Discussing Customer Loyalty and the Factors Affecting it

Customer loyalty is non-negotiable for business growth. But customer retention seldom tops the list of priorities for businesses. We explore this gap and ways to bridge it.
March 14, 2024

Customer loyalty is not a commodity. It is an abstract property, tying together buyers,sellers and everything else in between. Often associated with churn, customer satisfaction, and customer service, loyalty is a major factor driving business growth. But what drives loyalty?

Customer Trust is Waning & Loyalty is Scarce

A study on customer acquisition by Hubspot revealed that 81% of customers trust recommendations from family and friends instead of information from brands. The study inferred that the modern consumer is smarter, more demanding, and impatient. A 2022 study by Netomi revealed that 39% of customers have less patience now than in the pre-pandemic times. Such a shift in consumer behaviour is bound to impact how brands interact with customers and how to keep them loyal.

Customer loyalty is scarce because competition exists. Customers have ample choice to fulfil their needs.The audience is hardly captive and moving from one seller to another is easy. The customer today is empowered and rightly so, and it has changed strategies and tactics for brands and businesses to maximise customer satisfaction, service and retention.

Jill Griffin in her 1995 book ‘Customer Loyalty: How to Earn it, How to Keep It’ says customer satisfaction alone is not enough to build loyalty among customers. Perhaps because the metrics against which satisfaction was measured were not the most reliable predictor of repeat purchase. Repeat purchase is important to establish customer loyalty. It happens when a customer is attached to a brand. And that attachment is again affected by:

- Customers’ preference of a product/service to its competitors’ products/services

- Customers’ perception of a product differentiator against its competitors’ products/services

In a summary of Griffin’s book, Jim Altfeld says that when any product or service fulfils both the conditions, it may lead to multi-product loyalty.

The Retention-Acquisition Gap

There is a visible gap between the efforts made to acquire and the efforts to retain. An article by Marius Kiniulis in Markinblog reveals that 44% of companies are primarily acquisition-focused while only 16% of companies are retention-focused. “Even though most companies indicate that retention is better than acquisition, they are still doing the opposite,” says Kiniulis.  

The Pareto Principle (80-20 rule) has been quoted way too many times while talking about customer acquisition and retention gap. But that is only because real-life data validates the Pareto Principle. Let’s look at the following data:

1. 65% of a company’s revenue comes from the repeat business of existing customers

2. Businesses have 60-70% better chances of selling to an existing customer than a new customer

These figures establish customer retention as a viable system for business growth but we must dive deeper to understand the underlying factors of customer loyalty.

Loyalty, Value and Experience

In Jim Altfeld’s interpretation of Jill Griffin’s work, he says that without a strong track record of contact and repeat purchase, the person buying from a particular seller is not a customer but a buyer.

A loyal customer according to him is:

- Someone who makes repeat purchases

- Purchases across product and service lines

- Refers other to the product or service

- Remain unaffected by the pull of the competition

Perception of Value

Jill Griffin when stating the two elements affecting customers attachment for repeat purchases, uses the term ‘perception’. Its usage is interesting within the context as it clearly differentiates between how something is shown and how it is seen. This has been baffling academia for decades. Behaviour is a product of perception (Discussed in American psychologist W.T. Powers’ book ‘Behaviour: The Control of Perception)’. So, understanding customers’ perception of a product/service and how they react to it are important to understand customer behaviour holistically.  

Customer value, according to researchers at Universitas Negeri Padang, Indonesia, is the customer’s perception in selecting and evaluating product attributes and services. In Griffin’s words, it could refer to the element of perceived product differentiation.

Griffin, in her 1995 book, talks of the three types in which customer value can be delivered. They are:

Operational Excellence

This can be delivered by providing customers with reliable products at competitive prices The product should also be easily purchasable.

Customer Intimacy

What we today call personalisation, according to Griffin, customer intimacy enables segmentation and targeting of a market with precision. That leads to better customisation of offerings to meet niche demands.

Product Leadership

This is all about ensuring that the product and services provided to customers are leading edge, projecting the brand or business as torchbearers of the industry, instantly differentiating itself from the less advanced competitors.

An effective tool to deliver customer value is customer experience. If done right, it can impact customer’s perception of value, exceeding their expectations and gain loyalty at scale.

Customer Experience

The conversation around customer experience and its effect on customer loyalty is not new. But with businesses going digital, the onus of providing customers an experience they would love to come back for more is on the business. Anything lesser than that is unacceptable for the customers who are ready to move to the next better alternative and do it quite easily.

Poor customer service is one of the leading contributors to churn. According to Salesforce, 82% of customers have stopped doing business with a company because of their bad customer service. If consumers are dissatisfied, they will talk about it. While doing so, not only does the business lose existing customers but it will also impede acquisition of new ones.

Empathy in customer service is another game-changer. A study on the correlation between empathy and customer loyalty showed a positive relation between the two. Another study highlighted the indirect but evident relation between empathetic behaviour of a brand’s employee towards its customers and its effect on customers’ loyalty to the brand. This empathy factor must equally sustain across all customer touchpoints.

Appreciating Customer Loyalty

According to Motista, once an emotional relationship is established between customers with a brand, customers have a 306% higher lifetime value. Such customers also recommend the company at a rate of 71% compared to the average rate of 45%. A Harvard Business Review article says the most loyal customer is also the most profitable one for any business. They need to spend less on the customer while the customer spends more on premium services and brings in new customers through referrals. So, it is only natural for such loyal customers to expect a little more than just a reputation of being a loyal customer.

Well thought-out loyalty reward programs are designed to do exactly that. They create value for both the seller and the customer but also something more than that. They leverage the loyalty to upsell, cross-sell or promote products and services. Rewarding for loyalty comes with the unsaid motivation of inculcating desired customer behaviour. Good loyalty reward programs also have checks in place to prevent non-loyal customers from taking advantage of it.

For effective functioning of such programs, it is important to track its performance and optimise the approach, if necessary. According to HBR, while on the one hand, a well-designed program can target and attract valuable customer segments, on the other hand, it can discourage customers that don’t fit the profile.

Partnerships for Effective Programs    

One of the principal necessities for any reward program is its relevance to the customer. Imagine if a luxury car company offered 20% off on three Rapido rides. It would not have any real relevance to the customer buying a car. Now imagine an exclusive offer on a four-wheeler for customers who have banked with a major Indian bank for more than 10 years. This is an example of businesses partnering with other institutions to complement each other’s business goals while targeting the same pool of customers. Not only does such a reward make sense but also acts as a great motivation for customers to stick around and be rewarded for it.

Customer loyalty is non-negotiable for business growth. It might be scarce and gaining the trust of customers, winning their hearts with out-of-the-world experiences and providing uncompromising customer service might seem like a big ask. But it cannot be ignored. Especially at a point of time when heavy competition has forced businesses to constantly depend on providing freebies to customers, spoiling them for good.

Customer loyalty is not a commodity. But a loyal customer is the most valuable commodity in a business. It’s time to re-etch that on all business playbooks.