Climbing up the rungs of the ‘loyalty ladder’ – why bother?

It’s one of the dumbest marketing theories ever to see the light of day. Why focus on one rung when – like Tesco – you can spread the load?

Have you got a strategy for driving your customers up the “loyalty ladder”? If not, don’t worry, you can breathe a sigh of relief. The loyalty ladder is one of the stupidest ideas to infect fad-prone marketing for some time.

The loyalty ladder has its roots in a simple observation/ there are different types of customer relationships. One version of the ladder divides customers into suspects, prospects, customers, clients and advocates. Another version divides them into the barely satisfied, frequent purchasers, committed purchasers, evangelists and “owners” with a “shared responsibility” for the brand’s success (whatever that means). Or you can ask why customers are doing business with you. Are they prisoners? Do they stay with you out of inertia, habit, positive preference or advocacy? Either way, the message is the same. Move as many customers up the ladder as you can.

It’s an alluring thought, especially for the brand narcissists among us. Wouldn’t it be nice if we had thousands of unpaid advocates out there, spreading the word for us, heaping praise on us wherever they went?

Promiscuous Behaviour
But what about the reality? Here are some reasons for caution. First, advocacy doesn’t always mean superior profitability. I will recommend Vergelegen Sauvignon Blanc to anyone who asks me, but like most wine drinkers I keep on switching because, for me, variety is the spice of life. Likewise, it’s almost impossible to push up the repeat purchase rates of some sports car brands because buyers positively like to move from marque to marque.

Second, if you look at the loyalty ladder again, it neatly diverts attention from what is usually the biggest problem – the silly things companies do in terms of poor quality, awful service or bad value which positively drive customers away. Take the call centre experience from most companies. It’s reminiscent of the defunct airline Sabena (see whose acronym came to stand for “Such A Bloody Experience Never Again”. If you want to lose the will to live, try using a Dell helpline. For most companies, fixing such glitches should be far more important than embarking on a quest for advocacy.

But the real problem with the loyalty ladder is it doesn’t recognise the realities of business. Take the customer as prisoner. As good marketers, we all agree that keeping customers prisoner is not good practice. Or do we? Some of the most successful brands and businesses prosper on the basis of prisoner strategies. This is what platform and standards wars are about. Sony PlayStation and Microsoft were spectacular successes because once customers bought in to their systems, they were effectively trapped. Likewise the refillables scam: some companies make most of their money from products like computer ink cartridges, razor replacements and branded auto parts. Would you give that up in favour of advocacy?

Or consider the long-term savings sector. It imposes heavy penalties on customers if they try to leave contracts early, and it screws them with administration and other charges if they stay. This is a win-win prisoner strategy – “we win whatever you try to do, stay or escape”. Why on earth would you want to move customers up a loyalty ladder in such a situation?

Just Do Nothing
So what about inertia? Surely you’re a poor marketer if all you can do to keep customers coming back is rely on their inertia? Perhaps. But customer inertia is probably the most popwerful and profitable force in marketing today. Today’s fabulously profitable banking industry is built on the rocks of customer inertia. The real or perceived hassle of changing current accounts means that customers are even now more likely to divorce than switch banks. This means bankers can go to bed at night safely assured that about 60% of their profits will be guaranteed tomorrow without really having to lift a finger: the difference between interest paid on total current account balances versus lending rates. Why seek advocacy when you have inertia?

Likewise, in deregulated markets such as gas, electricity and landline telephony the old prisoner/monopolists are still dominant despite the fact that they routinely charge higher prices. Why? Because, despite the efforts of comparison and switching services such as uSwitch and Simplyswitch, large numbers of customers simply can’t be bothered to make the change.

Then there’s habit. It’s not hugely gratifying to realise the main reason many of your customers are still with you is sheer force of habit. But then, ask brands like Heinz Baked Beans or McVitie’s Digestives how valuable it is to be a habit. Is it a failure of my marketing imagination that I cannot conceive of a credible, sustainable advocacy strategy for Heinz Baked Beans that would deliver returns superior to its status as “part of my weekly routine”?

Diminishing Returns
Now let’s flip the coin to consider advocacy. Nine times out of ten, it’s simply a triumph of hype over reality. The usual recipe for creating advocates is to keep on delighting them by exceeding their expectations. This recipe is flawed. Once a surprise is repeated, it’s no longer a surprise. Bells and whistles that delight the first time round – courtesy cars in car dealers, flat beds in business class – quickly become routine expectations. (Hint to men: only buy your wife flowers occasionally. That way, every time you do, she’s still surprised and delighted). Marketers who pursue the forlorn quest to perpetually exceed customer expectations have only themselves to blame. They are making themselves victims of expectation inflation.

So what can we learn from the loyalty ladder? One lesson is that go-to-market and business strategies tend to gravitate around which rung happens to be the most profitable. Competitive activity then revolves around displacing rivals from that rung: look at promotion intensity in habit-based packaged goods markets, for example. Or 0%-balance transfers in the formerly inertia-driven credit card sector. Frequent flyer programmes are de rigueur in airlines precisely because frequent flyers make many, separate purchasing decisions – they are not prisoners and are not affected by inertia.

Another, related, lesson is that value is maximised where improved customer economics meets improved supplier economics. There is potential here at every rung of the ladder. Becoming a prisoner to the winner of a standards war greatly reduces risk and complexity. Inertia is often rational. Often the costs of switching – searching, considering, making alternative arrangements – outweigh the potential benefits. Habit is also efficient. If you always buy Heinz Baked Beans, that’s one less thing you have to worry about when shopping. Now ask yourself: what economic benefits do customers get from being brand advocates?

Cover All Bases
The final lesson is perhaps the most important: reliance on any single rung is risky; much better to spread your weight. Take Tesco. Where it can, it adopts a prisoner strategy – its legendary property portfolio means it’s better at being the only available store than its rivals. When customers are in danger of defecting (when they opt for home shopping for example) it uses inertia to help keep them: “simply download your Clubcard record of your last shopping trip to save the hassle of making a new list online”. It also relies on habit: “I don’t like going elsewhere because I don’t know my way around that store”. It then tries to build preference via lower prices or better own-label ranges. And every now and then it does a little something to “delight” – such as its “one in front” queue-busting initiative a few years ago.

So the loyalty ladder does have a use – but precisely opposite to the one suggested by the gurus. Most real businesses work at all levels of the ladder simultaneously. The trick is not to drive customers up or down the ladder, but to use every rung as best you can, and to find and keep the right balance between them.

Alan Mitchell,

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