Loyalty Business Model

A loyalty business model is determined by three factors:

  • Relationship strength

  • Perceived alternatives

  • Critical episodes

A relationship can end when: a) the customer moves away from the company’s service area, b) the customer no longer has need of the company’s products or services, c) more suitable alternative providers become available, d) the relationship strength has weakened, e) the company handles a critical episode poorly, f) unexplainable change of price for the service provided.

The final link in the model is the effect of customer loyalty on profitability. The fundamental assumption of all the loyalty models is that keeping existing customers is less expensive than acquiring new ones. It is claimed by Reichheld and Sasser (1990) that a 5% improvement in customer retention can cause an increase in profitability between 25% and 85% (in terms of net present value) depending upon the industry. However, Carrol and Reichheld (1992) dispute these calculations, claiming that they result from faulty cross-sectional analysis.

According to Buchanan and Gilles (1990), the increased profitability associated with customer retention efforts occurs because:

  • The cost of acquisition occurs only at the beginning of a relationship: the longer the relationship, the lower the amortized cost.
  • Account maintenance costs decline as a percentage of total costs (or as a percentage of revenue).
  • Long term customers tend to be less inclined to switch and also tend to be less price sensitive. This can result in stable unit sales volume and increases in sales volume.
  • Long term customers may initiate free word of mouth promotions and referrals.
  • Long term customers are more likely to purchase ancillary products and high-margin supplemental products.
  • Long term customers tend to be satisfied with their relationship with the company and are less likely to switch to competitors, making market entry or competitors’ market share gains difficult.
  • Regular customers tend to be less expensive to service because they are familiar with the processes involved, require less “education,” and are consistent in their order placement.
  • Increased customer retention and loyalty makes the employees’ jobs easier and more satisfying. In turn, happy employees feed back into higher customer satisfaction in a virtuous circle.

For this final link to hold, the relationship must be profitable. Striving to maintain the loyalty of unprofitable customers is not a viable business model. That is why it is important for marketers to assess the profitability of each of its clients (or types of clients), and terminate those relationships that are not profitable. In order to do this, each customer’s “relationship costs” are compared to their “relationship revenue.” A useful calculation for this is the patronage concentration ratio. This calculation is hindered by the difficulty in allocating costs to individual relationships and the ambiguity regarding relationship cost drivers.

Expanded models

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Virtuous Circle

Schlesinger and Heskett (1991) added employee loyalty to the basic customer loyalty model. They developed the concepts of “cycle of success” and “cycle of failure”. In the cycle of success, an investment in your employees’ ability to provide superior service to customers can be seen as a virtuous circle. Effort spent in selecting and training employees and creating a corporate culture in which they are empowered can lead to increased employee satisfaction and employee competence. This will likely result in superior service delivery and customer satisfaction. This in turn will create customer loyalty, improved sales levels, and higher profit margins. Some of these profits can be reinvested in employee development thereby initiating another iteration of a virtuous cycle.

Fredrick Reichheld (1996) expanded the loyalty business model beyond customers and employees. He looked at the benefits of obtaining the loyalty of suppliers, employees, bankers, customers, distributors, shareholders, and the board of directors.

Data collection

Typically, loyalty data is being collected by multi-item measurement scales administered in questionnaires by software providers such as Confirmit, Medallia, and Satmetrix.[2] However, other approaches sometimes seem more viable if managers want to know the extent of loyalty for an entire data warehouse. This approach is described in Buckinx, Verstraeten & Van den Poel (2006).

All historical trends for different segmentations and their standard of living may also be very helpful in developing customer retention strategy. Lifestyle is also a very powerful tool, can be used for better customer retention and to know his/her needs in better way.

See also

Notes

  1. ^ Storbacka, K. Strandvik, T. and Gronroos, C. (1994) “Managing customer relationships for profit”, International Journal of Service Industry Management, vol 5, no 5, 1994, pp 21-28.
  2. ^ Lester, Aaron (2013-04-23). “Seeking treasure from social media tracking? Follow the customer”. SearchBusinessAnalytics. Retrieved 2013-10-01. 

References

  • Buchanan, R. and Gilles, C. (1990) “Value managed relationship: The key to customer retention and profitability”, European Management Journal, vol 8, no 4, 1990.
  • Buckinx W., Geert Verstraeten, and Dirk Van den Poel (2007), “Predicting customer loyalty using the internal transactional database,” Expert Systems with Applications, 32 (1).
  • Carrol, P. and Reichheld, F. (1992) “The fallacy of customer retention”, Journal of Retail Banking, vol 13, no 4, 1992.
  • Dawkins, P. and Reichheld, F. (1990) “Customer retention as a competitive weapon”, Directors and Boards, vol 14, no 4, 1990.
  • Fornell, C. and Wernerfet, B. (1987) “Defensive marketing strategy by customer complaint management : a theoretical analysis”, Journal of Marketing
  • Moloney, Chris X. (2006) “Winning Your Customer’s Loyalty: The Best Tools, Techniques and Practices” AMA Workshop Event(s). Misc. materials distributed related to event(s). San Diego, 2006.
  • Reichheld, F. (1996) The Loyalty Effect, Harvard Business School Press, Boston, 1996.
  • Reichheld, F. and Sasser, W. (1990)”Zero defection: quality comes to services”, http://hbr.org/1990/09/zero-defections-quality-comes-to-services/ar/1 Harvard Business Review, Sept-Oct, 1990, pp 105–111.
  • Schlesinger, L. and Heskett, J. (1991) “Breaking the cycle of failure in service”, Sloan Management Review, spring, 1991, pp. 17–28.
  • Stieb, James A. (2006) “Clearing Up the Egoist Difficulty with Loyalty”, Journal of Business Ethics, vol 63, no 1.

This article uses material from the Wikipedia article loyalty business model , which is released under the Creative Commons Attribution-Share-Alike License 3.0.