Pay a Little Less Attention to Retention - Brief Article

There is a miscalculation afoot in Corporate America that could prove profoundly costly in the long run: Too many branding efforts and strategies are tied to the goal of retaining current customers. Rather than making a critical and fundamental shift in how they think about their customers, too many companies are priding themselves on their extensive database and deep contact lists, not on the fact that they have kept a customer by the customer's own choice.

Many of those firms are confusing retention with loyalty. Yet the only thing that matters has nothing to do with retention, but instead with loyalty and deep customer relationships.

I may fly a certain airline because it is the only one that flies to the city that I need to get to or I may use electric utility because deregulation has not unfolded in my area yet. Does that make me loyal to that airline or utility or am I simply stuck with their brand because I don't have any choice?

The difference and potential benefits tied to loyal customers (versus retained customers) are astounding enough to make a pretty convincing case for a loyalty-only focus.

First, on average, it costs seven to 10 times more money to acquire a new customer than to keep a loyal customer. In some industries, a 5% increase in customer loyalty can yield up to a 100% increase in profitability.

Loyal customers, on average, are willing to pay a 20% premium for their brand of choice relative to the competition. Loyal customers are willing to try new product offerings under your "endorsed" brand, without a lot of convincing. Loyal customers are more willing to be forgiving if your brand makes a mistake (the difference between Tylenol and Perrier), and will put up with price increases if you continue to deliver high performance.

By contrast, retained customers give you a false sense of business security. It is estimated that one-third of Commonwealth Edison's electric utility customers will leave ComEd the day deregulation unfolds in its Midwest service region. Numerous airlines, which consistently rank poorly on customer satisfaction measures, would surely lose many retained customers the day other airlines start to offer routes that they currently control via their hub-and-spoke networks.

Droves are leaving their local cable provider to go to satellite TV since that became a feasible option three to five years ago. Ditto for long-distance telephony as new options have emerged there.

Cable television has done the same to "loyal" network television. The bottomline: retention should be thought of as nothing more than "you are as good as your last transaction."

Loyalty is what now drives up to 70% of all purchase decisions. Loyalty is where Jeff Bezos at Amazon.com focuses much of his time, as do Howard Schultz at Starbucks and Herb Kelleher at Southwest Airlines. This is also why the lifetime value of a customer has taken hold in so many companies as the metric of choice. After all, the lifetime value of a Coke customer is over $30,000. The lifetime value for a General Motors customer is several hundred thousand dollars.

To make the shift from retention to loyalty, you need to do three things. First, figure out who your loyal customers are and how to continue to delight them on a regular basis. For example, American Airlines' announcement of increased legroom could prove to be a great loyalty/delight mechanism.

Second, understand those customers who are not loyal to your brand but still buy your product. With them, you have to better understand their needs and wants, their current levels of satisfaction or dissatisfaction, and then address them head-on.

And third, you have to shift the internal mindset of your company to one built upon a loyalty platform, not a transaction platform. This will require new metrics, new reward systems, increased training and, for many companies, an employee attitude "facelift."

In the end, you really only have two choices: take control of your customer base and thrive, or accept that your customers are controlling you and prepare to take a dive.

Scott Davis is a senior partner at Kuczmarski & Associates, Chicago, and leads the firm's Brand Asset Management practice area. He is also an adjunct professor at the Kellogg School of Management at Northwestern University. His book, Brand Asset Management: Driving Profitable Growth Through Your Brands, is being published by Jossey-Bass in June.

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