Loyalty Ain’t What It Used To Be

By Richard Adams

Business is really simple. It’s just a case of finding the best customers, keeping them, then growing and leveraging their loyalty.

This thought popped into my mind when I read about the changes recently introduced in the UK by the Financial Conduct Authority, which seeks to stop the practice of insurers offering new customers far lower prices than those renewing policies.

The dysfunctional nature of the UK consumer insurance market, where existing customer prices are ‘walked’ up very aggressively to subsidise heavily discounted new customer premiums, is all the stranger given that it comes from an industry that holds a relatively sophisticated understanding of the value of customer loyalty. Unlike some industries which have more infrequent transaction patterns, financial services are very much in the recurring revenue world and have developed models that can predict the profit that will accrue for the duration of a customer relationship. Sectors such as credit-card issuers have segmented markets according to customer loyalty – most notably MBNA in North America, where their strategy of targeting the most loyal customer groups such as teachers through affinity marketing campaigns has been hugely successful.

If you’re in the business of selling insurance, you really don’t want my household as a customer. Between my wife and I, we’ll not only remember when the renewal is in advance, we’ll also ruthlessly shop the market for price. You want customers like my mother, who values the continuity of a long-term relationship and is less price sensitive (but not to the point of paying double!). All customers are not equal. If you can win my mother as a customer for your insurance product, it’s worth more than winning me.

As more companies embark on transitioning to a subscription or ‘X-as-a-service’ business model, the importance of paying attention to the quality of customers, as much their quantity, is increasing. When sales change from a single transaction to a regular subscription, the risks of not reaching break-even point increases, as early exits by customers can come before acquisition costs have been covered. A seemingly healthy recurring revenue stream that is dominated by the wrong type of customers can quickly degrade and efforts to back-fill it with new customers can be counter-productive, often attracting more even lower quality customers and further diluting the customer mix.

What can you do to avoid this pitfall? Becoming more aware that some customers are better than others is one thing. Doing something proactive about it is another.

For me, the solution can be split into two parts. The first is to secure ‘good’ customers in the first place, or at least to strengthen their presence in your customer base. The second is to work to keep the ‘good’ customers for as long as possible whilst serving them as profitably as possible.

What makes a ‘good’ customer? In his book “The Loyalty Effect” Frederick F. Reichheld sets out three criteria:

• Their inherent loyalty. Some customers just prefer to have stable long-term relationships. This is what credit card issuer MBNA figured out when they targeted groups such as teachers.
• The profitability to serve. Customers vary in their price sensitivity or available funds. They also vary in how often they need support and how promptly they pay their bills.
• The value they see in what they are buying. The degree to which what you are selling fits with what the customer values will vary: not every product or service is right for every customer.

Selecting customers that score well in one, two or all the above criteria will strengthen your business. Profitably serving customers who are inherently disloyal, very price sensitive, poor payers, demand lots of support and who don’t see significant value in what they bought from you will be a hard road to follow!

Identifying how groups of customers you target or serve today fit against the loyalty-profitability-value criteria set out above is important. With this knowledge, you can devise appropriate marketing, sales and sales compensation strategies that focus on the customer groups that you want to attract.

You may be thinking that all is this fine, but right now you have the customers that you have and firing them is not a short-term option. What else can be done to improve the quality of today’s recurring revenue?

The answer is in the second part of the solution, which is to keep those good customers that you do have for as long as possible. It also lies in the value dimension of what makes a good customer, as this is somewhat in your gift.

You retain customers by providing them with value. And crucially this is value as they see it. You therefore need to find out exactly how your customers experience value from your product or service. Once you know this you can make informed choices about where you invest (and perhaps disinvest) to optimally maintain or increase this value.

The way to do this is beguilingly simple. You ask them.

To do this effectively requires more than doing a Net-Promoter-Score (NPS) survey or a Customer Satisfaction Survey. Such approaches may tell you how a customer is feeling about your company or offering at that moment, but it’s not diagnostic: in other words, it doesn’t give you any clues about what you might need to do to increase the value you provide.
Remember again, this is the value as they see it. To be effective, the questions also need to focus on what’s important to the customer. As sellers we are quick to assume that we know what our customers care about. Most of the time we are completely wrong and, at best, we have significant blind spots.

Like any feedback process, information of this type from customers can sometimes make for uncomfortable reading. However, the journey is tremendously rewarding, as it reveals crucial insight. When you know your customer’s expectations, their relative importance, and how well you’re meeting them, you have actionable information. Expectations analysis provides a list of improvements you need to make in order to increase the value of what you are offering to your customers, as they see it. Increase this value and you increase their value to you.

As more and more companies and industries shift towards recurring-revenue based business models, the visibility and understanding of the quality, as well as the size, of the subscription base comes more to the fore. A switch in mindset from looking at revenues and numbers of subscribing customers, to one that looks at the value of customers as assets could be helpful when navigating this shift. Selecting the right customers in the first place is one smart way to maximize the value of your customer assets. Keeping your product or service aligned with, or ahead of, customer expectations as they evolve is another very high-yield activity.

Regularly measuring your performance and targeting investments, and management attention, in areas that will deliver the most value to customers will, in turn, maximise their value to your business.

The Promising Outcomes methodology is designed specifically to determine customer expectations and the extent to which these are being met by a business. This highlights performance gaps and their relative importance, from the customer’s perspective. It identifies areas of weakness and the risk of customers switching supplier, where a failure to take remedial action will impact current and future revenue and profit. This illustrates clearly how customers perceive the value of the relationship.

If asked in a simple way, those same customers can tell you how your competitors perform as well. So, you get two performance gaps, yours and those of your competitors. Put the two together and you get a short and prioritised list of ways to improve, a list many leaders yearn for.