Alan Mitchell: Why all loyalty schemes were not created equal

When somebody uses the word “loyalty”, what exactly do they mean? Do they mean a strong emotional affiliation for a brand? Do they simply mean repeat purchase? Or could they be dressing up mere habit and inertia with fancy words?

Many a marketing debate – and strategy – has been waylaid by such basic definitional issues. How often, for instance, have you heard people criticise reward-based loyalty schemes for “bribing” customers to return, when they should be focusing on creating greater emotional attachment? But who says one is better than the other? And on what basis are marketers supposed to choose – by their personal branding or marketing philosophies?

Recent McKinsey research from the US begins to throw some light on this question. Every brand has at least three types of loyals (a loyal is defined as someone whose spend stays the same, or increases, over time). There are what McKinsey researchers Stephanie Coyles and Timothy Gokey call deliberatives who rationally re-choose their current provider because it seems to offer the best options; emotives who feel a special affinity for the brand; and inertials who can’t be bothered to switch.

At the same time, every brand has three types of “downward migrator”, whose spend or share of wallet with the brand is falling. There are lifestyle downward migrators, whose changing lifestyles mean the brand no longer fits as it once did; deliberatives, who have looked around and decided someone else is offering a better deal; and the dissatisfied, who have a particular grudge or complaint.

Generally, downward migrators have a far greater impact on sales and profits than straightforward defectors. One retail bank, for instance, saw deposits fall by three per cent as a result of defections. But deposits fell a further 24 per cent as a result of reduced balances. The resulting hole that had to be filled by new customer acquisitions or upward migration: 27 per cent in one year.

Such figures differ for every brand and industry, because the breakdown between the three types of loyals and the three types of downward migrators is different.

On average, about half of all loyal customers are deliberatives, followed by emotives, who edge slightly ahead of inertials. But that’s just an average. According to the McKinsey research, for instance, 69 per cent of all clothing customers are loyal deliberatives, as are ten per cent, who are downward migrators. That’s 79 per cent deliberative, all told. In soft drinks, on the other hand, just 29 per cent of customers are loyal deliberatives, plus five per cent deliberative downward migrators – making 34 per cent deliberative – compared with 40 per cent who are emotionally attached.

And because the reasons for migration – both up and down – differ greatly among industries, understanding the particular profile of your own customer base is key to helping you prioritise and focus your marketing activities.

Internet service providers need to worry most about dissatisfied customers with bad experiences, for instance (and, perhaps, about the fact that only 14 per cent of their customers feel emotionally bonded to them). Banks are missing their biggest trick by failing to keep up with people’s changing lifestyles – a failure which turns 13 per cent of their customers into downward migrators.

For industries driven by deliberatives, rewards-based loyalty schemes may be effective. But for others, they’re inappropriate. Where inertials are high – as in life insurance and fixed-line telephony – making it really easy to stay on as a customer may be the best use of limited resources.

Some loyalty schemes can be counter-productive. For instance, if all your marketing initiatives stress rational benefits, then perhaps you’re educating your customers to behave solely on rational lines – hence the 12 per cent of credit card customers migrating downward solely on deliberative grounds.

However, no one single programme or approach is likely to increase the loyalty of all customers. What companies need to do, argues Gokey, is understand and manage the migration patterns of all six loyalty segments through a range of different tactics designed to appeal to each one of them.

Sound obvious? Perhaps. But few companies have got this far yet. Instead, they’ve focused on blanket measures such as “customer satisfaction”, pouring huge amounts of effort into moving the satisfaction needle, which may result in little bottom-line effect. Or else they’ve fixated on the latest “flavour of the week” technique such as loyalty rewards, or CRM. As Coyles observes: “When you have a hammer everything looks like a nail”.

The result is that nowadays “there’s a tremendous degree of frustration that loyalty levels are so difficult to influence”. Yet, with more sophisticated analysis and better targeted marketing efforts, claims Coyles, some companies have already reduced downward migration and defections by 30 per cent.

Does this mean that the loyalty issue is cracked at last? Perhaps not. Another growing body of research, led by Professor Andrew Ehrenburg of South Bank University, suggests that marketers’ ability to influence customer loyalty is limited. Loyalty varies very little between brands and correlates almost perfectly with market share when it does: not only do more people buy bigger brands than small brands, they also tend to buy them more often.

Ehrenburg started studying this so-called “double jeopardy” or Dirichlet effect decades ago in consumer products. More recently, through his research and development initiative, he’s found the same patterns in doctors recommending prescription drugs, in cars, TV viewing, impulse buys, retail store choice, and B2B relationships. The very notion of “increasing brand loyalty” is suspect, he suggests. “You can’t increase brand loyalty, if achieve it at all”. The best way to focus your resources is to continually muscle your way into more people’s consideration sets.

Perhaps these two research results are contradictory. Perhaps, on the other hand, they’re complementary. Perhaps the best way of muscling your way into more people’s consideration sets is to target each loyalty segment with things specially designed to maximise that segment’s response. But the main point is this. Concepts such as loyalty are deceptively simple. Almost dangerously so. When it comes to understanding the complexity behind them, we’ve still got an awful lot to learn.