Customer loyalty is not always what it seems

This made eminent practical sense and loyalty programmes became all the rage in a wide range of industries from airlines with their frequent flier programmes, to hotels and even video rental, drug and grocery stores in the United States. These loyalty programmes took on a life of their own within many large companies, as there was widespread acceptance of the "goodness" and desirability of customer loyalty.

Over the past few years, however, there has been a growing realisation, supported by academic studies and books published by practicing loyalty experts, that customer loyalty comes in many forms and that investments in increasing customer loyalty have to be tempered by the same scrutiny that all investments have to undergo. Let me illustrate this with some examples.

I live in Charlotte, North Carolina, which happens to be the largest hub for US Airways, which is among the top six airlines in the United States. US Airways handles approximately 90 per cent of the passengers flying in and out of Charlotte, giving them a virtual monopoly in this market. When I want to make a trip anywhere, for business or pleasure, US Airways usually has the best (sometime only) connections. I don't really have much of a choice but to fly them. I am a Platinum member of their frequent flier programme and get frequent upgrades to first class and the privilege of boarding early.

Am I a loyal customer? The numbers would say I am. However, despite my exalted status and the upgrades, I would switch in a heartbeat, if I could, because I don't like their high, monopolistic fares. Recently, two discount airlines, AirTran and JetBlue, have started flying in and out of Charlotte AirTran has cheaper fares and JetBlue has better service and cheaper fares. I gladly give up my premium status privileges and fly these airlines when I can. So much for my supposed loyalty. If US Airways had hoped to retain me as a loyal customer based on past behaviour and their programme numbers, they were mistaken.

My second example comes from the mobile phone business. Three years ago, due to a new law on number portability, it became possible to switch mobile phone providers but retain your phone number. Mobile phone companies found that once number portability became law, the percentage of customers renewing contracts dropped dramatically. Both of these are examples of "forced" customer loyalty. Customers being loyal because they really do not have reasonable, competitive choices. When market conditions change, this kind of loyalty proves very ephemeral.

Another kind of loyalty is that driven by price. My local supermarket has a "very important customer" programme. Despite the name, anyone can sign up for the programme and get a membership card. I use the card whenever I buy groceries and other supplies from the store and, in exchange, I get discounts on many items. I go to the store because it happens to be convenient. I use the card because I get discounts. My loyalty is driven by price and convenience, not because of any belief that the store is superior to others. This is more of a robotic kind of loyalty. If I were to move, the store would lose me as a customer. I would not go out of my way to shop there.

Contrast these with a pioneering example of a loyalty programme that was wildly successful in the '80s. MCI was a scrappy little long-distance telephone company that was trying to win market share against a former monopoly, AT&T. They launched a programme called 'friends and family', where customers were encouraged to get others to sign up for MCI's long distance service in exchange for deep discounts on calls to those people in their 'friends and family' circle.

Overnight, MCI succeeded in turning its customers into its best sales people, because they were trying to convince their friends to switch. Of course, it was driven by the discounts, but how many of us can say no to a friend who calls with a compelling value proposition? This was an early example of viral marketing and MCI went to on to become a major competitor to AT&T.

The latest thinking on loyalty emphasises that repeat purchase behaviour by itself is not a sign of great loyalty. True customer loyalty goes beyond behaviour and encompasses notions of emotional commitment and customer advocacy, a la MCI. A couple of years ago, I was speaking to the top management team at one of our clients. I happened to mention an insurance company called Amica that happens to be my insurance company, as a firm that engenders inter-generational loyalty, not just lifetime loyalty.

Until recently, Amica only accepted new customers if they were recommended by an existing customer! It still relies largely on customer referrals for its growth. The CFO of the client company came up to me after my talk and wanted to share his own Amica story. His house and two cars had sustained very heavy damage during Hurricane Andrew in the early '90s (he lived in Miami, Florida). After the insurance adjuster came to his home and assessed the damage, he said "I will file my report with xxx insurance company and they will follow up with you about the claim."

At that point Steve, the CFO, asked, "What do you mean you will file with xxx company, my insurer is Amica". The adjuster then responded, "I am sorry, I work with several companies. I do see that you are an Amica customer. In that case, I will write you a check for the damage right now. Amica authorises me to do that, to minimise hassle at a time like this." The check was for a very large amount. Steve said he knew that his premiums over a lifetime would not add up to the amount of that claim and he felt so good about the way he had been treated and so guilty that Amica would never make money on him as a customer that he recommends it whenever he could to his friends and family, in the hope that this would repay Amica for the cost it had incurred by having him as customer. Now, that is customer loyalty.