Sa le s a nd
Excellence
Volume 5 Number 9
Loyalty Myths
M a k e
by Timothy L.
Keiningham and
Terry G. Vavra
T HE KEY TO MARKETING AND SALES
revolves around two issues: win-
ning customers and keeping them. No
firm can survive without customers.
However, the customer defection
plague has alerted both sales and mar-
keting to the important activity of
building strong relationships with new
customers to keep them coming back.
CEOs cite customer loyalty high
among their strategic objectives. As a
result millions are spent on loyalty pro-
grams and customer relationship man-
agement (CRM) systems. Since CEOs
and managers have adopted the loyal-
ty doctrine, you would think that
brand loyalty would be sky high; and
yet brand loyalty is at an all time low!
Thirty years ago, Kraft classified 40
percent of its customers as loyal. Today,
only about 15 percent are seen as loyal.
Despite all the time and money spent
to enhance customer loyalty, loyal cus-
tomers are more difficult to find.
What’s the Problem?
Customer loyalty is a very seduc-
MICHAEL WEISSMAN
Seven Invisible Forces . . . . . . . . . . . . . . . . .3
LYNN J. TOMJACK
Success Checks . . . . . . . . . . . . . . . . . . . . . .4
HARVEY MACKAY
Memories . . . . . . . . . . . . . . . . . . . . . . . . .4
ANN CONWAY
The Right Pitch . . . . . . . . . . . . . . . . . . . . .5
CARMINE GALLO
Five Secrets . . . . . . . . . . . . . . . . . . . . . . . .6
AL RIES AND LAURA RIES
The PR Era . . . . . . . . . . . . . . . . . . . . . . . .6
JEFFREY GITOMER
Why Salespeople Quit . . . . . . . . . . . . . . . .7
Ser vice
c u s t o m e r l o y a l t y
tive business strategy. It fits perfectly
with our sense of justice and fair play.
We want to believe that good behavior
leads to good outcomes—that it is good
business to treat customers favorably.
The problem is many of the proposi-
tions driving the creation and manage-
ment of loyalty strategies are incorrect.
In fact, most are patently false, making
their prescriptions both unrealistic and
financially dangerous.
The difficult truth is this: How cus-
tomer loyalty links to growth and prof-
itability is more complex than we
commonly think. A pursuit of the plati-
tudes of customer loyalty will at best be
a case of misallocated resources; and at
I NS I D E
PHILIP KOTLER
Differentiation . . . . . . . . . . . . . . . . . . . . . .8
JOHN BOYENS
Productive Selling . . . . . . . . . . . . . . . . . . . .8
ALEX WIPPERFÜRTH
Chasing Cool . . . . . . . . . . . . . . . . . . . . . . .9
MICHAEL DIFRISCO
Accountable Marketing . . . . . . . . . . . . . . .10
KELLY GAY
Timely Leads . . . . . . . . . . . . . . . . . . . . . .10
SCOTT ALLIY
Best Practices . . . . . . . . . . . . . . . . . . . . . .11
REGIS MCKENNA
Time to Acceptance . . . . . . . . . . . . . . . . . .12
September 2005
p a y .
worst a recipe for financial disaster.
Having witnessed disappointing
results from loyalty programs, we set
off to better understand how loyalty
works. We studied our own engage-
ments and reviewed the best thinking
and practices. We accumulated 53
common statements and beliefs about
customer loyalty and subjected each to
the tests of logic and business reality.
Under careful scrutiny, each of these 53
statements proved false. They are
myths; oversimplifications and gener-
alizations that rarely, if ever, hold true.
For example, take the claim that
retaining a customer is more cost effi-
cient than winning a new customer
and that acquiring a new customer can
be 12 times more costly (a core precept
of the loyalty movement). This myth is
so pervasive that it has stood unchal-
lenged for 20 years! However, there is
enough contrary information to bury
or disqualify this truism. Three major
factors contradict its claim:
1. How profits are distributed among
a company’s customers. For this myth
to be true, an acquired customer could
be expected to purchase no more of a
firm’s products than the customer to
be retained. But what if a high-value
customer is to be acquired at the risk
of losing a small-budget customer?
VIN D’AMICO
Brainless Activities . . . . . . . . . . . . . . . . . .12
JEFF THULL
Value Creation . . . . . . . . . . . . . . . . . . . . .13
ROWAN GIBSON
CRM . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
RAY DIZAZZO
Energize Your Team . . . . . . . . . . . . . . . . . .14
RANDY SCHWANTZ
The Wedge Sales Call . . . . . . . . . . . . . . . .15
MICHAEL W. MCLAUGHLIN
Five Myths of Marketing . . . . . . . . . . . . . .16
BRANT CRUZ
Outside the Box . . . . . . . . . . . . . . . . . . . .16
This myth naively views all customers to be
about equal in their value to a company—
making them equally worthwhile to retain.
