We all agree that customer loyalty is good, right?
On paper it seems pretty obvious: more loyal customers, better results.
But is it really so?
To what extent does having more loyal customers make us more money? Does customer loyalty give us better results?
Harvard Business School and the business consultancy Flowtown asked the same question.
The former concluded that increasing customer loyalty by 5% resulted in a profit increase of between 25% and 95%.
For its part, the consultant discovered that getting a new client is 6 to 7 times more expensive than keeping one you already have.
And both pay the same, of course 😀
With this data in hand, it seems clear that devising a strategy to build customer loyalty is a good idea.
But what is customer loyalty?
It may seem a simple question to answer: a customer who buys from us many times.
But how many are many? And are two customers who buy a lot equally loyal? A customer who buys little but only buys from us and never from the competition is loyal?
To answer all these questions, a framework known as RFM was developed.
What is RFM and what does it have to do with customer loyalty?
RFM stands for Recency, Frequency, Money Value.
It is a very simple model that weighs up for any customer when they last bought, how often they buy and when we enter with their purchases.
On the basis of these three factors, a note is extracted that scores the loyalty of a customer.
It is a quite useful model to segment your customers, but it has a major drawback:
It does not take into account your customer’s consumption habits.
Imagine you have 2 customers. Sarah and John. They both buy the same thing from you for the first time in January.
Sarah buys again every 4 months: May and September.
For his part, John buys every month without fail, until October, when he stops buying.
When January arrives, according to the RFM model, John would be a more loyal customer than Sarah. He buys more frequently and has done so more recently.
Nevertheless, to little that you think it, the most probable thing is that John has gone away to the competition and for that reason he has stopped to buy whereas Sarah, will return to buy, as it does without lack every 4 months.
What alternatives are there to that model?
The main detractors of the RFM model start from another premise:
Not all loyal customers are profitable. And not always the most profitable customers are loyal.
The main reason is that often loyal customers, aware of their importance, ask for discounts and other benefits that reduce their profitability.
On the other hand, there are customers with very high volumes who do not marry any supplier but place very large and profitable orders.
With this in mind, at Harvard Business School they made an analysis that gives rise to this matrix.
The purpose of the matrix is not only to analyse the loyalty of a particular client, but also its profitability in order to give a specific treatment to each client:
These are customers who are not very profitable or loyal. It is best not to focus on this segment.
These are customers who are not very profitable but are very loyal. The recommendation of the authors is to find out if they are not very profitable because they do not have more budget or because they do not want to spend more budget.
If it is the latter case, it is worth trying to make them more profitable.
These are the customers who are very profitable but not at all loyal. According to the authors, the possibility of making these customers loyal is around 10%, so it would not be worth trying too hard and it would be better to try to get the most out of them in the transactions they want to make with us.
Very profitable and very loyal customers. These must be looked after with all the love in the world.
Which of the two models is the best for segmenting your loyal customers and working on customer loyalty?
Well, the truth is that it depends on your type of business and your type of customers.
If you sell cars and have a lot of customers, you will probably be more interested in applying the matrix model.
If you sell very expensive services to few customers your loyalty systems will be very particular, and it is very likely that it will be more worthwhile to apply the RFM model and add a small manual weighting layer to fine-tune the system.
In any case, whatever model you choose, it only leads to the segmentation of your customers.
Now it’s time to make them loyal.
Customer loyalty strategies
Broadly speaking, there are only 3 customer loyalty strategies:
- Offer a product or service that is well above average.
- To offer a treatment and a personalization far above the average.
- Classic loyalty programmes based on gifts, points and promotions.
Offering a product or service that is well above average.
A clear example of this model is Apple.
The way they got loyal customers to the extreme was to create a product far above all their competitors.
The rest happened on its own.
Offering a treatment and personalization far above the average.
A clear example of this model is Nespresso.
When you go to one of their shops, the treatment and personalization is light years away from the treatment you expect in any other shop. They even invite you to a coffee!
The classic loyalty programmes based on gifts, points and promotions.
Continuing with coffee, a clear example of this model is Nescafé.
Their customer loyalty programme is a classic:
The Nescafé salary. I can’t count on my fingers the number of people who collect Nescafé labels to see if it’s their turn.
Obviously, all 3 strategies have advantages and disadvantages.
If you want to discover them all, you can read this article:
Who should be in charge of customer loyalty in the company?
When we talk about loyalty, it is not always 100% clear who the job depends on.
Is it a marketing thing?
From time to time it seems feasible to segment customers and communicate with them.
Should support be commissioned?
They are responsible for happy customers, so they are also good candidates.
Should they take care of this in sales?
The ultimate reason for loyalty is to sell more, so it seems that in sales they could also take care of this.
As you can see, it is not an easy answer to give, but if you want to know our opinion in detail, you can do it in this post:
Can I work on customer loyalty without a CRM?
Short answer: You can’t.
Long answer: Seriously, it’s impossible.
Don’t get me wrong. If you have a few dozen customers, you could manage with paper and pencil or an excel (although I don’t recommend it).
But if you have more than 30 or 40 customers, implementing loyalty systems without a CRM is impossible.
And Efficy CRM is the best way to do it.
Do you want to try?
Try Efficy CRM
The most complete CRM