Mismanagement of the customer loyalty

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Mismanagement of The

Customer Loyalty
T
he best customers, we’re told, are loyal ones. They cost less to serve, they’re usually willing to pay more than other customers, and they often act as word-of-mouth marketers for your company. Win loyalty, therefore, and profits will follow as night follows day. Certainly that’s what CRM software vendors–and the armies of consultants who help install their systems – are claiming. And it seems that many business executives agree. Corporate expenditures on loyalty initiatives are booming: The top 16 retailers in Europe, for example, collectively spent more than $1 billion in 2000. Indeed, for the last ten years, the gospel of customer loyalty has been repeated so often and so loudly that it
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A perfect correlation (that is, 1) would mean that marketers could confidently predict exactly how much money there was to be made from retaining customers. The weaker the correlation (the closer it was to zero), the looser the association between profits and customer tenure. The results were hardly a ringing endorsement of the loyalty mantra. The association was weak to moderate in all four companies we studied, with correlation coefficients of 0.45 for the grocery retailer, 0.30 for the corporate service provider, 0.29 for the direct brokerage firm, july 2002

and just 0.20 for the mail-order company. But did the weakness of the overall correlation between profitability and longevity conceal any truth in the specific claims about the benefits of loyal customers? To find out, we tested the three claims usually advanced by loyalty advocates, the ones we started with at the beginning of this article: that loyal customers cost less to serve, that they are willing to pay more for a given bundle of goods, and that they act as effective marketers for a company’s products. We tested each of these hypotheses for all four companies by looking at several cohorts of customers at each who had begun doing business at the same time, tracking the profitability of each member of each group. In this way, we saw how these customers’ purchasing patterns and the level of service the companies accorded them evolved over time. Claim 1: It costs less to serve

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