Review of “Loyalty Myths” (by Keiningham et al.)

Keiningham, Vavra, Aksoy and Wallard (2005)

Loyalty Myths:  Hyped Strategies That Will Put You Out of Business and Proven Tactics That Really Work

(Keiningham, Timothy L., Terry G. Vavra, Lerzan Aksoy and Henri Wallard.   New Jersey:  John Wiley & Sons, 2005).

Loyalty Myths is a great 2005 book that challenges 53 assumptions about customer loyalty, including those put forward by Reichheld (1996).  The authors are from Bain & Company consulting competitor, Ipsos Loyalty.

It can be easy challenging a small number of assumptions, but 53 is a lot.  Of course some of their “challenges” are stronger than others, but overall they do an admirable job.  What they succeed in doing is point out very clearly that reward program design is not a simple thing; customer loyalty is important and reward schemes can work, but careful research, planning and proper implementation is required for them to be successful.  In short, customer loyalty is a complex and frequently very illusive concept.  We recommend this book as a reality check on what reward programs can and cannot do.

The book begins by stating that “the marketing community has deified the early pioneers of loyalty, and these individuals have misled leaders … and followers alike who have honestly sought out good business strategy.  Our goal is to set the record straight” (p.2).  The authors also state that, “despite their popularity among chain stores, and quite contrary to popular belief, most loyalty programs actually lose money for their sponsors” (p.112).  One by one, and with varying degrees of success, Keiningham et al. (2005) take apart commonly held assumptions, including:

Myth 5:  Companies should seek to change switchers into loyal customers.

Myth 8:  It costs five times more to acquire a new customer than to retain a current customer.

Myth 9:  Companies should focus on their high share-of-wallet customers.

Myth 25:  The 50-plus age segment is more loyal than younger segments.

Myth 26:  Loyal customers help grow a business through positive word of mouth.

Myth 32:  Frequency of contact increases loyalty.

Myth 35:  Loyalty programs will attract customers from competitors.

Myth 39:  Share-of-wallet increases as customer lifetimes increase.

Myth 42:  Loyal customers are less price sensitive.

Myth 43:  Loyal customers are less expensive to service than nonloyal customers.

Many of the above “myths,” we believe, are not so much completely myths as oversimplified, or over relied on assumptions.  As the book points out, customer loyalty is not as simple as the above “myths” imply.

Loyalty is the latest buzzword in marketing today, along with customer relationship management (CRM).  According to the authors, worldwide businesses spend over $35 billion a year on CRM systems (p.19).  And in a 2002 worldwide survey, CEOs rated customer loyalty and retention their biggest and most important challenge – “more important than improving stock performance, reducing costs, or developing leaders within their organizations” (p.16).  Despite all the hype and multi-million dollar investments, Keiningham et al. argue that loyalty initiatives and CRM have hurt, not helped, company profits.  They support these statements with survey results from various sources.

Although their arguments are not always completely convincing, they do present some very valid and illuminating points.  They suggest that consumers are getting bored and immune to reward programs, given the prevalence of loyalty schemes in the marketplace and the fact so many of them look so much the same.  As they put it, “the proliferation of loyalty programs tends to homogenize otherwise indistinguishable operations even more by minimizing opportunities for meaningful differentiation.”  Keiningham et al. go on to say that “if programs are perceived as ever-present and effectively identical, their ability to generate a positive ROI is virtually zero,” which is indeed a valid point (p.23).

The book is full of various facts and research figures from a range of sources supporting the authors’ doom and gloom theories about loyalty and reward programs.  For example, in a 20-year study of purchase data in the U.S., U.K., Europe and Japan, researchers Goodhardt and Ehrenberg (1977) discovered that for highly purchased goods only about 10% of consumers were 100% brand loyal.  Studies showed consumer purchases of services had similar ratios.  “Worse still, monogamously loyal customers typically were light buyers of the products or services. …  As such, they account for very little revenue” (Keiningham et al., 2005, p.87).  The point is made:  loyal customers are not necessarily the best ones.  Assuming these figures are accurate, they indeed paint a pessimistic picture.

Keiningham et al. agree with O’Brien and Jones’ (1995) outline of the characteristics required for a loyalty program to be successful.  These include the importance of perceived value, convenience, choice, relevance, and aspirational value, along with the critical role of effective communication and a product’s own merits.  They argue, however, that “most programs fail to deliver on most or all of the above.  [And] even those programs that aspire to these standards would be hard-pressed to keep from being rapidly copied” (p.126).

