Reicheld’s loyalty myth

A 5% reduction in customer defections does not result in amazing profit increases.

I exposed this myth some years ago in this article. Here is a video presentation covering the same loyalty myth content.

Double Jeopardy law - Ehrenberg Video

Hear Professor Andrew Ehrenberg describe the Double Jeopardy law in his own words.

This video was recorded in the late 1990s at London South Bank University, at what was to become the Ehrenberg Centre.

Snake (oil) and loyalty ladders

Many market research houses now market a “loyalty ladder” or “loyalty pyramid” product. These dissect a brand’s customer base into 4-6 groups, starting with something like “no awareness” at the bottom and ending with something like “passionate loyals” at the top. This classification is usually based on behaviour (or claimed behaviour) such as share of category purchases devoted to the brand in question. Some add attitudinal statements into the customer classification. Others, like The Conversion Model, claim to be entirely attitidudinal.

All these do is reflect the brand’s relative popularity (i.e. market share) and random sampling error (which looms large when you have 4-6 groups).

Marketing Science has known for decades that loyal behaviours and attitudes follow a set statistical distribution, and so any brand’s true loyalty ladder can be accurately predicted simply from knowing its size compared to rivals. And if it has 100% relative share, then all customers will be at the top of the ladder, but not until then.

I suppose these ladders are attractive because intuitively marketers feel it’s their job to move people along this path, sorry up this ladder. Yet I notice that my practitioner colleagues rarely draw any practical insights from these ladder metrics, they provide more entertainment value (”that looks interesting”) than knowledge. Which is fine, because that’s all they are, an entertaining expensive way of presenting, and obscuring, loyalty metrics.

Do Loyalty Programs Increase Brand Loyalty ?

Back in 1997 Anne Sharp and I published the first empirical evaluation of a large scale loyalty program:

Sharp, Byron; Sharp, Anne (1997) “Loyalty Programs and their Impact on Repeat-purchase Loyalty Patterns”, International Journal of Research in Marketing, Vol 14, No. 5, p.473-486.

By using Dirichlet benchmarks we were able to assess the loyalty program’s affect on repeat-buying while avoiding the problem of self-selection (i.e. more loyal buyers of the brand are more likely to join the program). We documented weak effects.

Since this study we, and others have done more work. All using real world panel (i.e. individuals repeat buying) data. This evidence will be brought together in a forthcoming report, and possibly a chapter in my forthcoming book “How Brands Grow”.

More misguided loyalty programs

In a previous post I commented on Coles Myer’s misguided new loyalty program.

Now I read that they have hired Tom Lemke a former Kmart US executive in charge of loyalty programs. One hopes he will bring new knowledge to the company, but I doubt it. More likely he will consolidate blind faith in loyalty initiatives.

And today I read that they are testing a new program that asks shoppers to register and fill in a questionnaire on what brands they buy. They are then sent a shopping list which switches them to other brands - if they stick to this list they get large discounts in the form of loyalty points (that can later be converted to cash).

Good to see experimentation, but they would be better off first putting money into fundamental research into marketing. This program is doomed to be insignificant at best, and most probably a waste of money.

A 5% drop in defection does not lead to 80%+ more profits

Some of the most popular modern marketing myths come from the writing of Frederick Reichheld. In particular a famous article with Earl Sasser where, on the very first page they write:

Companies can boost profits by almost 100% by retaining just 5% more of their customers.

This has been quoted extensively. Even academics, who should know better, quote it in textbooks and in articles in leading scholarly journals.

And yet it is a grossly (and rather obviously) misleading line.

To read the full article go to the University site - click here.

Misguided Myer Marketing

Two major Australian newspapers ‘The Australian” and ‘The Age’ have reported that the department store chain Myer is to launch another loyalty card, they already have Fly Buys and a credit card.

Called ‘Myer One’ this loyalty program is to be aimed at Myer’s high value customers. According to chief executive Dawn Robertson “Myer One is for our most loyal customers”.

This is so fashionable, and so misguided.

Given the things Ms Robertson has said, this marketing initiative appears to have been planned in ignorance of the serious R&D into the effects of retail loyalty programs, not to mention fundamental patterns of buyer behaviour and brand performance.

And the logic is faulty.

Think about which customers a loyalty program might attract, and who are desirable to attract (from the perspective of making money):

1) Occasional buyers of the category - these customers are unlikely to be attracted to a loyalty program (they realise they won’t earn many points), indeed they aren’t even likely to hear about it let alone give it much thought.

2) Frequent buyers of the category but occasional Myer shoppers - these would be very attractive to gain, and they might be attracted to the program, after all they could earn a lot of points if they shift their buying towards Myer. Unfortunately all of our research shows that loyalty programs do very little to attract non and light customers of the loyalty program brand.

3) Frequent Myer buyers - these are the customers that Myer One is targeting. But these are the least desirable group. These customers represent the greatest subsidy cost of a loyalty program, ie giving people rewards for doing what they were doing anyway. They are of course the most likely group to join - they will see the program’s promotional activity (remember they shop at Myer regularly) AND they will realise what a good deal it is…something for nothing !

In short the Myer One will probably be a good deal for a few customers, and a poor marketing investment.

And it won’t lead to growth, real growth comes from winning more customers…and that’s mainly occasional customers. No brand ever got big by simply trying to get more out of its most loyal customers.