The stampede to invest in loyalty was begun almost single-handedly by Frederick Reichheld. His book, The Loyalty Effect, provided a business rationale for the massive investment in customer relationship management (CRM) that is now in its second or third wave, depending on which analysts you speak to.At the core of Reichheld's book was the leaky-bath analogy: most of your sales and marketing spend goes on keeping the tap running to fill the bath with customers, but most companies have no plug - no customer retention strategy - so out they go again.

Since Reichheld's book, business conference attendees everywhere have become used to presenters flashing up the slide that shows it costs between five and seven times as much to recruit a new customer as it does to keep an existing one. It is, commonly, a "eureka" moment for previously sales-driven organisations.

But, more than half a decade later, there is no evidence that customers are less fickle. Industries from cable and mobile phone networks to health clubs still struggle with massively expensive customer turnover, or "churn". The Business asked Reichheld, Fellow of the Bain consultancy in Boston, if we are deluding ourselves in pursuing customer loyalty.

"No, I would refute that," Reichheld says. "The idea that there has been a change in customer psychology leading to a chaotic world of churn that we have to learn to live with is bunk.

"The state of churn in many industries is due to companies abusing their customers and customers searching for what they have always wanted: a supplier they can trust who will fix it if they screw up."
But, there are those who argue that customer psychology has indeed changed. US academic Regis McKenna says we have entered "the age of the never-satisfied customer" where an overcrowded supply side in many sectors leads to a constant round of customer poaching.

The connection between satisfaction and loyalty is largely gone, according to this analysis. Hence the emergence of overambitious buzzwords like "customer delight" as new targets to aim for. But they are hardly realistic targets. When did your bank, for example, last delight you? Isn't delight, almost by definition, an exceptional rather than a constant state of affairs?

There is also a clear paradox between intent and reality here. Sticking with financial services as an example, the same banks that invest in CRM systems to keep their customers loyal still play the loss-leader card (literally) to pry customers away from the competition through low initial credit rates and special offers.
The paradox is that banks are inadvertently training customers to be fickle: research shows that a customer who has switched once is more likely to switch again, says Richard Whiteley, founder of the Pearson-owned Forum Corporation, which specialises in helping companies design their customer "experience".

"The emerging customer culture is one of 'what have you done for me lately and what else are you going to offer to keep me?'," says Whiteley. Customers, in other words, are increasingly aware of their own power and only remain loyal until something better comes along.
One of the few companies to have caught this mood and grown with it is Virgin. At the height of dot.com fever, Sir Richard Branson said in a US interview: "We are not in the age of the internet. We are in the age of customer control."

This phrase well may have been borrowed from Patricia Seybold, author of Customers.com, but it was nonetheless perceptive. The assumption behind CRM systems still tends to be that the supplier is in control and cross-selling (finding out more about a customer so you can sell them other products) is a relationship. Virgin has focused more on developing a customer-centred culture.

Professor Adrian Payne of the Cranfield Institute of Management conducted an experiment that showed the power of Virgin's loyalty effect. He asked 300 people in a conference hall in Paris to put up their hands if they were fans of Virgin Atlantic. Around 30-40 hands went up. He then asked for people who had flown with Virgin to put their hands down. Around half a dozen hands stayed up. These were people who felt a loyalty to an airline they had never flown with. Their family or colleagues or friends had recommended them so highly, they would fly Virgin if they had the chance.

"The key to getting loyalty right is to realise that it is a two-way street. What have you done that shows loyalty to your customers? That's what most companies miss," says Clive Humby, Chairman of Dunnhumby, the company that developed Tesco's Club Card. Where most loyalty cards are thinly-disguised sales promotion tools, Tesco's is one of the few that is widely acknowledged to have some real loyalty "hooks" built into it.

Reichheld agrees. "The acid test you need to apply is to be brave enough to ask your customers this obvious question: 'Have we done enough to earn your loyalty?',", he says, citing a list of industries that are getting it wrong.

"Banks have missed the point. Cellphone network operators, automobile distributors, magazine subscription companies...most of these companies have broken most of the rules of loyalty, leading to astronomical churn rates and depressed financial performance.
"They invest in CRM technology, buying a multi-million dollar hi-tech toolbox. But they don't have a hammer or a chisel to get the basics right first. What's missing is a clear picture of which customers you want to invest in relationship building with, then defining how to create, deliver and measure the customer experience."

So, who is doing it right? "MBNA, Cisco, Dell, Harley-Davidson. I've identified a group of loyalty leaders who have grown 220% faster than their competition over the past decade. They range from hi-tech to low-tech across all industries," Reichheld says.

"That's where CRM offers a breakthrough opportunity. When I wrote The Loyalty Effect, it got a lot of people's attention, but they lacked the tools to do it properly. What moves an insight from being a fad into a permanent part of your business process is a link to measurement and compensation systems. That is what is happening with loyalty. So, the tools are now there. There is no excuse."

(c) Copyright Sunday Business Limited 2002.
Source: SUNDAY BUSINESS 24/03/2002