Understanding and profitablymanaging customer loyalty

Robert Gee, Graham Coates and Mike NicholsonDurham University, Durham, UK

Abstract

Purpose – The purpose of the paper is to draw together the salient issues surrounding customerloyalty and customer relationship management (CRM) into a single coherent discussion. Variousschools of academic thought are examined. The paper concludes with practical implications formanagers.

Design/methodology/approach – The literature surrounding customer loyalty, customersatisfaction, effective CRM and managing loyalty in a profitable manner are all reviewed. The paperallows managers to consider a wide range of material in the context of their business.

Findings – The need for businesses to retain customers is an important issue in today’s globalmarketplace. To retain customers, a business must forge loyal and long-term relationships withprofitable customers. Reasons why customers leave a company are discussed, and preventativestrategies are considered. Loyalty schemes are considered and their relative merits examined.

Practical implications – A key implication of this paper is the need to focus attention on managingcustomer loyalty in a profitable manner. Certain theories hold the view that generating customerloyalty will automatically drive profits. This paper suggests that this is probably not the case. Giventhis, the paper calls for data analysis and database segmentation to be considered as an integral part ofprofitably managing customer loyalty.

Originality/value – The paper provides both a broad and in-depth discussion of all the salientissues surrounding customer loyalty. By drawing together these issues into a single discussion, thepaper offers a unique perspective that is not available in the current literature. Holistically consideringall of the practical elements of customer loyalty allows academic researchers and marketing managersto compare and contrast different theories and principles.

Keywords Customer loyalty, Customer satisfaction, Profit, Customer relations

Paper type Literature review

IntroductionWhile a large body of academic research exists that focuses on specific elementsof customer relationship management (CRM), no current academic paper attempts todraw together the salient issues into a single discussion. The purpose of this paper isto do just that. By reviewing current theories and principles, a best practice reviewof CRM can be outlined and guidelines for implementation within the business worldconsidered.

In today’s global marketplace competition has intensified (Sivadas andBaker-Prewitt, 2000). Singh and Sirdeshmukh (2000) suggest that customer loyaltyis rapidly becoming, “the marketplace currency of the twenty-first century”. This is acommonly held view in the academic field (Seth et al., 2005; Venkateswaran, 2003;Duffy, 1998; Kandampully, 1998), which advocates the need for businesses toadopt a customer-centric vision. Anderson and Narus (2004) believe customerretention is a more effective business strategy than continuously trying to acquire newcustomers in order to replace the defecting customers. This seems logical given that the

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Received January 2007Revised January 2008

Accepted February 2008

Marketing Intelligence & PlanningVol. 26 No. 4, 2008

pp. 359-374q Emerald Group Publishing Limited

0263-4503DOI 10.1108/02634500810879278

well versed marketing maxim notes, “It costs five times more to acquire a newcustomer than to retain an existing one” (Pfeifer, 2005). While the exact cost ratio isdebateable (Sterne, 2002) the common viewpoint is that it makes commercial senseto look after your current customers before acquiring new customers (Walsh et al.,2005).

The remainder of this paper now presents reviews of relevant literature inthe following areas; examining customer loyalty, understanding and preventing theending of relationships, managing loyalty in a profitable manner, loyalty schemes andmanagerial considerations. To summarise, the paper presents key findings resultingfrom the consideration of the aforementioned areas.

Examining customer loyaltyCustomer loyalty is essential if a company is to retain its current customers. However,many debates are centred round what customer loyalty actually is, as Majumdar (2005)states, “Customer loyalty is a complex, multidimensional concept”. The complexity ofcustomer loyalty is reflected in the wide range of definitions within academic fields.Focusing on consumer attitudes, Oliver (1997) defines loyalty as “A deeply heldcommitment to rebuy or repatronize a preferred product or service consistently in thefuture, despite situational influences and marketing efforts having the potential tocause switching behaviour”. Other definitions of customer loyalty focus on the patternof past purchasing activity. A wealth of data suggests that most consumers arepolygamous and are loyal to a portfolio of brands within a product category (Uncleset al., 2003). This has led to another definition of customer loyalty, “an ongoingpropensity to buy the brand, usually as one of several” (Uncles et al., 2003). In a reviewof 50 operational definitions, Jacoby and Chesnut (1978) report a central theme thatruns through all the definitions. Specifically, that loyalty is related to the proportion ofexpenditure devoted to a specific brand or store.

