Loyalty Strategies & Program Development
Customer Centricity Insights
The best loyalty is natural loyalty.
Although this is an old phrase which you most likely will have heard before, it is still very true. The alternative, which is paid loyalty, can be strategically interesting to either leverage the brand or from a competitive perspective necessary depending on the served customer segments and the competitive context.
But, why does natural loyalty prevail over paid loyalty, besides that fact that it is more efficient? Let us start at the beginning which is the difference between retention and loyalty since both are often being used as eachother's synonymes.
Natural Customer Loyalty
Although there are many definitions, we are applying the following definition to express customer loyalty: "a customer's willingness to use a brand (also read product or service) repetitively". Whether this willingness is strong or ambivalent depends on multiple factors, such as: the customer's personality; the purchase frequence; emotional involvement; the availability of alternatives, or the effort to switch.
On the basis of a combination of factors we have arrived at three basic types of loyalty:
- Mechanical loyalty - The customer uses the brand repetitively out of habit or without thought. Alternatives are hardly being considered. Mechanical loyalty is especially applicable to typical household brands that often enjoy lifetime customer loyalty as long as the customer's context remains the same. Due to a more dynamic lifestyle and increasingly digitized context, mechanical loyalty is losing ground.
- Functional Loyalty - The customer uses the brand repetitively because of its perceived superior level of functionality. It serves the needs and it does it better than alternatives, which are being regularly evaluated. As long as the perceived performance is offering the best relative value for money, it will retain its customers and enjoy a certain level of loyalty. Functional loyalty, is becoming increasingly dominant due to better informed customers and digitized relationships.
- Emotional loyalty - The customer uses the brand repetitively because it creates a strong positive emotion with the customer and as long as it continuous doing so, alternatives will not replace its role. In principle, every brand, product or service can reach this level of loyalty, however, it is more applicable to lifestyle type of brands that express someone's values, likes, image, or status. Emotional loyalty creates the strongest bond between user and brand/product/service.
Naturally, the ideal situation is to score high at all three types of loyalty. However, whether this is achievable or desirable depends on many contextual factors and long term goals of the company.
Loyalty versus Retention
The difference between customer retention and customer loyalty is more than a difference in vocabulary. While both share similarities, retention and loyalty cannot be used interchangeably when describing customers affinity with a brand, a product or a service.
A retained customer may buy from you again and again without ever becoming loyal. This might be because there is no good alternative or unconsciously out of routine which means that the customer might be easily triggered to switch regularly or even permanently.
A loyal customer on the other hand will consciously buy from you because of an functional and/or emotional attachment with the brand. He or she will make an extra effort to buy your brand and will even encourage others to do the same.
Loyalty goes beyond spending money. Loyal customers will vouch for you and serve as your brand advocates, which is essential to temper your marketing communications expenditure in the long run.
Over the years, many studies have demonstrated the financial substantiation of why satisfied -and loyal customers are so incredibly important for the sustainability of your business.
Natural versus Paid loyalty?
The term "paid loyalty" is being used when customers are stimulated to continue using a brand, product, or service because of a future incentive in the form of either complimentary benefits (e.g. priority VIP service) and/or financial incentives (e.g. in the form of cash, points, miles, credits, discounts). Although not all loyalty programs benefits have an out of pocket expense, they do incur internal cost and/or lower future revenue streams due to displaced revenue once a customer redeems accrued credits instead of paying in cash for the product or service.
On the other hand, natural loyalty means that customers are continuing buying from you as often as they can, simply because they prefer, or like you over others. Love is the ultimate level of affection of course.
Paid loyalty can be strategically interesting from a brand leverage perspective or necessary to overcome a shortage in competitiveness that thrives your existing customers into the hands of the competition. Designing the appropriate strategy to follow is a crucial decision which determines the long term sustainability of the program.