OPINION: Why your loyalty scheme may be a waste of cash

The top 16 retailers in Europe collectively spent more than $1bn on loyalty initiatives in 2000 in the belief that the best customers are the most loyal ones. That's because they cost less to serve, are usually willing to pay more, and act as brand ambassadors.

Well, no, actually, according to two business academics writing in the July issue of the Harvard Business Review. They believe it's time to challenge this gospel of customer loyalty that has been peddled for the past decade by customer relationship management software vendors and the armies of consultants who install the systems.

Weiner Reinartz, assistant professor of marketing at Insead, and V. Kumar from the University of Connecticut, base their claims on extensive research they have carried out on the dynamics of customer loyalty using four firms' customer databases: a US high-tech corporate service provider, a US mail-order firm, a French food retailer and a German direct brokerage house.

They have combed through the records to compare the behaviour, revenue and profitability of more than 16,000 individual and corporate customers over a four-year period. For anyone spending millions every year on a loyalty scheme, it could make uncomfortable reading.

They have found that the relationship between loyalty and profitability is much weaker than many proponents of loyalty schemes claim. In fact, in all four companies the correlation between customer longevity and profitability was very low.

More specifically, they have discovered that the evidence simply doesn't back up three commonly held beliefs: that customers who purchase steadily from a company over time are necessarily cheaper to serve, less price sensitive or particularly effective in bringing in new business through word-of-mouth.

Take the first one - that loyal customers are cheaper to serve because it's more expensive to acquire customers than retain them. That doesn't seem to be so. In none of the four companies they tracked were long-standing customers consistently cheaper to manage than short-term customers. In some cases they were even more expensive in terms of costs versus sales.

The second myth is that loyal customers will pay a premium. Afraid not.

Their research shows that loyal customers, both corporate and individual, are actually more price sensitive than occasional ones. They theorise that this could partially stem from the fact that loyal customers resent companies that try to profit from loyalty. Look at the commotion caused by both Halifax and Nationwide when they tried to get away with offering new customers better mortgage deals than current ones.

Finally, they put paid to the claim that loyal customers are your best advocates. Length of customer relationship has little bearing on how happily customers will talk about you. People often stay with their bank or shop at a particular retailer because of inertia or convenience.

What they call true apostles are customers who are loyal not just in the way they behave but also in terms of attitude. So just using longevity as a measure of the success of a loyalty programme can be very misleading.

Their conclusion is that companies should never take for granted the idea that managing customers for loyalty is the same as managing for profits.

Otherwise loyalty schemes could just be money down the drain.

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