The lack of a uniformly accepted definition of customer loyalty is also reflected inthe academic work that attempts to understand the key factors than generate customerloyalty. Indeed, Dick and Basu (1994) note the need for a more in-depth assessment ofthe variables that coerce customer loyalty and retention. Furthermore, to leverage thegreatest benefits available from customer loyalty it is imperative to understand theantecedent drivers of loyalty (Terblanche and Boshoff, 2006). To do this, Crosby andJohnson (2004) recommend that a causal model of customer loyalty is produced, linkingtogether the chain of events from touch points with customers through to inducingexamples of loyal behaviour.

Terblanche and Boshoff (2006) cite empirical and anecdotal evidence tosupport the notion that loyalty is a both a long-term attitude and a long-termbehavioural pattern, which is reinforced by multiple experiences over time.Overall, customer satisfaction becomes important because these multiple experiencesneed to be satisfactory to lead to the positive predisposition of long-term loyalty. In asimilar concept, Gustafsson et al. (2005) note three drivers of customer loyalty;calculative commitment, affective commitment and overall customer satisfaction.Calculative commitment is the rational and economic decision making, reviewing costsand benefits. Commitment to the current brand or service is due to a lack of choice forsimilar products or services or high-switching costs (Anderson and Weitz, 1992).Affective commitment is a warmer and emotional factor, based on trust

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and commitment. Indeed, Muthuraman et al. (2006) and McMahon-Beattie (2005)comment on the need for customer trust in building sustainable and loyal relationshipswith a brand or service.

Commitment dimensions are described by Gustafsson et al. (2005) as “forwardlooking” and capture the strength of the relationship and the resulting commitment forthe future. Empirical data from Gustafsson et al. (2005) suggest that calculativecommitment has a consistent reduction in customer churn rates. This is interestingas the calculative commitment reflects the viability of the company’s offerings,thus demonstrating that consumers actively review the company’s products andservices against those of its competitors. Overall, satisfaction is described as a“post consumption experience which compares perceived quality with expectedquality” (Sivadas and Baker-Prewitt, 2000). Gustafsson et al. (2005) report that “whensatisfaction is measured as an overall evaluation of performance, it indeed predictschurn”. Furthermore, the results provide recommendations for customer relationshipmanagers when reviewing customer retention. To maintain the competitive advantagethe company holds, managers should consider both the overall satisfaction of itscustomers and the competitiveness of the company’s products and services.

The importance of overall customer satisfaction in inducing loyalty is noted earlier.The problem associated with this is that a consumer’s level of satisfaction is constantlyadjusting. Dahlsten (2003) supports this concept: “It is widely acknowledged thatcustomer satisfaction is a function of the relationship between customer expectationsand experience, that it is dependent upon value and that it is formed continuously”.With this evidence in mind, satisfaction is considered an “inherently unstable andtemporary mental state” (Reichheld et al., 2000). In an attempt to further understandthose factors that induce customer satisfaction, the notion of service quality becomesincreasingly prevalent within the academic literature (Oliver et al., 1997). Seth et al.(2005) suggest that many studies have found a “direct positive link between servicequality and customer behavioural intentions”. One assumption sometimes made is thatstrong service leads to satisfaction, which in turn leads to loyal behaviour. However,Venkateswaran (2003) highlights the need for caution, “An assumption that existsamongst companies that a satisfied customer is a retained customer may not be validin the current context”. In a review of customer defecting patterns, Reichheld et al.(2000) found “60-80% of customers who defect to a competitor said they were satisfiedor very satisfied on the survey just prior to their defection”.

Some of the differences between empirical results focusing on satisfaction andcustomer loyalty may be due to the different definitions adopted by the authors.As such, there is clearly a requirement to understand how the positive effects ofsatisfaction can be made less transient and yield a more stable loyalty effect.To achieve this, Sivadas and Baker-Prewitt (2000) suggest that it is, “not merelyenough to satisfy a customer”. Dahlsten (2003) believes there is the need to avoid the“satisfaction rut” and notes that, “many companies have fallen into a self-perpetuatingpattern in which practices that are not truly customer-orientated are reinforced”.To rectify this situation, managers move past the measurement of quality andsatisfaction and realign their practices on the actual customer experience (Crosby andJohnson, 2006).

