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Loyalty Myths
Hyped Strategies That Will Put You Out of Business
– and Proven Tactics That Really Work

by Timothy L. Keiningham, Terry G. Vavra, Lerzan Aksoy and Henri Wallard

John Wiley & Sons © 2005
272 pages

Focus Take-Aways
Leadership & Mgt. • Today's customers are indifferent to brands and picky about products.
Strategy
• Loyal customers rarely win you a large share of the market.
Sales & Marketing
Finance • Management teams usually don't have the time and resources they need to make
Human Resources customer loyalty programs work.
IT, Production & Logistics
• Contrary to myth, repeat purchasers and customers older than 50 aren't
Career Development necessarily loyal.
Small Business
Economics & Politics
• Loyalty programs are expensive. Getting a return on your investment takes a long
time – if you get one at all.
Industries
Regions • Loyal customers do not automatically ensure profitability.
Concepts & Trends
• Some “desirable” customers generate profits for you. Some “break even” and some
cost you money.
• Employee satisfaction is not correlated with customer loyalty.
• Customer loyalty and branding are interdependent.
• The competitive marketplace has turned loyalty programs, which used to be
lucrative perks, into standard expectations.

Rating (10 is best)

Overall Applicability Innovation Style

6 7 9 3

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 Relevance

What You Will Learn

In this Abstract, you will learn: 1) Why most strategies to build customer loyalty don’t
work; 2) Why you should retain only your best customers; and 3) How to manage
customer loyalty.

Recommendation
Many business people believe in Pareto’s principle, which states that 80% of your business
comes from 20% of your customers. As a result, businesses have invested a lot of time
and money developing that crucial minority of loyal customers. However, according
to Timothy L. Keiningham, Terry G. Vavra, Lerzan Aksoy and Henri Wallard, some
of the customers you’re working so hard to retain may actually be costing you money.
Even worse, if you follow the advice of many marketing experts and focus narrowly on
retaining old customers rather than on finding new ones, you can kill your business. The
authors effectively demolish each of 53 myths about loyalty using helpful statistics and
case studies on the one hand, and some enigmatic charts and corny cartoons on the other.
However, in the end, you may wish they’d spent a little less time on demolition and a
little more time on presenting the “proven tactics” they promise in the second half of their
subtitle. Nonetheless, getAbstract recommends their book to marketers who wonder why
their customer loyalty programs are not working and who want to make a change.

Abstract

First National Thumbs Its Nose at Customers – And Wins

“Virtually The First National Bank of Chicago, like most banks in the 1990s, was searching for
everything we ways to improve the abysmal 5% return on equity that it had begun to suffer as more
have been financing options became available to customers. The bank decided to decrease its costs
told about the
relationship
by encouraging customers to transact their business by phone or ATM. It began charging
between customer $3 for each transaction with a live teller.
loyalty and
financial outcomes The media went to town making fun of the policy, and competitors took advantage of it
is bunk.” by offering to pay customers, rather than penalize them, for using tellers. Obviously, the
bank’s decision flouted conventional wisdom about customer loyalty. However, in the end,
the bank’s profits increased by 28%. More than 80% of its customers began to transact
their business electronically, and two-thirds began using ATMs to make deposits.
No one would argue against investing energy in understanding and meeting your customers’
needs. However, customer loyalty isn’t everything, and focusing on it too narrowly –
especially to the exclusion of acquiring new customers – will hurt your bottom line.
“A business
should first Myths about customer loyalty come in six varieties.
understand which
of its customers
are profitable…
1. “Loyalty Myths that Subvert Company Goals”
and why.” The product life cycle (PLC) begins with the product’s introduction and moves through
growth and maturity to decline. At the end of the PLC, the product either dies or gets a
makeover. Customer acquisition is most important in the early stages of the PLC, while
retention takes over in the latter stages. Thus, you should spend a lot of time on customer
loyalty efforts only when your products have reached the end of their PLC.

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 An influential Harvard Business Review article claimed that you can increase profits
25% to 85% by retaining only 5% of your customers. However, this argument ignores
“Don’t manage three important caveats:
for customer
retention before 1. You get the largest increase only if your profits are already low.
you manage 2. Whether you can continue generating profits by improving retention rates depends
for customer on your current retention rate.
selection.”
3. You won’t increase profits by retaining just any 5% of customers; you must retain the
right customers. For example, some customers are “switchers” who constantly seek
variety or look for the best deal. They’ll never stay loyal.