In reality, all customer bases are composed
of a mix of customers who vary in the costs
to retain them and their contribution to
profits. We can recognize three types of cus-
tomers in terms of their profitability:
1. Desired customers: those who generate
substantial profits;
2. Break-even customers: those who con-
tribute a minimally acceptable rate of return
(but can help businesses achieve a “critical
mass”); and
3. Costly customers: those who require such
extensive servicing that they cost substan-
tially more than they contribute to operat-
ing profits.
For most firms, desired customers are in
the minority, while break-even and costly
customers account for 80 percent of the cus-
tomer base. Contrary to the myth, losing a
costly customer can be a benefit, and spend-
ing extensively to win a desired customer
can be rewarding. As a result, while it may
be reasonable to accept that acquisition
costs are higher than retention costs, the
result depends on the profitability of the
customer acquired or retained.
2. The misrepresentation of costs of acqui-
sition and rewards of retention. This loyalty
myth assumes that long-term customers
cost less to service and that bringing on new
customers requires considerable outlays of
time and resources. With regard to existing
customers, we assume that they will: 1)
increase their spending at an increasing
rate, 2) purchase at full-margin rather than
demand price-breaks, and 3) create operat-
ing efficiencies for firms through mutual
knowledge of needs and procedures. None
of these three conditions are true.
New customers are presumed to burden
operating costs. But, new customers have to
be educated as to the procedures of the
firm, and the firm needs to collect intelli-
gence concerning the needs and purchasing
habits of its new customers. Here too, we
find that there is either no difference in the
costs to service new versus long-term cus-
tomers, or that paradoxically long-term cus-
tomers on average cost more to serve.
3. The costs and role of advertising. The ‘x-
factor’ that makes this myth seem plausible
is the acknowledged costs associated with
advertising and promotion, especially since
outreach to the mass market represents
enormous expenses that would exceed the
costs of retention programs aimed only at
existing customers. There is one fatal flaw
with this assumption, however: advertising
and promotion are not simply about attract-
ing first-time purchasers. These activities
reinforce brand imagery and maintain
awareness among current customers as
well. So, the allocation of advertising and
2 SAL E S
promotion expenditures between acquisition
and retention is likely incorrectly weighted Volume 5 Issue 9
to the acquisition side of the equation to
arrive at this fallacy. Sales and Service Excellence is published
Making Loyalty Pay
Loyalty can positively impact a compa-
ny’s financial performance, but the chain of
effects from loyalty to profitability is com-
plex. We need to start with an understand-
ing of customers’ profitability. What we
typically find is that the 20 percent most
profitable customers generate between 150
and 300 percent of total profits, the middle
60 percent generate relatively few profits,
and the bottom 20 percent actually lose
money for the company.
This information alone has profound
implications for which customers loyalty
strategies should be implemented and how.
To create and launch a successful loyalty ini-
tiative, consider the following process:
Step 1. Score your customers on profitabili-
ty. Build a metric to evaluate each cus-
tomer’s contribution to your bottom line.
There is no defense for creating a loyalty
program without first identifying to whom
the program should be offered.
Step 2. Assess your total customer base.
What proportion of your customers are
desired customers, break-even customers,
and costly customers? The proportions will
allow you to target a specific group for your
loyalty efforts. For example, a company with
a low percentage of desired customers
should focus on activities that will elevate
some proportion of break-even customers to
desired customers. A company with a high
percentage of costly customers must create
ways to reduce its costs of servicing these
customers or escort them to competitors.
Step 3. Target one or more of your customer
groups with specific retention or development
goals. The more focused and selective your
program is, the better.
Step 4. Utilize loyalty growth tools for
strategic growth. Loyalty goals need to be
achieved through relevant leveraging of the
cache of the brand, the value equation,
unique relationship opportunities or product
or service modification. The growth strate-
gies are: brand equity; value equity; relation-
ship equity; and satisfaction.
The pursuit of customer loyalty can be a
highly profitable strategy, but not if you em-
ploy the conventional wisdom as propagat-
ed in the many myths. If loyalty doesn’t pay,
then firms will have to pursue another strat-
egy or they won’t remain competitive. SSE
Timothy L. Keiningham and Terry G. Vavra are authors (with
Lerzan Aksoy and Henri Wallard) of Loyalty Myths (Wiley).
Keiningham is senior VP and head of consulting, and Vavra is
chairman emeritus at Ipsos Loyalty. www.ipsos-na.com
ACTION: Use these steps to make your customer loyalty
pay big dividends.
A N D
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