According to Dahlsten (2003), to drive customer satisfaction managers must moveout of the satisfaction rut and have a more extrinsic focus. This requires “an organic

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shift from focusing on today’s problem in a reactive and cost-conscious way toconcentrating on longer-term opportunities”. To achieve this, the manager must gainan intrinsic knowledge of the customers needs and be able to deliver on theseexpectations (Lindquist, 2006; Bland, 2004). Gelb and McKeever (2006) support thisidea and suggest that, “organisations must strive to understand and manageexpectations”.

However, Berman (2005) suggests that organisations must do even more thandelivering on expectations and recommends delighting customers rather than merelysatisfy them. It is suggested that customer delight is a construct related to, but separatefrom, satisfaction. This is in the same way that dissatisfaction is related to, but distinctfrom, satisfaction. Satisfaction is generally based on meeting or exceeding one’sexpectations, customer delight requires that “customers receive a positive surprise thatis beyond their expectations” (Berman, 2005). When compared to satisfaction, delight,“is a more positive and emotional response”. Given the emotional response resultingfrom delight, it is suggested that satisfaction has a weaker memory trace than delight.The weaker memory trace resulting from mere satisfaction may offer an explanation tothe unstable and temporary nature of satisfaction reported by Reichheld et al. (2000).If customer delight can be achieved then maybe this can provide the more stableloyalty that companies actively seek.

Keiningham and Vavra (2001) provide empirical support for this notion. The studyreviewed the effect of customer satisfaction levels on customer loyalty toMercedes-Benz USA. The results found that there was only a 10 per cent chance ofa dissatisfied customer bringing return business. If the customer was satisfied withthe product and service, the likelihood or re-buy or re-leasing rose to 29 per cent.However, the likelihood of return business from those customers that were delightedwas found to be 86 per cent.

Berman (2005) employs the Kano (1984) model as an underpinning for explaininghow customer delight may be achieved. Kano’s model cites three levels ofrequirements:

(1) must be requirements;

(2) satisfier requirements; and

(3) attractive requirements.

A must-be requirement is taken for granted by the consumer. If this requirement is notfulfilled by the product or service then customer dissatisfaction will result. A satisfierrequirement, as suggested by the name, has the ability to induce customer satisfaction.It is proposed that the more satisfier requirements that are fulfilled, the higher the levelof resulting satisfaction. The third requirement is attractive requirements; these areneither explicitly expressed nor expected by the customer. If these attractiverequirements can be met, it is suggested that the result will be customer delight.To successfully compete, organisations must ensure they fulfil all must-berequirements, while also offering the satisfiers available through key competitors.To generate competitive advantage an organisation must go above and beyond theircompetitors on those variables that generate delight.

There is however, one final complexity with regard customer satisfaction.Mittal and Katrichis (2000) report that the attributes viewed as important fornewly acquired customers are different compared to customers who are already loyal. As

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they comment, “Often the attributes that enable a firm to acquire a customer differ fromthose that help the firm retain the same customer”. These findings would suggest that it isimportant for a firm to understand and explore those factors that elicit satisfaction anddelight for different segments of its customer database. By doing this, a company canmove towards the customer centric vision that Kale (2004) holds as imperative fortrue CRM.

Understanding and preventing the ending of relationshipsThe discussion in the section above provides an understanding of howdelighting customers can increase customer loyalty. However, for any business,unfortunately there will be times when customers defect to competitors. Inorganisations that are to implement excellent CRM, these failures must be seen asan opportunity to investigate and improve problem areas. Reichheld et al. (2000) concurand note:

When desirable customers defect, it’s a signal that something is amiss. In a learningorganisation, the departure of such a customer prompts a search for the root causes of theproblem to learn more about what needs to be fixed in the business.

