"How do I create loyal customers?" a reader emailed recently. Good question: Customer loyalty is an issue every business owner cares about greatly.

So I turned to Larry Freed, CEO of Foresee, a global leader in customer experience analytics, for the answer. He graciously allowed me to share the tips below from his book Managing Forward: How to Move from Measuring the Past to Managing the Future, a great read if you're interested in better satisfying your customers.

"In business terms, I think of loyalty as a faithfulness or allegiance to a company or brand," Freed says. "In short, when I am loyal to a company, that company is my first choice."

But in broader terms, Freed says there are four basic forms of customer loyalty:

Purchased Loyalty

The best example of purchased loyalty is a customer rewards program. Other examples include memberships, coupons, and rebates.

Basically, purchased loyalty pays customers to be loyal, and there is nothing wrong with that practice. In many industries and market sectors the purchased loyalty strategy works extremely well.

The main problem with it is that purchased loyalty can be easily stolen because the customer is loyal to the program, not the company.

Say you have a frequent flier account with a particular airline. If the only reason you are a loyal customer of that airline is its points system, then when another airline offers a more advantageous system you will immediately switch.

Every business wants a sustainable competitive advantage and a purchased loyalty program can provide one--even though it can be very tough to sustain.

Purchased loyalty can also produce unintended consequences. Some programs condition customers to expect deals, discounts, and loyalty rewards, causing many to be loyal to the deal or discount and not to your business.

Convenience Loyalty

The local market, the corner dry cleaner, the coffee shop on your way to work. You might be loyal to those businesses simply because they're convenient. You're likely to remain loyal unless competitors come along who are equally or even more convenient.

Convenience loyalty can apply online as well, although less commonly. If you own the right real estate on a home page or portal you may create loyalty through convenience.

Still, convenience advantages online are generally fleeting.

That's why location matters... until it doesn't.

Restricted Loyalty

Restricted loyalty exists when there is no other game in town. Your cable company may enjoy restricted loyalty, especially if you live in a rural setting and there is no competition. (Although it is easy to argue that other options do exist, like online services.)

Utilities tend to enjoy restricted loyalty. Most cities do not have multiple electricity providers.

A corporate travel program with a company like American Express may be a form of restricted loyalty, especially if you feel no other programs are competitive. Arguably some Walmart locations enjoy a form of restricted loyalty with a dollop of convenience loyalty mixed in. If Walmart is the only game in your town you naturally are "loyal." When customers have no options, loyalty is their only choice.

Constraints often create loyalty. Restricted loyalty is great for a business--if you can get it and maintain it--but restricted loyalty is increasingly a thing of the past. Competition exists in almost every consumer situation, both within an industry or category and in the larger marketplace.

Companies compete, especially in down economies, for a larger share of wallet--across industries and across markets.

True Loyalty

True loyalty is earned loyalty. True loyalty is undying allegiance to a brand or product based on an incredible level of satisfaction.

Customer satisfaction breeds true loyalty. When you are highly satisfied, when your needs are completely met and your expectations are consistently met and even exceeded, you simply cannot imagine using another product or service.

True loyalty is the holy grail of customer satisfaction and is something every business should aspire to create.


Clearly the ultimate goal for almost every business is to create and foster true loyalty. When you measure the right things, listen to your customers, and make changes and improvements that will increase customer satisfaction, you can create truly loyal customers.

That's great: Loyal customers come back. You don't have to pay to acquire and keep them. Loyal customers are more profitable as well since new customers are much more expensive to acquire.

But in order to achieve true loyalty you must first measure loyalty the right way.

For example, measuring a potential behavior, such as likelihood to recommend, does not measure loyalty. Likelihood to recommend measures positive word of mouth. We worked with a fantasy sports provider and found that 27% of its users said they would not be likely to recommend... but only 3% said they were actually likely to share that kind of feedback with others.

The fact that, when asked, people said they were not likely to recommend the service did not automatically mean they would volunteer that information to someone else.

The key is to understand customer needs and expectations, measure your results, and make changes that positively impact the customer experience and meet the real needs of customers. Creating truly loyal customers by satisfying customers is a long-term, sustainable advantage.

So don't be lazy. Purchased loyalty has its place as long as you also practice fiscal responsibility. (After all, it's easy to satisfy your customers if you don't have to be fiscally responsible. Simply spend what you want!)

Convenience loyalty can be wonderful, especially if you choose the right locations or modes of delivery. And restricted loyalty is great if you can get it.

But those forms of loyalty are difficult to obtain and tend to yield fleeting advantages.

True loyalty, based on customer satisfaction, is the ultimate goal of any business and the only true long-term competitive advantage.

(ForeSee publishes a massive amount of research and white papers on customer satisfaction, Web analytics, social media, best practices. Check it out here.)