2. “Loyalty Myths Contaminating Company Management Practices”

Most companies don’t really know their customers, since most don’t have in-depth
conversations with them. Instead, they do a quick check-in. Although a few businesses
– for instance, Harrah’s entertainment company and USAA financial services – can
predict customer need and spending patterns, most don’t have the tools to manage a lot
“The idea that of customer feedback. In the modern era of sophisticated technology you can collect and
companies know
their customers hold tons of data. This is good, because you need information to build good customer
is a myth.” loyalty programs. However, unless you gather the right information and put it into context
accurately, all that data collection is useless.

3. “Loyalty Myths about Customers”

Ryanair, an Irish airline, attempted to learn from Southwest Airlines’ model, but it
didn’t copy Southwest’s organizational culture, most crucially, its emphasis on customer
service. Although experts kept predicting Ryanair’s demise, Ryanair customers so far
have been willing to tolerate its poor service because of its cheap fares.
According to one study, only 10% of customers are loyal to one brand of frequently
“Most loyalty purchased consumer goods, and these brand-loyal customers tend to buy less of a product
programs or service than the average customer. In actuality, customers are loyal to several products,
are no more
than a means
in case one is sold out or offers a better deal. And, some customers just crave variety.
of achieving Repeat purchases don’t indicate loyalty. Customers may have no choice. For example,
parity with the
competition customers may repeatedly use the same airline to fly nonstop to a particular city not because
– which is another they like the airline but because no other airlines provide that service. Conversely, just
way of saying because a customer is unhappy doesn’t mean he or she won’t ever come back. Customers
they’re adding
costs to the forgive and forget their bad experiences. They have other things on their minds.
business without
Many organizations wrongly assume that customers older than age 50 are set in their
adding revenue.”
ways and unlikely to switch brands. A study by the American Association of Retired
Persons discovered that these customers are just as likely to switch brands as anyone
else. Yet, an advertising industry run by professionals in their 20s and 30s perpetuates
this age-biased myth.
Many businesses are beginning to use technology to gain word-of-mouth publicity.
However, word-of-mouth has its dangers. Most people share only their most extreme
feelings of satisfaction or dissatisfaction – and they’re more likely to talk about
dissatisfaction and frustration.
“Loyalty programs
won’t salvage an 4. “Loyalty Myths Concerning Loyalty Programs”
inferior product.” Many retailers believe frequent shopper programs will gain loyal customers. In fact, in
the grocery industry, customers with loyalty cards spend 48% more than those without.

Loyalty Myths © Copyright 2006 getAbstract 3 of 5

 (This drops to 18% in apparel stores.) However, customers with loyalty cards rarely
change their buying behaviors. They use their cards to earn discounts on things they
“Loyalty does not
equal profitability.” would buy anyway. Some belong to more than one program and use the card that garners
the best deal at the moment. When grocers use weekly discounts to lure customers
with loyalty cards to visit more often, customers still buy only what they need. Overall
revenue stays the same.

Using a loyalty program to entice your competitors’ customers to switch often doesn’t
work, since customers may not distinguish between brands. In fact, once you add in the
costs of technology, training and maintenance, most frequent shopper programs lose
money. Most companies design their loyalty programs for their own benefit, without
“Loyalty is, in considering the benefit to the customer.
simple terms,
a reliance on a A successful loyalty program has the following nine characteristics:
particular brand
or company even
though numerous
1. The product or service is of good quality.
satisfactory 2. The program is appropriate. Some products, due to their very nature, can’t gain
alternatives loyalty through a program.
may exist.”
3. The company projects the return on investment (ROI) before the program starts.
4. Customers see value in the program.
5. They have a choice about how to use their rewards.
6. The program offers customers something they want.
7. It offers them something relevant.
8. Customers can cash in rewards easily.
9. Customers understand the program.
“All too often
businesses
manipulate their 5. “Loyalty Myths about Loyalty, Share of Business and Profitability”
employees and Long-time customers don’t purchase more over time. Most people shop at the same stores,
their employees’
stick with the same telephone-service provider and drink the same soda for years. You
behavior in
the pursuit of don’t gain a larger “share-of-wallet” – the ratio between what they spend with you and
customer loyalty.” with your competitors – the longer you retain them. Instead, what they spend depends
on their needs.