While a universally accepted theory of relationship ending does not exist in academicliterature, Michalski (2004) cites Hirschman’s (1974) exit-voice-loyalty framework ashighly influential. One result from the EVL framework in particular has gained aconsensus within the literature. This finding suggests that a dissatisfied customer willeither simply leave the company and exit, or, they will voice there issues first. In thecase of those customers who first voice their concerns, “the likelihood of therelationship ending falls” (Michalski, 2004). Further, six distinct categorizationswere found regarding relationship ending based upon three triggers. Situationaltriggers are those that are driven by the customer, for example, moving house or anincrease/decrease in income. A reactional trigger is a company driven reason and canbe due to factors such as, poor service, reduced product quality or if the companydenies the customer a service (e.g. a bank loan). According to Gustafsson et al. (2005),reactional triggers cause the consumer to “evaluate present performance more closely,which may put customers on a switching path”. Finally, influential triggers arecompetitor driven reasons to induce a customer to defect from the current company.Triggers include price, perceived value for money or service quality.

According to Reardon and McCorkle (2002), “The choice for a consumer to choose onedistribution channel over another can be viewed as an optimization problem”. Therefore,it is proposed that consumers review the potential gains of switching to anothercompany against the costs of leaving the current company. Building on the work ofReardon and McCorkle (2002), Burnham et al. (2003) propose three different switchingcosts; procedural, financial and relational. Procedural switching costs are the time andeffort a customer must put into initiating a relationship with a new company. Financialswitching costs are those monetary costs that companies put in place in an attempt toreduce customer defections. Finally, relational switching costs relate to the loss ofpersonal relationships with employees of the current company. While all three costs canbe employed by a company to reduce customer defection rates, Jones et al. (2000) providea cautionary warning. That is, if customers are not satisfied with the current companybut feel trapped due to negative barriers such as high-financial switching costs, they

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may engage in “company-focused sabotage such as negative word-of-mouth”.Conversely, positive barriers such as interpersonal relationships can act as a moreeffective barrier to defection. Again however, the company must be careful. High-staffturnover or losing key members of staff could result in customer defection if the bond tothose staff is stronger than the ties to the company itself.

Given the review of customer switching behaviour, the pertinent question becomeswhat companies can do to reduce customer defections. According to Michalski (2004),companies must take a holistic approach, noting there is little point in focusing on theeffect of one trigger and ignoring the effects of other triggers. For example, consistentlyreviewing the quality of service or products may only have a limited effect if, forexample, prices are too high. This is because the influential triggers of competitorscould outweigh the potential benefits of the improved service. According to Michalski(2004), management must understand “the whole picture of an ending process to realizeand to decide which actions are necessary to keep customers or regain lost customers”.The results from Gustafsson et al. (2005) research support this holistic approach;they suggest that managers should consider both the overall satisfaction of itscustomers and the competitiveness of the company’s products and services, or in theirterminology, the calculative commitment of the customers.

While companies can attempt to provide complete satisfaction there willunfortunately be times when a customer feels the need to complain. Effectivecustomer complaint handling becomes imperative given the Hirschman’s (1974)exit-voice-loyalty framework and the importance of reactional triggers highlighted byGustafsson et al. (2005) and Michalski (2004). Indeed, Griffin (2001) cites the results of aRockefeller Foundation study, which found that of those customers who left a companyfor a specific reason the most influential factor was poor customer complaint handling.Homburg and Furst (2005) report that “complaint satisfaction has a strong effect oncustomer loyalty” and propose that successful resolution of a customer’s complaint canbecome a significant driver of customer loyalty. Interestingly, Smith and Bolton (1998)note that “An excellent recovery can increase customer satisfaction and loyalty beyondthe degree before failure”. Therefore, it appears that while a company must continue toreduce the desire for customer defection in the first place, it must also focus onensuring loyalty is also borne from effective complaint handling procedures.

Managing loyalty profitabilityThe preceding sections have considered both the need for creating customer loyaltyand the factors that can cause customers to switch to a competitor. While customerloyalty is important for generating a strong, reliable customer base these customersmust be profitable for the long-term success of the organisation. Understanding theintricate links between customer loyalty and business profits is an area which needsmore in-depth understanding and discussion (Uncles et al., 2003). Previous research onloyalty has advocated that if customer loyalty is gained, profits will follow (Chen andChang, 2006; Reichheld, 2002). Reinartz and Kumar (2002) state the past mantra,“Win loyalty, therefore, and profits will follow as night follows day”. Garland (2005)agrees stating, “Customer loyalty has been widely regarded as a necessary precursor toindividual customer profitability”. The viewpoint that gaining loyalty automaticallygenerates profit is now under scrutiny.

