists - these folk rarely think about leaving either, but it's because they perceive a hassle factor of going elsewhere. They're very familiar with how the company or product works, even if they don’t like it that much. Banks, utilities, and airlines are examples that typically fall into this category.
- Deliberative Loyalists - these people quite often reassess alternatives, in a rational rather than emotional way. Grocery stores or petrol stations illustrate this - usually there is a strong convenience pull, but it’s easy to switch from time to time, or when you have to.
- Lifestyle Migrators - this group either leave or reduce purchase, but not because they’re unhappy customers. Rather, it’s because their lifestyle has changed, perhaps starting a family, children going to university or simply moving house. Their needs have shifted.
- Deliberator Migrators - like their loyalist cousins, this groups' behaviour is a rational decision. They may have tried switching and liked what they found. So what was the occasional alternative is becoming the preferred option. A good example of this happening in the UK today is the rise of the discount grocery brands Aldi and Lidl. Other illustrations can be found in digital alternatives such as e-books replacing physical books.
- Dissatisfied Migrators - this group have usually had a bad experience and this has prompted them to reevaluate the market. Even a die-hard loyalist can shift to this segment if they’re really upset, usually by how the problem was handled as well as the issue itself (you can find this in almost any industry)
To get hands-on and practical with this approach, a company first has to establish the mix of these segments in their own business. For example, Coca Cola or Persil might enjoy 30 or even 40 per cent emotive loyalists, with hardly any dissatisfaction, given the consistency of the product formula and packaging. In contrast, a mobile phone provider might find that the end of a contract period throws nearly half its customers into ‘deliberation mode’, reassessing the market, even if a deal can often be done to keep the customer for another contract term.
Having established a loyalty profile (feel free to contact me if you’re interested in the process for doing this), a company can then set about managing each segment, rather than simply deploying 'one-size-fits-all' efforts to stop defections. And knowing the size of each segment helps work out where to focus. So for instance, there is likely to be a big difference between how to handle a very small number of major service failures for the top 2 loyalist segments, compared to trying to convince a large number of deliberators who are migrating away for a cheaper competitor price. Here’s a personal example. Recently, in 'deliberator mode', I received my pet insurance renewal letter for my dog. The price had jumped, so I checked around on the web looking for comparison quotes. I then rang my current insurer to ask if they could match my lower price quotes.
In doing so, I flagged my ‘deliberator' status. But would they recognise it? As it turned out, yes.
Instead of matching the price, or offering nothing, the insurance agent asked whether all the policy cover was the same on my cheaper quote, and picked out two elements (lifetime cover and overseas cover) where their offer is particularly strong and relevant to my needs. These were things I did care about. It wasn’t enough to make me renew there and then, but it did stop my defection for a few weeks whilst I consider further. And with these two insurance cover features brought to my attention, I have to admit to being more likely to stay (something a bad experience would not have turned around).
Brand loyalty is not a binary function - that you're either true-blue loyal or not. Instead, there are degrees and types of loyalty, and the bond is stronger for some segments than others. As a company, it’s well worth the effort to identify the blend of 'loyals' and 'migrators' that you have, and developing specific tactics to manage each segment. Such action is likely to be both cheaper and more effective than a single 'loyalty hook’ of some money-off vouchers or '2-months-for-free'. Such deal-based efforts should be reserved for those deliberators, for whom a price discount might well make all the difference. And don’t insult a dissatisfied customer with a low-value voucher - choose a personalised resolution instead. Happy segmenting!!
For a free, no-commitment and confidential chat about customer loyalty and segmenting your customers, simply contact firstname.lastname@example.org.