Customer loyalty has emerged as one of the most important marketing concepts of the Nineties. Today we are deluged by companies offering air miles, club cards and customer magazines in the hope that our loyalty will make us buy more, pay premium prices, introduce new customers and ultimately cost less to service.
While many people may associate such schemes with supermar-kets and petrol retailers, even the conservative insurance companies are now waking up to the power of loyalty.
For an industry sector which “has policies not customers”, this represents a quantum leap forward. But then the insurance companies are being hit for six in all directions.
Deregulation, a shrinking market, competition from new entrants, more demanding consumers and the banking sector poised to move into the life and insurance market, adds up to the possibility of a huge shake-out which, according to IBM’s Insurance Research Centre, could see fewer than 30 significant providers of life assurance by 2000.
Hanging on to existing customers is becoming increasingly important. Quite apart from the commercial considerations, several high-profile scandals such as the personal pensions debacle, mean that the industry regulator looks at persistency (or lapse rates) to indicate if a company has been over-selling or mis-selling policies.
However, loyalty programmes being offered by insurance companies tend to be small-scale, says Paul Goodhind, an insurance sector analyst at NatWest Securities. “A blur exists between what might be described as customer service and customer loyalty. There is an increasing emphasis on brands and service standards and loyalty schemes are undoubtedly a part of that.”
There may not be too many club cards on offer, but Jon Epstein, director of Results R Us, the customer targeting specialist, stresses that plastic cards or points schemes are not necessary for building loyalty. “Loyalty is a very abused word. The fundamental driver of loyalty is satisfaction, which is based on proven experience and trust.”
But certain products, such as motoring and household insurance, are becoming commodity items, with purchasing decisions increasingly based on price. Philip Mann, principal of identity consultancy Bamber Forsyth, says this is only part of the loyalty equation.
“Customers will stay with companies that provide consistently good service. The quality of its communications and how they are managed are crucial elements.”
For an industry sector which has frequently been criticised for poorly-targeted campaigns and by the consumer watchdogs for misleading customers with marketing hype, this presents a challenge. Yet Mann believes that attitudes in the industry are changing.
“In the past, companies would typically spend 90 per cent of their budgets on pre-sale activity rather than developing customer relationships. Now they are behaving more innovatively. They are looking at the various stages of making a sale and the literature associated with those stages. The trend is to be more forward thinking and anticipate what existing customers are going to want next.”
Nevertheless, it is clear that low- cost competitors such as Direct Line and Virgin Direct have shaken the traditional insurers. Struggling to compete on price, the response has been to strengthen brands and add value to their services. Insurance is bought for any number of reasons, but the primary motive is peace of mind. It is only when the need arises to invoke a policy that the customer begins to trust the insurance company.
Epstein adds: “Retention is about trust and belief. The most loyal customers are those who have had a problem or a claim but have had it dealt with efficiently. Effective delivery is what drives loyalty.”
One example of a company that has differentiated its product through branding and added value is the Commercial Union and its Customer Power programme. Aimed at people buying short-term products direct from the company, it promises to deal with claims within specified times and will offer discount vouchers against renewal premiums if it fails to do so. It also offers a retail discount card and a 24-hour emergency line.
However, Commercial Union direct marketing manager Jon Athawes admits it is difficult to gauge whether it has had an impact on customer retention rates.
But in the face of sweeping change, are companies reacting fast enough to counter the threats that are facing them?
Raman Leszczyszyn, customer services manager at the Institute of Consumer Affairs, is sceptical. “I haven’t noticed a significant im-provement in the way disputed claims are dealt with, nor in the quality of the communications. Insurance companies are still characterised by inertia,” he says.
Jane Carroll, chief executive of management consultancy Forum Europe, thinks many service improvements are simply “surface stuff”. One of the most important loyalty issues relates to customer information and how it is used.
“Sustained growth through customer loyalty means being able to identify who your most profitable customers are, what they value the most and then being able to deliver a valuable proposition that sets you apart from your competitors,” says Carroll.
She believes that many financial service companies are hampered because they don’t have the facility to interrogate their customer data and “still segment their market in old fashioned ways”.
Edwina Dunn, managing director of database consultancy, Dunn-Humby Associates, has worked closely with a number of retailers in developing loyalty programmes and concurs with this view. “Customer loyalty is what companies owe good customers. The problem is most insurance companies are not able to spot who their good customers are.”
She believes the insurance companies can learn from the experience of the retail sector. “What changed the retailers’ view of the world was the discovery that 80 per cent of the business came from five per cent of the customers. This allowed them to build loyalty by developing more individualised services for the important, high spending customer. I would be surprised if the financial services sector could say where 80 per cent of their business came from,” she says.
“Compared with retailers, insurers have vast amounts of customer data. Yet most of it is wasted because departments within companies don’t share the information.”
She stresses that there has to be a way of treating people on loyalty schemes differently. “When companies don’t reward loyalty, they encourage promiscuity. Customers will simply jump from one company to the next in line with who is offering the best interest rate or price on an insurance policy. The present level of personalisation is inadequate. Inappropriate mailings and poor communication simply under mine marketing activities. More detailed data is needed to make service and offers intelligent, flexible and attractive.”
With consumers becoming more demanding and expecting products to be customised to their needs, the next step is likely to be greater segmentation and customer differentiation.
Dunn continues: “Most companies are segmenting their customer base using sweeping averages, such as high, medium and low income. It now seems obvious that there are many, many variations in segments. The future is to get below the averages and focus on individual customers – micro marketing on a mass scale.”
Epstein adds: “The real issue is ‘loyalty at what price?’ You need to differentiate between your customers, build loyalty with your most profitable ones and lose the ones you don’t want.”
Carroll cites the example of US insurance group USF&G, which decided to target services only in the areas that its customers cared about. The result was a 41 per cent increase in net income in one year.
The importance of good customer-oriented IT has not been overlooked by the likes of Virgin and Marks & Spencer, highly successful retail operations with outstanding customer loyalty, which are already selling financial services. The fact that the low cost of their products reinforces the widely held consumer beliefs that the financial companies have been taking them for a ride. This, therefore, is a source of serious competition.
This underlines the fact that if it is to work successfully, customer loyalty has to be viewed as a long-term strategic investment. Financial institutions have been slow to recognise that they have customers and as a consequence our mistrust of them has never been higher.
The issue facing them is whether they are willing to risk the temporary reduction of short-term profits in order to provide a better service and gain worthwhile customers in the long term. The big problem, however, is getting the companies to act.
Dunn believes this is imperative. “The organisation must accept the responsibility for making the first move by saying ‘I am going to be loyal to my customers before customers can respond in kind. Then you will begin to see companies more likely to reward the customer with better service in return for loyalty and expenditure.”