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Empirical research by Reinartz and Kumar (2002) suggests that the relationshipbetween loyalty and profits is far weaker than those scholars, who advocate loyaltyprogrammes ( Reichheld et al., 2000; Hallowell, 1996; Reichheld, 1993), would suggest.Their research found the following correlations between customer profit and customertenure. A French grocery retailer 0.45, corporate service provider 0.30, a German directbrokerage firm 0.29 and just 0.20 for an American mail-order company. The results donot provide support for the theories linking customer loyalty with profit. In turn thissuggests that businesses need to strive for customer loyalty that also delivers profit.

While the overall correlations between customer tenure and profitability are low,there remains the possibility that these low figures mask other underlying advantagesof customer loyalty. Other cited advantages of customer loyalty are that:

. loyal customers costs less to serve;

. they will pay higher costs for a set of products; and

. they will act as word-of-mouth marketing agents for the company ( Reichheld,2002, 1993; Zeithaml, 2000).

In their empirical research, Reinartz and Kumar (2002) found no conclusive support forany of the posited outcomes of customer loyalty. As Garland (2005) concludes there islittle to suggest that customers who bought regularly were any cheaper to serve, anyless price sensitive or any more zealous about recommending the company to others.

Although Reinartz and Kumar (2002) find little evidence of the link between loyaltyand profitability, this does not mean there is no correlation. As they note, “In ouropinion, the reason the link between loyalty and profit is weak has a lot to do with thecrudeness of the methods most companies use to decide whether to maintain theircustomer relationships”. Traditionally, models such as the recency frequencymonetary value model are used to assess whether a customer warrants furtherinvestment in order to generate future sales and profit. For a more in-depth discussionof traditional models and methods of managing customer relationships (Kumar et al.,2006).

In order for a company to manage customer loyalty and profitability moreeffectively, Reinartz and Kumar (2002) provide a framework for customersegmentation. The framework builds on the profitability and longevity measuresfrom Reichheld’s (1993) work on customer loyalty and that of the loyalty typologyposed by Dick and Basu (1994). The final framework is based upon a special case of“event-history modelling”. For a complete explanation of the model see Reinartz andKumar (2000). The customer segmentation concept borne from event-history modellingis a 2 £ 2 matrix based upon profitability and customer tenure. This produces fourdifferent types of customer classification; butterflies, true friends, stranger andbarnacles.

The resulting analysis from the model allows tailored marketing and customerrelationship strategies to be developed for each of the four segments. For thosecustomers who are classified as low profit and short-term tenure, defined as strangers,the model advocates a simple policy, “Identify early and don’t invest anything”.Those customers who are termed true friends are long-term profitable customers, whoneed nurturing and every effort should be made to develop relationships with them.Highly profitable customers who exhibit little loyalty to the company requirea strategy that ensures they are “exploited before they ‘flit off’” (Garland, 2005).

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It is essential that a company identifies the right point in time to cease trading with abutterfly. The common mistake that managers make is attempting to generate loyaltyas “our research shows that attempts to convert butterflies into loyal customers areseldom successful” (Reinartz and Kumar, 2002). The final segment, termed barnacles,are loyal but have a negative impact on company profitability. The first stage indeveloping a strategy to deal with barnacles is to review the financial potential,otherwise termed the wallet-size, of the customer. If the customer is low wallet-size,then the company should ensure pricing controls are in-place so that the customer ismanaged profitably. If the wallet-size is high, the focus should be shifted towardscross-selling and up-selling to increase wallet share and thus maximise sales andprofits. Therefore, the company should attempt to convert barnacles into true friends,or, as Zeithaml et al. (2001) assert, from lead into gold.

Although different models have been presented, there is one common element thatruns throughout all of them. Specifically, this is the need to target finite companyresources at those customers that generate the largest profits for the company.As Garland (2005) notes, “While companies may want to treat all customers withsuperior service, they find it is neither practical nor profitable to meet (and certainlynot exceed) all customer expectations”. If a company tries to look after all customers inthe same manner then the highly profitable customers end up subsidising the servicefor low-profit generating customers (Zeithaml et al., 2001).