The nineteenth-century economist Vilfredo Pareto noticed that 20% of his country’s
population held 80% of its wealth. Pareto’s 80/20 ratio describes other things as well:
20% of your effort usually generates about 80% of your results. And many managers
assume that 20% of their customers will bring in 80% of their profits. However, all
customers are not created equal. Some are “desirable,” and generate profits; others are
“break-even”; and still others are “costly” and the company actually loses money on
“Employee them. Paradoxically, costly customers often generate the largest amount of revenue;
satisfaction and
employee loyalty revenue doesn’t predict profitability. Neither, by itself, does loyalty, since all three types
are only two of a of customers may be loyal. No simple formula can predict the relationship between
myriad of factors financial gain and loyalty. To generate profits, identify and retain only your desirable
that ultimately
affect the loyalty
customers. Customers with these three characteristics are most likely to be loyal:
of customers,
and loyalty can 1. They‘re satisfied with the brand.
still be had in 2. They would repurchase the brand.
the absence of
either of them.” 3. They would recommend the brand.

Loyalty Myths © Copyright 2006 getAbstract 4 of 5

 6. “Loyalty Myths Regarding Employees”
Safeway once instituted a policy requiring its employees to smile. But the policy backfired as
some customers interpreted smiling as flirtatious or worse, and brought sexual harassment
suits. Insisting that employees always demonstrate certain behaviors can have a negative
effect, since the behaviors may be insincere or inappropriate in some contexts.
Both customers and employees will forgive a business for occasional slips. Problems
occur when products and services plunge consistently to unacceptable levels.
Customers may be loyal because of employees’ actions and attitudes. However, employee
“When satisfaction loyalty doesn’t necessarily determine customer loyalty. Customers may be loyal even
increases are when employees are not, and companies with happy employees can still go out of
considered in business. Instead of concentrating on employees, determine your customers’ needs; then
conjunction
with brand encourage employees to fulfill those needs.
preference, the
effect on loyalty Branding and Loyalty
is exponential.” Most businesses, and even researchers, separate branding, or “product management,” from
“customer behavior” or loyalty. Businesses assign responsibility for these two areas to
different departments, and researchers study them separately. However, you’ll do better if
you manage your brand and your customers at the same time. When truckers decide what
kind of vehicle to buy, satisfaction accounts for 8% of their decision; “brand preference”
accounts for 11%. Combining the two factors, though, creates a jump of 21% in customer
satisfaction – more than either factor generated on its own. This finding demonstrates the
importance of taking a holistic approach to branding and customer service.
Design your loyalty programs using a five-step process:
1. “Observation” – Collect data on your customers. Over a designated time period,
examine “purchasing activity,” that is, the size and patterns of customer purchases;
“It is human nature
to totally dismiss a “activity costs,” what you spend on serving customers; “share-of-spending,” your
philosophy when percentage of your customers’ wallets; and “customer demographics,” their
we learn that background information.
some or much
of what we have 2. “Scoring” – Calculate customer lifetime value (CLV), or the profit per customer, by
been told about looking at purchasing projections and subtracting the cost of serving each customer.
it is wrong.”
3. “Selection” – To gain insight into your company’s health, categorize your customers
as desirable, break-even or costly.
4. “Prioritization” – Decide how you’ll treat each type of customer to improve
profitability. You may decide you can’t afford certain customers.
5. “Leveraging” – Increase your percentage of desirable customers.
Making the customer your first management priority increases your odds of success
only if you focus on the right customers. Too many businesses rely on overly simple,
unsophisticated customer-retention strategies.

About The Authors

Timothy L. Keiningham is the senior vice president and head of consulting at a customer-
loyalty consulting firm. Terry G. Vavra is a public speaker, and a consultant on loyalty and
customer satisfaction. Lerzan Aksoy is an assistant professor of marketing at Koc University
in Istanbul, Turkey. Henri Willard is the CEO of a customer-loyalty consultancy.

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