Why customer loyalty is declining and what companies can do about it
Various studies point in the same direction: customer loyalty is disappearing in a hurry. Consumers put less trust in brands and tend to switch brands a lot faster. The famous 80/20 rule (20% of the customers account for 80% of the turnover) has turned into a 60/40 rule (40% of the customers generate 60% of the turnover) and is slowly evolving towards a 50/50 rule. In the latter case, loyal and disloyal customers generate the same amount of income. This shift is putting quite a few established marketing tactics in doubt. Should marketers invest less in loyalty programs? Or should they invest more? Should marketers favor proven methods such as investing in mass media?
The brand paradox
On the one hand it’s no surprise that brand loyalty is on the wane. Apart from the odd exception, top brands aren’t able to retain their status as market leaders as long as they used to. A loyal customer base can melt away in twelve short months. Many of Nokia’s loyal customers switched to Apple or Samsung without a second thought. On the other hand, consumers do tend to attach themselves to certain brands. Research shows that consumers are prepared to commit to up to five brands as longs as they provide a clear added value. Consumers have an emotional attachment to these brands. As a result, loyalty to these brands is almost self-evident. In other words, there exists a certain brand paradox in the world today. People like specific brands while putting less trust in brands in general.
Why customer loyalty is down
Several causes explain the decline in customer loyalty:
- Companies can’t keep up with rising consumer expectations. In recent years, declining customer loyalty has been an issue for most companies in spite of heavy investments in service improvement. This is because the consumers’ pattern of expectation is evolving even faster. Consumers don’t compare a company to where they were a year ago; rather, they compare companies to the ‘best-in-class’. If Amazon doesn’t question a faulty delivery and deals with the problem immediately, consumers will expect the same of their local supermarket. The best examples create expectations across all sectors. Companies with a certain history and an older infrastructure have trouble coping with today’s rate of change.
- Loyalty programs are missing their mark. Many companies thought there was a shortcut to creating customer loyalty: the loyalty card. However, all the latest studies agree that loyalty cards slash profit margins on existing customers. Instead of creating loyalty you’re really losing money. Loyalty is not for sale but must be earned.
- Digitization makes everything transparent. The world is becoming more and more digital. The fast adoption of smartphones and tablets has further enhanced transparency. Today, more than half of the consumers use their mobile devices to compare prices while shopping. If a company or brand doesn’t provide a clear added value then consumers will shop for price. The online world has made price transparency very accessible, a trend that spells danger for any company out there.
- Focus on individual touch points instead of on the customer experience as a whole. Companies are divided into various departments, with every department being responsible for the customer’s experience of one specific aspect of the customer relationship. There’s hardly any contact between the sales and after sales departments and invoicing is housed three floors down. Few companies take a holistic approach to customer relations, with just one person in charge of every aspect of the customer relationship. In a recent article in the Harvard Business Review, McKinsey claimed that disloyalty is caused by a lack of understanding across the various touchpoints rather than by customer dissatisfaction with a single interaction.
- No unique relevance to consumers. When customers are disloyal, they are really saying that a product or service was not relevant enough for them to remain a customer there. The product or service in question didn’t stand out from the competition. In recent years marketers have launched scores of innovations, often a new flavor or packaging. Too little thought is put into the role a brand has to play in consumers’ lives. The relationship is too rational in nature instead of emotional.
Everything becomes a commodity
The five causes of declining customer loyalty described above all point in the same direction. Digitization has created a rift between the consumer’s expectations on the one hand and what the average company is offering on the other hand. The ever-increasing transparency is turning nearly every industry into a commodity industry at a record pace. The problem with a commodity industry is its high focus on price. Some sectors even find themselves competing against a free alternative. For instance, free online content is becoming the bane of the printing industry. When paying solutions no longer have an edge on the free alternative, the outcome is predictable.
The solution: back to basics
According to popular theory, there are two ways to escape the commodity market. On the one hand a company can work more efficiently, making it possible to sell its products cheaper. On the other hand, you can offer a unique added value, thereby reestablishing differentiation so you can charge higher prices again. In today’s society, though, this theory should be revised. Rather than an ‘or’ question, we are now looking at an ‘and’ question. If companies are to survive, they will not only have to work more efficiently; they will also have to build a unique added value for their customers.
Organizations should explicitly ask themselves: what is our place in our customers’ lives? What is our relevance to their lives? The answers to these questions provide the basis for devising a new method of approaching customers.
It all starts by approaching customers with a transparent story that goes beyond mere product information. In addition, modern consumers expect companies to act properly on three levels. Ranked in order of importance according to the customers themselves, these are:
- Treating customers well: customers primarily expect an excellent and proper treatment.
- Treating employees well: companies that exploit their employees or use child labor can get into trouble.
- Doing good for society: customers like companies with a sound world view. While they don’t expect companies to wear a cassock, they do expect them to make a difference in a way befitting the company’s identity.
To meet this expectation, the story needs to be the same on all three levels. A company like Ben & Jerry’s is a prime example. They make delicious, high-quality products. Their employees and customers are treated the same and meanwhile they’ve started working according to fair trade principles. The overall picture fits, which enhances Ben & Jerry’s credibility on the market. No wonder Ben & Jerry’s boasts an above average customer loyalty.
Conclusion: customer loyalty is declining and we’re not going to solve it through marketing. The solution lies on a deeper level
This means you can’t boost customer loyalty through a simple marketing trick. A new customer program is not the answer and a new ad campaign won’t solve the problem either. The solution is not to be found in the marketing department (alone). Instead, we should look to the company’s top echelon. Those on the highest rung of the corporate ladder should have a clear vision of the added value their company has to offer and they should be able to translate that vision for their employees and customers. Getting your story straight on every level is the first step towards reaffirming customer loyalty.