Loyalty schemesVarious academic theories have been discussed regarding how customer loyalty can begained and maintained. Loyalty schemes are designed to induce long-term loyalty fromcustomers. Building upon the discussion regarding management of loyalty in aprofitable manner, it is now important to consider the influences of loyalty schemes.

According to Uncles et al. (2003), there are two main aims of loyalty schemesemployed by companies. The first aim is to increase an individual customer’s salesotherwise seen as increasing the “share of wallet”, or to cross-sell and increase therange of products bought from that company. The second aim is more defensive in itsnature. It is hoped that by building closer bonds between the customer and thecompany, customer defection rates will reduce. With reference to the work of Burnhamet al. (2003), it is hoped that the relational costs of switching to a competitor areperceived to be so high that switching behaviour is made less likely.

The use of loyalty schemes is increasingly prevalent within the business world(Lewis, 2004). However, within academic literature there are mixed views on theeconomic viability and success of loyalty schemes. One often cited advantage of loyaltyschemes is their ability to collect sales data to allow trends analyses to be conducted.For example, Stone et al. (2004) propose that the information a loyalty scheme generatescan be used to tailor the company’s offerings, and thereby fulfil its customers’ needs.Furthermore, Rowley and Haynes (2005) note that a successful loyalty scheme allows abusiness to “move beyond an analysis of which products are popular, to who buysthose products, and what other products they buy at the same time”. As Wood (2005)concurs, “Loyalty schemes are a method of gathering information on customers, whichthen allows appropriate strategies to be applied to different customer segments”. With aless supportive view of information analysis, Uncles et al. (2003) posit that often the vastvolume of data make insightful analysis impossible. Furthermore, they suggest that

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often too little of the right kind of data are collected by a loyalty scheme. For example, alack of data on non-customers does not provide a complete view of the marketplace.

Another area of contention is whether loyalty schemes actually induce loyalcustomer behaviour. Lewis (2004) proposes that to increase loyalty a loyalty scheme“must have a structure that motivates customers to view purchases as a sequence ofrelated decisions rather than as independent transactions”. In a review of purchasingbehaviour, when collecting stamps to receive a free coffee, Kivetz et al. (2006) foundthat, “to earn one free coffee, customers bought two more coffees than they would haveotherwise”. As Wood (2005) suggests, the behavioural assumption of a rewardprogramme is that it can “motivate customers to base their purchasing decisions bothon the current environment and on a long-term goal of achieving a frequent buyerreward”. Interestingly, Kivetz et al. (2006) also suggest that consumption acceleratesthe closer the customer is to receiving the reward goal, in the case of the coffeeexperiment, a free cup of coffee. However, in a response to the search for loyal customerbehaviour, Uncles et al. (2003) state, “Customers appear not to want to watchone television station, eat at one restaurant, patronize one hotel, drink one brand ofwine . . . etc”.

Another criticism of loyalty schemes are the opportunity costs of implementingsuch a scheme (Uncles et al., 2003). It is important to consider the relative impact thatcould be achieved by investing the same financial resources in new marketingchannels, establishing an everyday low-price strategy, or further product development.Finally, if a loyalty scheme is seen as a success, it can be quickly imitatedby competitors and thus eroding the original competitive advantage it provided(Uncles et al., 2003). Given the potential advantages and disadvantages of loyaltyschemes, managers must be careful when considering their implementation.

Managerial considerationsBuilding on the previous sections, the following discussion aims to providerecommendations that managers can implement. This section outlines further theoriesand concepts that managers can consider in context with their organisation.

CRM initiatives have become increasingly popular in the business world. Kale (2003)defines CRM as the, “holistic process of identifying, attracting, differentiating, andretaining customers”. In addition to this, CRM focuses on nurturing businessrelationships with the belief that long-term customer relationships yield better resultsthan an orientation focused on short-term transactions (Raman et al., 2006). However,despite the enthusiasm for CRM, Reinartz et al. (2004) report that 70 per cent of CRMprojects result in either losses or no bottom-line improvement. According to Kale(2004), there are seven deadly sins that result in ineffective CRM programmes.The factors cited are; a lack of management support, underestimating the effects ofchange management, inflexible business processes, undervaluing data analysis, losingsight of customers, ignoring customer lifetime value (LTV), and focusing solely ontechnology. With an understanding of those factors, which result in ineffective CRMpractice, businesses must adopt a relevant strategy for implementing successfulCRM initiatives.

