Loyalty: Oh Boy!

Here's two business tidbits for you:

• Most of the marketing literature tells you to focus on increasing customer loyalty.

• The easiest way to grow your business is to find new customers.

I shared this image with you, back in February.  I conducted an analysis of annual retention rates across fifty or so businesses ... as you can see, retention rates vary by +/- 10%, over time.

In other words, if you currently retain 40% of last year's buyers, you should not expect to find a marketing strategy that allows you to retain 80% of last year's buyers ... you may find a strategy that increases loyalty to 44%, or you may fail, causing loyalty to drop by 36%.


So much of the marketing literature focuses on loyalty.  Here's the deal, folks.  Loyalty matters much more if you are Wal-Mart, Starbucks, McDonalds, Nordstrom, Target, any place you purchase from at least once a month.  In those situations, getting a customer to go from 12 purchases a year to 13 purchases a year is easy, and it has a huge impact on the profit and loss statement.

Now pretend you are Pottery Barn.  Folks, you don't buy from Pottery Barn once a month, do you?


Here's another key point.  The vast majority of us work for businesses that generate less than a billion dollars of sales a year, right?  Well, in those cases, the best way to grow is to find new customers.  Heck, I can recall being at Nordstrom back in 2005, and one of my analysts produced a slide that showed that we had something like 3-6% market share in womens apparel ... and we sold more than a couple billion dollars of womens apparel a year.  We could still find new customers, and we were an eight billion dollar company.

You don't have 3-6% market share, in all likelihood, do you?  That being the case, go out and find new customers.  It's easier to find a new customer than it is to increase customer loyalty, and if you do find a way to increase customer loyalty, you'll increase loyalty among prior buyers and the new buyer you just acquired ... a multiplicative effect, right?!

Give This A Try

Next time you have a few moments to spare, give this exercise a try.

Step 1 = Look at 2005 buyers ... segment them into two groups, one with above-median spend, one with below-median spend.

Step 2 = For each segment, measure the repurchase rate and spend per repurchaser during 2006.

Step 3 = For each segment, measure how many of the repurchasers migrate to above-median spend, and how many migrate to below-median spend, during 2006.

We focus a lot of energy on "loyal" buyers. Take a look at the repurchase rates and migration statistics of above-median and below-median spending customers. You might be surprised to learn just how valuable below-median spending customers are!

Customer Loyalty vs. Customer Acquisition

Imagine you are running a direct-to-consumer business. Your board of directors wants you to increase sales at a faster rate than sales are growing.

Your board of directors is split on how, from a marketing standpoint, to grow sales. Half the team wants to increase customer loyalty via a loyalty/rewards program. The other half of the team wants to grow the business by ramping-up customer acquisition activities.

What information would you need to help your CEO make this decision?

In lieu of good data, which strategy do you believe is more likely to be successful, and why?

Marshall Field And Customer Loyalty

Businesses and brands are created and destroyed every day (i.e. Cingular). Marshall Field represents another brand that was wiped out, this time by Federated, owner of Macy's.

When Federated purchased May Company, the decision was made to convert many different brands to the Macy's brand.

In Chicago, customers are frustrated with this decision. Seeing this as an intrusion upon Midwest tradition, customers continue to lobby for the nameplate to return.

Ok, my virtual Chief Executive Officers, here's the question for you. Would you keep the Marshall Field nameplate on stores, along with the traditional merchandise assortment, or would you convert the stores to the Macy's nameplate, and risk customer alienation?

For instance, assume management ran profitability numbers. Assume that a Marshall Field store would generate $60,000,000 net sales, and $4,800,000 profit a year.

Assume that converting the nameplate to Macy's results in a ten percent reduction in sales, down to $54,000,000. Normally, this would result in profit decreasing down to $2,700,000 --- but various efficiencies created by a mega-brand increase profit to $4,000,000 a year.

Back to the question. Do you take this potential hit in sales and profit, in order to build a nationwide department store brand that may have better long-term upside than a regional merchandiser like Marshall Field?