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Thinking Through Customer Loyalty

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In these challenging economic times, many small and independent retailers find themselves focusing their attention on their most loyal customers, the regulars that make up the core of their business. It seems like common sense. Still, over the past few years, customer loyalty has become a retail buzzword that's taken on a life of its own. What is customer loyalty, and how does a small or independent retailer develop loyal customers?

Building customer loyalty, as a strategic retail objective, is founded on the theory that loyal customers represent the best opportunity to increase sales. It's long been accepted knowledge that it's easier and less expensive to sell more to existing customers than it is to attract new customers. The concept is to focus on retaining those customers that shop in the store on a regular basis, those customers that form the underpinnings of the business, and then expand on that base by converting occasional shoppers into additional loyal customers. The idea is to build market share by creating greater customer loyalty in an over-stored and on-line retail environment, where consumers seemingly have an infinite number of choices.

So what exactly is customer loyalty? Is it whoever chooses to opt in to a customer loyalty program? Is customer loyalty akin to customer satisfaction and should it be measured subjectively through customer feedback and questionnaires? Or is it something more tangible that can be measured empirically, such as the percentage of customers who shop and make a purchase at least once a month?

I'd suggest that it's the preference that a customer has for one store over another for a given item or basket of items. For example, I prefer Home Depot for building materials, hardware, and tools, but Lowe's for appliances, carpeting and home decor. If I need a dress shirt, my store of preference is the local Geoffrey Beene outlet. And in the springtime, I buy my plants from a local family-owned nursery. My preferences are obviously highly subjective, and not always driven by price considerations. These are the stores that just feel right to me.

But here's the rub. The fact that I will first go to Home Depot for lumber doesn't mean that I'll buy more lumber, it merely means that when I need lumber and nails I'll be in Home Depot, and that gives them the opportunity to sell me something I perhaps hadn't planned on buying. When I go to Geoffrey Beene for a new shirt I may pick up a tie, or a pair of pants, or a knit shirt, though I may not. But at least I'm in their store.

Loyal customers are important because they form the core of your business and the base of your traffic count, but the mere fact that they are loyal doesn't automatically mean they will buy more and drive your sales increases. Customer loyalty will bring your regular customers into your store, but it's what happens when they are in your store that determines whether they'll buy more. It's their experience once they are in the store that truly counts.

Having said this, it's necessary to make the distinction between customer loyalty, as a strategic objective, and customer loyalty programs. There is nothing new about focusing attention on loyal customers, but customer loyalty programs are relatively new on the scene.

Customer loyalty initiatives have generally taken the form of opt-in programs, where customers are offered incentives to join, and retailers are able to collect names, addresses, phone numbers and email addresses (and, occasionally, additional demographic information). These incentives-for-data programs allow retailers to target specific promotional messages, usually built around pricing incentives designed to drive traffic, as well as track the purchasing patterns of those customers in the program.

These programs use the banner of customer loyalty to inexpensively market to self-identified customers, and at their core, are marketing programs rather than customer loyalty programs. What's unclear from these programs is whether those opting in, and choosing to share their personal information, are truly loyal customers, or become more loyal once they've opted in. From a marketing perspective, these programs serve the same purpose that department store credit cards once served, to build a database of known customers, and track their purchases.

Being able to target specific promotional messages is not the same as building customer loyalty in your store, one exceptional experience after another. Customer loyalty programs may help you drive more business into your store, but do not necessarily create new or more loyal customers. It's only what happens in your store that can do that.

Customer loyalty is built one customer at a time, through the quality of their experience once they are in your store. When that experience exceeds their expectations, they'll be back, and they'll tell their friends. It's what happens in your store that counts. That's true not just for loyal customers, but for all customers. It's how customers become loyal in the first place.

Last updated: Sep 9, 2008




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