Given that the C of CRM stands for the customer, it is imperative that a businessdevelops a customer centric vision (Thakur and Summey, 2005; Kale, 2004). According toDay (2003), a customer centric approach is achieved when the belief that customer

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retention is of the highest priority transcends through all departments of an organisation.As a guiding principle, Reichheld et al. (2000) suggest that “customer repeat purchaseloyalty must be the basic yardstick of success”. If a business can successfully achieverepurchase behaviour, then it is on the way to generating customer loyalty. In agreement,Kumar et al. (2006) comment, “second-time customers are more likely to become third-timecustomers than first-time customers are to become second-time customers, and so on”. Togenerate repeat purchase behaviour, a business must understand exactly what isimportant to its customers. Kale (2004) believes that a company needs to “preciselyascertain what knowledge about customers is required in order for it to retain, grow, anddelight its most valued customers”. Berman (2005) concurs and explains that a companymust deliver attractive requirements, providing delight for the customer, in order togenerate future sales. In addition to this, a company must understand the differentexpectations from distinct segments of its customer database (Mittal and Katrichis, 2000).

To understand customers’ requirements, data analysis becomes increasinglyimportant. Indeed, to undervalue data analysis is one of Kale’s (2004) seven deadlysins. Importantly, this data analysis can be relatively simple in practice and does nothave to require expensive CRM software (Bland, 2004). If a business can develop adatabase, which allows analysis of customer requirements across different customersegments, it can begin to serve its customers better. The internal data warehouse heldby a company is an extremely important asset. Jackson (2005) suggests that ifeverything else is equal, “internal data is the one differentiation and competitiveadvantage available to a company concerning its customers”. Furthermore, Bouldinget al. (2005) note that firms with the required customer information in place exhibitsuperior performance.

Effective data analysis also enables a company to manage loyalty profitably(Reichheld and Detrick, 2003). With the right data and appropriate analysis, Ramanet al. (2006) report that a business can identify profitable customers with whom tofurther relationships, and identify unprofitable customers with whom remedial actionis required. Thomas et al. (2004a) comment, “Stable, healthy growth is built on theprofitability of customers, not their raw numbers or their loyalty”. While some authorssuggest that the profit gained from some customers deems them not worth serving(Reinartz and Kumar, 2002), in practice this does not seem a viable option for mostcompanies (Wood, 2005). According to Wood (2005), a company cannot afford to rejectthe business of any customers, since even low-value customers still produce revenue.A question posed is whether the overheads of a company would fall by 10 per cent if itdid not serve the 50 per cent of its customers who only contribute to 10 per cent of itsrevenue. Again, according to Wood (2005), “the answer is always negative”. Therefore,what businesses must do is to manage and adopt sensible operating costs for differentcustomer segments.

In addition, data analysis can be used to effectively manage marketing spend ondifferent customer segments. Analysing the LTV of a customer allows appropriateallocation of a company’s resources (Day, 2003). According to Kale (2004), LTV can bedefined as, “the estimated profitability of a customer over the course of his or herrelationship with a company”. Ryals (2005), along with Reinartz and Kumar (2003),provide methodologies for LTV calculation methods. Kale (2004) cites Harrah’s casino,which segments its customer database based on LTV. The majority of marketing spendis devoted to its top platinum customers as they provide 85 per cent of the revenue.

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New customer acquisition is regarded by most companies to be near the top of themarketing agenda (Banasiewicz, 2004). The directional policy matrix (DPM)highlighted by McDonald (2005) allows a company to compare different markets ormarket segments. The DPM reviews market segments categorised by potential andtherefore attractiveness to the company, the firm’s relative strengths in those markets,and the relative importance of each market segment. With a review of all potentialmarkets and the firm’s strengths and weaknesses, strategies can be highlighted toacquire customers in the best fitting market segment or segments. However,while acquiring new customers is important for the growth of a company, this mustproduce incremental business for sustainable growth. If new customers simply replacethe attrition of past customers, then the turnover of the business will not grow. Withthis in mind, companies must also focus on recapturing deviating customers.

