Saturday 9 May 2009

The Myth of Loyalty?

The above headline grabbed my attention in the latest Marketing Week (30/04/09). It was the title of a letter from Hamish Pringle, Director General of the IPA in which he stated that contrary to popular opinion, it is far more profitable to have a new customer acquisition strategy than it is to have a “loyalty” one.

This basis of this as he describes it is “There are really only two ways in which marketing might affect volume sales: more consumers might buy the brand (penetration growth), or the existing buyers might buy the brand more often (loyalty growth)”. Referring to r
esearch from the 70’s and 80’s by Professor Andrew Ehrenberg around FMCG brands that indicated that category consumption is pretty much fixed, Hamish reasons that attempts to increase consumption are futile and hence a loyalty strategy which focuses are trying to get customers to buy more is also futile.

Hamish’s comments were made in response to a previous letter (MW 23/04/09) that stated that within the current climate brands should not be spending money on acquiring new customers and instead should be investing only in existing customers.

Both of these views are poles apart but it’s not lost on me that the Director General of the Institute of Practitioners in Advertising is stressing that going after new customers - which is typically ATL - is a better strategy than loyalty – which is typically below the line; and the phrase that comes to mind is “If the only tool you have is a hammer, you tend to see every problem as a nail”.

I have to say though that I don’t actually disagree with Hamish on the point about increasing consumption being futile – but only for certain c
ustomer segments, and the beauty of a customer loyalty programme is actually knowing WHICH customer segments to target.

Whether its clothing retail, online gambling or credit card spend, every programme I’ve ever looked at has between 70-80% of revenue tracked to just 20-30% of people – and these are the ones where increasing consumption is hardest and as Hamish says, potentially futile. However, within a loyalty programme the strategy for these customers is “protect and retain” - it’s not about getting more from them, it’s all about keeping them longer.

Within a restaurant loyalty programme we operate, we
have divided customers into 3 groups based on frequency of visit. The “high loyal” customers were visiting once a week or more, sometimes daily, and so increasing usage for this group would be hard. However the next segment, the “medium loyal” were visiting on average 4 times per year and so this group showed a high affinity to the brand and could be encouraged to make 1 or 2 extra visits per year. The scheme was designed around this with the reward threshold set to trigger at visit number 4 based on average purchase value, with the reward encouraging an extra visit.

Even outside of retention marketing, the now famous “Got Milk?®” campaign for the California milk marketing board managed the stem the 2-3% annual decline in milk sales – technically not increasing consumption, but certainly maintaining it. This is not unusual, I’ve seen this same behaviour within other FMCG brands, with on-pack loyalty schemes actively increasing sales or maintaining sales in the face of a category decline – and this isn’t based on subjective data, this is based on comparing actual baskets from real customers.

I’m not however trying to say that marketing spend is better on customer retention than it is on customer acquisition – this is too simplistic. You actually need to spend on both, adjusting the mix a little as required.

A sole focus on customer retention misses the point that customer lifetime value doesn’t mean the “three score and 10” and that customers will change, mature, move on – even in a highly loyal customer base, you may still lose 3-5% of customers per year and if these aren’t replaced through acquisition efforts then you’ll have an ever dwindling customer base.

Likewise, a sole focus on customer acquisition misses the point that it costs a lot of money to raise customer awareness, generate a sale, on-board customers and educate them on your products/services. Not focusing on retaining these customers just means you’ll have to spend even more money filling in the hole they left – running faster and faster simply to stand still.

You also can’t lose sight of the fact that customers are a finite resource, as pointed out in Return on Customerby Don Peppers and Martha Rogers. In highly concentrated markets, all brands will be fighting for customers and growth for one brand will typically be coming at the expense of another. In this scenario, focusing only on customer acquisition will simply mean that your existing customers will defect to your competitor who is providing a compelling acquisition offer – and is largely where we have been in the insurance and mobile industries.

In the essay by Chris Stephenson for the recent IPA Excellence Diploma he makes an interesting point saying "I believe brands should only invest in marketing communications through existing users of their brand". Arguing that providing the tools/knowledge to existing customers to advocate your brand whilst at the same time creating advertising which is seen to be targeting existing customers will creating a desire from prospects to ask and an ability for customers tell - essentially seeding word of mouth.

Whilst this is a great idea it is simply one way and combining acquisition and retenton marketing and in reality loyalty marketing is actually just this - a combination of both acquisition and retention marketing.

In order to retain customers you have to make sure you recruit the right kind to begin with.

Rather than a “holy war” between ATL and BTL line marketers, what would be more profitable for our clients all round is if we simply joined up these efforts.

We've been calling this approach “Acquisition for Retention” or “Loyalty” for short.