CNBC Discovers Customer Loyalty

A recent segment on CNBC posed the question: Is there something investors should consider beyond the numbers? The suggested answer: Customer loyalty. As if it were a new concept.

The discussion with three customer loyalty “experts” (in quotes because one guy was from a firm that help telcos/IT firms develop qualified new sales and new market opportunities”, and the other two were from Wall Street investment houses) contained a few questionable comments and perpetuates some common misconceptions about customer loyalty. According to the experts:

“Most companies spend millions of dollars on sales and marketing but very little money on retaining the customers they just sold to.”

My take: Ah, the old myth about the cost of acquisition versus the cost of retention. Apparently, the costs that firms incur to provide customer service to existing customers don’t count as retentionetaining them. And direct marketing efforts to cross-sell customers don’t count. And from a B2B perspective, the costs associated with providing account management must not qualify. The notion that firms spend little on retention is flat-out wrong.

“While customer loyalty is important, it’s no substitute for strong operational performance.”

My take: First off, this misses the point that for some firms/brands, it’s strong operational performance that earned the loyalty in the first place. But second, if a brand has strong loyalty, shouldn’t that compensate for less than stellar operational performance? I think what the expert was trying to say was that loyalty wasn’t a substitute for strong financial performance. In other words, it doesn’t matter if you have raving fans — just make your quarterly numbers.

“In tough times, price matters. To maintain a brand, firms have to spend an enormous amount of money.”

My take: If a customer’s loyalty is that susceptible to economic conditions, it’s got to make you wonder how strong the loyalty is. For example, if a “loyal” Starbucks customer switches from Starbucks to Dunkin’ Donuts for her daily caffeine fix during a downturn, then how loyal was she to Starbucks in the first place? If, on the other hand, she only buys coffee every other day — but still buys it from Starbucks — then the loyalty is still strong, even though total sales volume is down.

The problem with Wall Street’s view of customer loyalty is that it confuses:

1) Customer loyalty with brand affinity. When asked which firms have strong customer loyalty, all of the experts agreed on Apple. No doubt that many Apple customers are vocal supporters of the firm. But there are a lot of firms out whose customers don’t buy from anybody else. Strong brand affinity may breed loyal behavior, but you can still have loyalty without the strong brand affinity.

2) Retention with share of wallet. Firms that sell products or services with low purchase frequency often fall prey to this misconception. Just because a bank customer isn’t motivated enough to go searching for a new checking account provider, it doesn’t mean he’s loyal to his bank. Likewise, if he stays with his bank for his checking account, but parks all his investments with other firms, then how loyal is he to the bank? Not very.

3) Ad spend with marketing spend.
This isn’t just a Wall Street issue, it’s a Madison Avenue issue, as well. There are way too many people who seem to forget that advertising is under the marketing umbrella — and not the other way around. There are a lot of marketing investments that firms make beyond advertising. But go tell that to the advertising people.

4) The means with the ends. Apple isn’t great because it has raving fans. It’s great because it’s great at product design, which attracts customers who appreciate and value product design. This is, perhaps, a not-so-subtle point, but one that many firms miss. Instead of saying “let’s go improve our customer loyalty” firms should be saying “let’s be great at something that customers will value and therefore be loyal to us.”

Anyway, thanks to Paul Schwartz for the heads up on the CNBC segment, and I’m really looking forward to the cable channel’s next great discovery.

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