What every business needs is a litmus test to prove how loyal their customers really are.

At a recent professional hockey game an intriguing question was flashed up on the scoreboard overhead: “What percentage of our fans told us in a survey they would accept $100 to wear the opposing team's sweater to a game?”

The answer: 38%. Naturally, that disclosure was loudly booed by the home town crowd, believing those fans to be treasonous.

Every business should have an equivalent litmus test that separates the truly loyal customers from those who are neutral or disaffected. Without knowing the proportion of customers who are steadfastly committed, ambivalent or susceptible to switching, marketing spending decisions can get made for the wrong reasons.

Take the example of one long-established brand nearing the end of its lifecycle. Despite the fact that its market share was in sharp decline, no one knew exactly why customers were leaving or where they were going.

Although it was suspected that 40% had switched to competitive products, the brand still elected to divert a major portion of the marketing budget into consumer advertising when a smarter move might have been to spend that money on retaining current users (or upgrading them to another product).

The stubborn allegiance of brand marketers to mass messaging is what keeps CRM on the periphery of strategic thinking. Even if they understand what CRM means, it remains an exotic consideration, low down on the list of spending options.

One of the reasons for this budget myopia is a singular focus on market share: it seems no other metric comes close in importance. Not churn rate, not average revenue per customer, not even share of requirements.

That's because most marketers are trained to battle for the attention of the consumer, not retain the loyalty of customers. While they acknowledge the importance of loyalty, they are often uncertain how to define it--so it remains an ethereal metric.

Often solely bonused on unit sales, brand managers automatically embrace awareness building strategies, shoveling dollars into advertising in the hope that it will pay off through a spike in market share. And yet according to the Mercer Marketplace 2002 Survey, brand image and equity are rated lowest as a source of competitive advantage. The highest rated strategy: effective management of customer relationships. Echoing that finding is a recent PwC “Trendsetter Barometer” survey of the fastest growing businesses in the U.S., which concluded that those companies focused on winning customer loyalty were more likely to have achieved higher growth rates.

More support for the correlation between business performance and customer management is offered up by QCi, a U.K.-based consultancy, which states in its latest “State of the Union” report that based on research it has done, “…those companies that look after their customers and are truly customer centric are more likely to return better financial results.”

Most organizations now concede that CRM should be more of a priority, but they're uncertain how to translate that yearning into business strategy, since they have no idea what relationship management means from a customer perspective.

Most simply do not know what makes a customer loyal in the first place. Nor do they track how many high value customers are being lost--and why. This usually leads to a poorly conceived CRM strategy that hardly ever addresses the real drivers of customer loyalty--and is often just a promotional program in disguise.

What's required is a fresh approach to marketing planning: one that relies less on market share as the overriding goal and more on a basket of interlocking measures. These would include all of the standard brand equity measures such as awareness, perception, satisfaction and purchase intent; but would also encompass relationship equity measures like willingness to recommend, resiliency to competitive offers, and, above all, a composite score that would slot customers into four attitudinal groups: deeply committed; superficially loyal; disenchanted; and imminent defectors.

Once the interdependency of loyalty and market share is known, the marketing budget can be more intelligently divided between acquisition, development and retention programs. As Jan Hofmeyr and Butch Rise point out in their book, Commitment-Led Marketing, “The single most important question a marketer can ask every day is: where should my scarce resources be spent today to build the value of my brand most cost effectively?”

To ensure brand compliance, the organization should develop a single enterprise customer management plan that spells out the relationship strategies and objectives by major segment. Each brand would be expected to absorb a share of the collective costs in hope of a lift in product sales. The plan would outline:

  • Segment Objectives: An investment plan is built that establishes fiscal targets for all of the key portfolio measures such as segment growth, cross-sell ratio, revenue and retention rate.
  • Contact Grid: A messaging and offer strategy is tailored to each segment guided by predetermined spending limits. The contact intensity, timing and channel mix are all variable according to where customers are in the lifecycle (i.e. new, growing, established, declining, dormant) coupled with their explicitly stated preferences.
  • Treatment Rules: For each segment a set of rules are defined that govern service entitlements, offer eligibility, content presentation and access privileges, invoked by a recent event, past activity or a sharp variance in purchase patterns.
  • Feedback Management: All of the possible opportunities for feedback are identified along with a profiling plan that orchestrates the collection, coding and streamlining of voluntarily supplied customer information.
  • Performance Evaluation: The measurement hierarchy includes both additive measures based on observable customer behavior (e.g. purchase transactions) and attitudinal ratings (e.g. brand favorability and trust).

By asking the right questions, an organization can force its marketing staff to give relationship management as much attention as brand management. Instead of just asking, “Are we hitting our share forecast?”, it should start demanding to know, “What percent of our customers would stay loyal to us under any circumstances?”

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Stephen Shaw is vice-president of strategic services with The Kenna Group, a full-service customer relationship management company. He can be reached at 905-361-4046 or via email: sshaw@thekennagroup.com.