What Is True Customer Loyalty?

I believe we would all generally agree that the purpose of focusing on customer experience is to create lifetime, loyal customers. As many companies struggle to maintain growth in an increasingly commoditized world, they must compete on customer experience to maintain margins and avoid a “race to the bottom” with price.

And we have all seen various statistics about how much more it costs to acquire a customer than to retain one. Research by Harvard Business Review found that it costs between 5 and 25 times more to acquire a new customer than to retain an existing one. McKinsey found that replacing the value of one customer may require having to acquire three new customers.

But do we really have a good way of measuring, let alone understanding, loyalty? If a company has direct line of sight to end customer purchases—no channel partners or retailers as intermediaries as is the case for many large CPG companies—then its CRM and finance systems should be able to measure the tenure and buying history of a customer. More sophisticated companies can measure actual or imputed profitability based on whether a customer generally buys at full price or only when discounts are available and can make a strong estimate of lifetime value. And using solid segmentation analytics, these companies should be able to identify both their most profitable customers as well as their most loyal customers.

But do they really? The data being measured is behavioral, reflecting actual purchases made. And, of course, our accounting and finance systems operate just fine with that definition of loyalty. Our C-level executives and shareholders are happy when we can report on that data, as they should be.

Behavioral Loyalty vs. Habit/Inertia

Is behavioral loyalty really loyalty or does it include some level of habit or even inertia? For example, how many of us really think about our purchases in low-involvement categories like toothpaste or laundry detergent? I would venture a guess that many people, especially younger adults, just buy what their parents bought when they were growing up. Or because that’s when income tends to be lowest in the span of your life or career, they buy something cheaper and stick with it longer term out of habit because it “does its job.”

That is why marketers spend billions of dollars on branding and advertising to make that buying decision automatic. And operations and the customer experience have to reinforce making that buying decision as easy and frictionless as possible. For brands competing on low price or ease of use, the goal is to create that habit to prevent people from switching brands.

But what happens when another brand offers comparable quality or experience at a lower price? Or what happens when a global pandemic destroys supply chains, making product availability go from a certainty to a random event? I haven’t seen good post-pandemic data on brand switching, but 6 months after Covid hit, McKinsey data showed that 33–36% of consumers had tried new brands and nearly 75% of them intended to stay with the new brand. Loyalty just went out the window because it was really based more on habit (and product availability) rather than true loyalty.

Remember from science class the inertia principle is defined as a body in motion stays in motion unless acted upon by an outside force. That same principle applies to many purchasing situations where once people make a decision, they never, or rarely, revisit it. How many people actually shop their cell phone or insurance providers on an annual basis? According to PolicyGenius, 1/3 have never re-shopped for home or auto insurance. That’s a good example of inertia.

Here is an even better one: As of May 2021 when Verizon sold some Verizon Media assets, including AOL, to Apollo Global Management, AOL still had roughly 1.5 million people paying for monthly subscriptions for an internet service that didn’t even exist anymore. That’s $180M annually of revenue from pure inertia!

Of course, the brand and product managers, the CFO, CEO, and stock analysts love that passive revenue. And they should! But is that really loyalty when I would theorize that AOL brand managers and marketers don’t dare contact those people to drive upsell revenue for fear of making them realize what they have been paying for for so long.

Attitudinal Loyalty

What I am saying is that there is more to loyalty than our CRM and accounting systems measure. There is an attitudinal component to loyalty as well.

True loyalty requires an emotional connection. Think about the people or things to whom you are loyal: family, long-time friends, your pet(s), a sports team, or your university. You are loyal to them because you have an emotional attachment, or you have positive memories and associations that you will always have. Some people build such an emotional attachment to brands that they’re willing to get a tattoo to “permanently” declare their love for the brand. Not surprisingly, Disney is believed to be the brand that is most tattooed on people.

The challenge is how do you identify your most loyal customers in your CRM system. Obviously, surveys can help if you are using NPS or something similar to identify your Promoters. But most companies only get responses from 10 to 20% of their customer base, so how do you identify your promoters or attitudinal loyalists across the rest of the customer base?

Many brands, especially membership or subscription-based brands, ask for referrals. Referral marketing is a great way to identify true brand advocates, particularly if they are doing it genuinely because they believe in the product or service and not because they are getting some type of discount or reward for their referral. But many brands can’t or do a poor job of tracking these referrals and the lifetime value they create above and beyond the referrer’s purchases, especially as the original referral creates a daisy chain of referrals.

So as you think about what loyalty means for your company, and more importantly how to measure it, consider both behavioral and attitudinal loyalty and perhaps even conduct a SWOT analysis on the loyalty you believe you have. It should make you think about your segmentation differently and seek different actions to take with different segments to capitalize on both forms of loyalty. This focus on activating attitudinal loyalty can be a powerful lever for growth.

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