The following is a list of other points raised by the authors:

  • Usually, about 20% of a business’s customers generate between 150 and 300% of all profits, 60 to 70% of the customers are “break-even” and 10 to 20% of the customers lose 50 to 200% of total profits.  Consequently, a firm should not only want to retain their best customers and turn their break-even consumers into best customers, but they should just as importantly want to get rid of their worst customers; “striving to retain them all is suicidal” (p.43).
  • There are two types of consumers prone to brand switching that will virtually never change their shopping habits and become “loyal customers.”  Variety seekers show low levels of loyalty because they are curious and appreciate variety and new experiences.  Deal seekers are those who switch because of price.  Firms should not waste valuable resources trying to upgrade these types of customers to “best customers.”  The authors argue that these groups simply will not change (p.47).
  • To realize the full potential benefits of a CRM program, customer information from all sources within an organization must be fully integrated.  In the world today, there are very few “well-publicized examples of companies with well-equipped databases” (p.75).
  • Consumers have come to expect deals from merchants, in part due to the prevalence of loyalty programs and their promotions, coupons and sign-up deals.  This leads to huge demand for products during promotions and weak sales during non-promotion periods.  The authors quote a retail executive saying “‘we have trained our loyal customers to [delay shopping, to] wait for our coupon in the mail. …  We have to learn to wean them off of the drug’” (p.118).  As Keiningham et al. suggest, consumers can indeed be bought.  In many cases, in fact, “firms are merely buying the repeat purchases of customers rather than developing true loyalty” (p.119).
  • A rather skeptical way that loyalty programs can enhance customer retention, at least in the short term, the authors admit, is when customers are affected by what they call “the sunk-cost fallacy,” where they continue patronizing a business or loyalty program “by thinking of how much they have already accumulated. …  Hence, they become locked into the program and continued interaction, despite the fact that they may not feel truly (attitudinally) loyal” (p.119/120).
  • “Most loyalty programs are really bribes to increase customers’ frequency of interaction,” which is not always a good thing.  Reward programs are designed to reward frequent behavior and loyal customers are often offered membership exclusive sales on a regular basis.  However, if the result is that “customers spend about the same total amount but increase their frequency of contact, transaction costs are increased while revenues remain constant” (p.120).
  • Loyalty programs can affect consumer behavior in the short term.  Coupons, discounts and special promotions can encourage consumers to buy more and more often.  A sale on a particular product may encourage a customer to buy more than they need, and stock up with the excess.  “Ultimately, [however] customers will settle back into a state of purchasing what they actually need,” resulting in the long term in consumers buying what they would have purchased eventually anyway, but at a discount which is expensive for the retailer (p.120).
  • There has been research done to determine if customers with certain background characteristics are more prone to loyalty than other customers.  Some demographic findings suggest “minority group consumers have been shown to be more brand loyal” (p.190).

Despite all their cynicism, with many of their suggestions echoing the recommendations of O’Brien and Jones’ (1995), Keiningham et al. provide their own advice for organizations hoping to make loyalty programs into core elements of their competitive advantage.  Of primary importance, they suggest, businesses must ensure that one’s most desirable patrons view the benefits of the program as meaningful, valuable and consistent with the core brand services or products provided.  “Rewards should never disparage or denigrate the value of the core offering.”  Offering buy-ten-get-one-free kinds of rewards “can backfire,” they warn, “causing customers to question the value of the product at its everyday price” (p.127).

Keiningham et al. conclude their book with what they call their “Seven Truths of Customer Loyalty.”  They are:

  1. Focus first on customer selection before concentrating on customer retention.
  2. It takes a lot of time to foster loyalty; “planning and patience are required.”
  3. Concentrate on increasing customer share-of-wallet.
  4. Loyalty benefits must be a two-way street.  Not only must the business gain, but so too equally must the consumer.
  5. The path from loyalty to profits is complicated.  It is not automatic.
  6. Loyal, happy employees can be very important, but happy, satisfied customers can and do exist without them.
  7. Brand image and customer loyalty must be managed together as part of the same strategy (p.201).

The authors say in their book that “virtually everything we have been told [elsewhere in loyalty literature] about the relationship between customer loyalty and financial outcomes is bunk.”  However, they concede “that is not to suggest that fostering customer loyalty cannot be a profitable strategy; indeed, loyalty can be a highly profitable means of differentiating a firm from its competitors” (p.150).  “In fact,” they say towards the end of the book, “when it is based on sound foundations, we believe that building customer loyalty can be a very profitable business strategy” (p.200).  The trick is that the route to effective loyalty must be effectively researched and properly designed.  At the core of their argument, they state that the decision to adopt a loyalty strategy should be made based primarily on return on investment.  If it does not improve the bottom line, they say, do not do it.

Click here for more (and to go to the Loyalty Myths website).  It is a very good book (and again, no, we are not paid to say this).

(Review Source: Customer Loyalty Programs: What Makes an Effective (Community-based) Program, MBA Thesis, 2007).

 

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