The mismanagement of customer loyalty can cost a company a lot in terms of revenue. Serving loyal customers is less costly: they pay more for goods and services than other customers, and help attract new customers to the business through word-of-mouth. This is why many companies spend millions of dollars in launching effective customer loyalty programs.
Mismanagement would only mean that a large number of loyal customers may not generate enough revenue and profits to sustain the business. The most profitable customers can generate a lot of revenue that result in high profit margins. Ideally, more loyalty equals more profitability, but not all loyal customers can be profitable. On the other hand, not all profitable clients are loyal. Therefore, managing your customers for loyalty may not automatically mean structuring them for profitability. So, to strengthen this loyalty-profitability connection, a company must manage both elements – simultaneously.
The Misunderstanding of Customer Loyalty
For a majority of businesses, a loyalty customer is the best and most profitable customer they can find. This is because a loyal customer is regarded as a profitable customer because he or she purchases the same brand, and helps spread his or her knowledge/ opinion about the business. Regardless, a loyal customer may not always be as profitable for a business as many might think. This is because some of these hypotheses and claims can be refuted, and the techniques that businesses and companies use to define loyalty are not always accurate.
Lastly, a loyal customer is one who possesses an exclusive loyalty, meaning that he or she only buys a certain brand and not any other for a particular kind of product. This perception is mostly wrong, as most consumers have a shared loyalty. In fact, it is very rare to find a consumer who has an exclusive loyalty. But a shared loyalty does not equal disloyalty: a consumer can be very loyal to multiple brands and still be loyal to yours at the same time.
Why Some Hypotheses or Theories Can be Refuted
To begin with, let’s consider the fact that a loyal customer cost less, but let’s not forget that a loyal customer expects some reward from the company, because of the mere fact that he or she is very faithful. In addition, since some businesses consider some “regular customers” as “loyal”, these businesses waste a lot of money treating them this way. For this reason alone, a loyal consumer can be more expensive than a regular one if the company fails to clearly define who their loyal customers are and how to deal with them.
Companies consider that a loyal customer is willing to pay more than other customers. In theory, this is true: loyal customers love a brand, and would not refuse to pay more to keep using his or her favorite brand. But as loyal and faithful, this customer also considers that he or she should receive some advantage or benefit from his or her position, often expecting some special discount, unlike ordinary customers. Therefore, you cannot expect a loyal customer to pay more than an ordinary customer.
Next, we consider the theory that a loyal customer, through word-of-mouth, would help market the company. Again, this is untrue: a majority of people would not talk about what they like, unless asked. But if customers are extremely disappointed by or dissatisfied with your product or service, they would immediately share their opinion. On the other hand, the chances that they would share their opinion of they like your product are low. Therefore, while loyal customers are in the best position to market your company through word-of-mouth because they have a lot of information, they never use it as much as they should.
Dealing With a Customer
Dealing with a customer requires that you determine how to treat that customer as early as possible. So you must establish which kind of customer he or she is. The earlier you do this the better. A loyal and profitable customer is an asset. While loyalty can be used in word of mouth, investing in a loyal but unprofitable customer is a waste of time and company’s resources.
But again, this method not also 100 percent accurate: the only foolproof way to determine if a customer if loyal is through conducting a behavior survey on each customer. A truly loyal customer is one who comes regularly, purchases a lot, likes the brand, and exhibits a good behavior with the brand. But if he or she buys by necessity, convenience, obligation, but somehow dislikes the brand, then he or she is not a truly loyal customer. The fake loyal customers waste the money invested on them, and therefore companies should check each customer behavior. Questioning each customer about his or her behavior would be expensive and unrealistic.
Therefore, this approach is impossible and would not be accurate, as some customers would not say the truth and most of the, would not be willing to respond to personal questions.
A customer who enjoyed his or her last purchase would wish to buy again and would be in a position to advise his or her friend positively. A happy customer with a great relation indicator and great product feeling would be useful for word-of-mouth. On the other hand, a consumer who would only like the company, but not its products, is a “conciliator customer”, as he or she dislikes the product, but his or her love for the company causes him or her to have a positive global opinion. This person would not make a good vector for word-of-mouth.
Defining exactly who a loyal customer is would be primary in CRM. On the other hand, to consider an “ordinary” consumer as a “loyal” one would be a wrong calculation that might result in failure. Retaining customers through loyalty programs is costly, and these resources must be invested only on profitable and right customers. A good product and after-sale service, as well as polite and courteous staff, prompt response, and quality advice would help retain customers. The mismanagement of customer loyalty can cause a company to lose business to competitors.