December 14, 2006

Brand Loyalty in the Automobile Industry

Jim Fulton sends us this article about customer loyalty in the automobile industry.

Brands who retain sixty percent or more of their customers, placing them in "Retention Mode", include Toyota, Lexus and Honda.

Other top ten brands who retain between forty and sixty percent of their customers, placing them in "Hybrid Mode", include BMW, Scion, Cadillac, Chevrolet, Mercedes Benz, Ford and Hyundai.

Retaining customers in most of the online/catalog industry is important, but isn't a life or death proposition. There are always new customers that can be acquired at a reasonable cost, and the risk in buying a t-shirt isn't so huge that a customer can't be forgiving.

But the risk of making a mistake when buying a car is significant. If the car doesn't meet the expectations of the customer, the customer is stuck with it for several years, or sells it, and pays several thousand dollars to cover the depreciation.

So in the automobile industry, customer retention, and loyalty, mean everything. Let's compare Toyota with Ford.

Toyota retains about 63% of prior Toyota buyers, whereas Ford retains 53% of prior Ford buyers.

Ford sold 3.4 millon cars in North America last year. In four years, Ford will retain 340,000 fewer customers than Toyota. At an average of $23,000 per car, this means Ford will lose out on $7.8 billion dollars of sales four years from now, because Ford customers are less loyal than Toyota customers. Worse, some of the lost customers will purchase from Toyota, leaving Ford an even bigger hole to dig out of.

Of course, Ford loses this $7.8 billion each and every year. The impact is not additive, it is actually multiplicative. You can see why Ford has to spend $5 billion dollars each year on advertising. Ford has no choice but to recruit new customers, to reverse this downward spiral.

On big ticket items with long life-cycles, customer retention means everything. Companies do dig their way out of customer retention problems. In the automobile industry, it just takes longer to dig out. I'm glad I've worked in the apparel industry for the past sixteen years, where it isn't as hard to dig out of loyalty problems.

2 comments:

  1. Charles H. Green12:25 PM

    Kevin/Jim, that's an excellent tutorial in the power of retention economics. As far as I'm concerned, the magnitude of the implications of retention economics make it the number one strategic approach--more powerful than the reigning paradigm made popular by Michael Porter and wielded most recently (and famously) by Jack Welch (be number one or number two in your segment, be the low cost producer).

    The Toyota example is one of the few that get it really right. In a lot of cases, the "experts" confuse simple repeat buying behavior--customer retention--with loyalty. The result--a number of "loyalty" programs based on such things as special deals or promotions or price cutting.

    The way to huge profits is through customer trust, which results in loyalty, which goes way beyond repeat purchases due to promotional strategies. Toyota buyers aren't loyal because of a deal, but because of a total package of product, service, features, quality, etc.

    Yet there's one level even beyond that, and that is trust. One can make a rational decision to buy a car besides a Toyota. But if one comes to trust a company, a dealer and a salesperson, for example, then the loyalty ratio goes way up. Buyers will make decisions faster, not take as much time doing analyses, will take recommendations more easily.

    This isn't trivial. In its own way, it is as hard--sometimes harder--to create trust than it is to build a quality package of "automobile." But it's even more powerful.

    Thanks again for the great example of the power of motivated retained customers.

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  2. Thanks, Charles, for the response. I've always been an advocate of customer acquisition. But on big ticket items with long purchase cycles, the math really plays out, doesn't it?

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