Griffin (2001) found that 68 per cent of customers leave for no special reason.Therefore, companies must put in place an effective win-back strategy to sustain thecustomer base. Data analysis allows a company to highlight customers who havestopped purchasing and whom should be the focus of the win-back strategy.Furthermore, appropriate analysis will allow a profile to be generated of thosecustomers who are likely to defect. This insight allows at risk customers to be givenspecial attention where appropriate. There is also a positive strategic reason fortargeting the win-back of old customers over the acquisition of new customers.Thomas et al. (2004b) found there is a “20 per cent to 40 per cent chance of successfullyrepeat-selling to a lost customer, and only a 5 per cent to 20 per cent chance ofsuccessfully closing the sale on a brand new customer”. Griffin (2001) suggests that acompany should regularly grade and segment lost customers. The company must thenfocus on understanding the lost customer’s needs, and, with this, develop acommunication plan to reinstate the customer’s confidence in the business. With thismethod, Griffin (2001) suggests lost customers can be induced to return. However,there is a cautionary note. A company’s win-back strategy should think big but startsmall. Evaluation and refinement of the win-back strategy will then allow the companyto increase the effectiveness of the strategy.

With the correct database, analysis, customer acquisition strategies and win-backstrategies in place, managers must not lose focus on other changes that are required formanaging customer loyalty and effective CRM. While a customer delight programmewill enable customer loyalty to be developed, the business must be in a position toimplement such a programme. Berman (2005) provides a checklist for readiness inimplementing a programme. Effective business processes must be in place to allowpromises to be delivered (Little et al., 2006). Terblanche and Boshoff (2006) note therequirement for training and educating staff in handling of interpersonal calls. This isparticularly relevant given the need to effectively handle complaints (Homburg andFurst, 2005). Well trained, helpful staff can also provide positive switching barriers(Jones et al., 2000). Indeed, managers must also focus on employee satisfaction to yieldcustomer satisfaction (Johnson and Chiagouris, 2006). A study by Rucci and Kim (1998)discovered that a 5 per cent rise in employee attitude scores resulted in a 1.3 per centincrease in customer satisfaction and a 0.5 per cent increase in revenues. Finally,given the review of loyalty schemes, managers must decide whether this is a relevantand viable option for the company. Any managers wishing to implement or review acurrent loyalty scheme are referred to the checklist provided by Uncles et al. (2003).

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Key findingsWhile this paper draws on a number of areas of business, there are several keyfindings, which can be considered as general in that they are relevant to differentenvironments. The purpose of this section is provide a synopsis of recommendationsbased upon the theories, ideas and studies presented in the earlier sections of thispaper. As a summary, and in the interests of providing succinct conclusions andrecommendations, bullet points are now utilised:

. Organisations must understand what drives both value and delight for theircustomers. Adopting a customer centric vision enables an organisationunderstand their customers, deliver customer delight and drive for loyalty.

. Different customers have different requirements and will be delighted indifferent ways. Database segmentation and data analysis are critical if anorganisation is to generate loyalty from different customer segments.

. Positive switching barriers should be implemented to increase the likelihood ofcustomer retention.

. Customer segmentation based on profit is imperative. Operating costs forcustomer segments should be monitored to ensure they are not disproportionateto the profit the organisation receives from these customers.

. Analysing the LTV for different customer segments allows marketing spend tobe proportioned to deliver maximum return on investment.

. By utilising the DPM and profiling current profitable customers a customeracquisition strategy can be produced and implemented.

. Appropriate monitoring of customers is important to ensure that customerdefections are not masked by customer acquisitions. This is essential for thesustainable growth of an organisation.

. A win-back strategy is recommended as previous customers are less costly towin-back compared to the costs of acquiring of new customers.

. Analysis of defecting customers allows an organisation to profile at riskcustomers. Where appropriate preventative measures can be put in place toreduce customer defection.

By considering the ideas and recommendations discussed above, managers should bebetter informed to manage loyalty in a profitable manner within their organisation.Further research is required to continue to develop the concepts and theories discussedthroughout this paper. Future empirical studies targeted to understanding therelationship between customer loyalty and business profits would prove a usefuladdition to the currently available literature.

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Corresponding authorRobert Gee can be contacted at: r_d_gee@yahoo.co.uk

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