How To Build Customer Loyalty in an Internet World

IF YOU REALLY want customers to keep coming back, then toss out those glossy brochures from vendors looking to sell you the latest in CRM software. Customer loyalty does not stem from clever stratagems to collect every conceivable piece of data from customers and then cross-sell them something they don't want.

In fact, the very concept of customer relationship management is misguided. Companies shouldn't try to manage loyal customers; long-standing relationships arise from trust gained over many transactions, and they are sustained by customers' belief that the company wishes to keep them around rather than drive them away.

CRM is manipulation in too many cases. Companies are acting on information of customers against their interests - calling them at home at night, charging them at the highest price point [that CRM software shows they will pay], says Loyalty Rules (Harvard Business School Press, 2001). "Loyalty means listening to your partner, creating mutual satisfaction."

Customer loyalty seems like a quaint notion in the Internet age, when customers can search out lower prices and defect to competitors with a mouse-click. Yet customer survey research has found that in the faceless online market, customers yearn for trustworthiness more than ever. Give it to them, and they're yours forever. That kind of loyalty is immensely valuable: analysis shows that a 5 percent increase in customer retention rates results in a 25 percent to 95 percent increase in profits. Clearly, customer loyalty is too central to companies' fortunes to be ignored. And with technology so important in determining retention - or customer disaffection, technology must be used properly. Companies should start to measure and then influence customer survey data. This influence can take the form of entirely new metrics for customer loyalty.

Shooing Away Butterflies

CRM is not altogether awful. It's just that, too often, the standard CRM practices, relating to customer surveys, lead to discontent or worse from customers, not loyalty. Not many people enjoy being inundated with telephone calls and mailings from a vendor and its marketing affiliates. There is a good and virtuous use of CRM, however. One of the best things you can do with CRM technology is find out who the valuable customers are - those who are staying, not just any customer willing to accept your offer to switch from a competitor.

CRM data can do more than tell your marketing department what to pitch to customers. CRM software can also be used to determine which customers are worthy of a sales pitch. This may sound counterintuitive to capitalists, but loyalty is a two-way street. Companies should try to invest only in relationships where there's the potential for long-term value.

What I call butterflies - customers who jump from one promotional offer to another - do not create that potential. Such customers often don't even provide short-term value, in fact. Think of credit card customers who flit from bank to bank following a succession of introductory rates. Instead, companies should invest their resources in courting "barnacles" - customers who are likely to stick around for many years, as long as they're treated right.

Once companies know who their best customers are, the real work begins - convincing them to stay forever. Dell Computer, for instance, uses CRM data to determine which customers have the greatest hardware needs and then provides extra value to that select group, in the form of free web portals. Although Dell garners a great deal of valuable customer information from its sales transactions, which are largely conducted via the Web, the company does not implement common CRM practices. Instead, Dell has set up Premier Pages for thousands of its best customers. These customized, secure websites allow customers to check on order status, arrange delivery dates, and troubleshoot problems through Dell's help desk. Many Dell customers, which tend to be large companies, use their Premier Pages to keep track of system-wide computer purchases for better asset management. The Internet offers most businesses a rich set of possibilities for improving the customer lifetime experience, but few firms have matched Dell's initiative.

Gauging Customer Loyalty

Are your existing measures of customer loyalty inadequate? Perhaps it's time to step up to the plate. Companies typically gauge how well they're serving customers by getting them to fill out customer satisfaction surveys. Customer surveys are the mainstay of customer satisfaction measurement to be sure. Additionally, there is another way to measure satisfaction: track the percentage of customers who come back. Retention rates capture the real financial ramifications of whether or not a company is delivering high value to its customers. Customer surveys are used to indicate what to do to increase customer satisfaction and customer loyalty. Retention rates are where the rubber meets the road.

Although less than 20 percent of companies track customer retention, a few use it to great effect. USAA, a San Antonio-based insurance company, for example, has made customer retention the top metric for executive performance. USAA's budget submittals must address how they will maintain or improve customer retention. Not surprisingly, the company has one of the highest retention rates of any insurer in the world.

A second loyalty metric that companies should consider instituting is a Loyalty Acid Test, which asks customers whether a company is worthy of their loyalty. Customer survey questions can capture how loyal customers are to a particular company and why. NBRI benchmarked the Loyalty Acid Test with several companies that research had identified as "loyalty leaders," including Enterprise Rent-A-Car, Harley-Davidson, Intuit, L.L. Bean, Northwestern Mutual, USAA, and SAS Institute. Overall, 70 percent of their customers said these seven companies deserved their loyalty - compared with less than 50 percent of the customers of a representative sample of all U.S. companies.

While keeping customers happy makes sense on an intuitive level, it is also good business sense. The question is: "Is a company getting profits from employees and customers or at their expense?". If the answer is the latter, then company leaders do their company a painful but important service in revealing the extent of customer dissatisfaction by surveying their customers and tracking retention rates.