Although the best customers are often defined as the loyal ones, It has been found that loyal customers don’t generate the high profits companies assume they do. The relationship between loyalty and profitability is actually much weaker and more subtle than proponents of loyalty programs claim. 2. Companies need to look beyond customer loyalty alone, and instead find ways to measure the relationship between loyalty and profitability in order to truly understand which customers need to be focused on. . Several tools exist that evaluate customers. All probability models, including event history modeling, depend on three simple factors – when did the customer buy for the first time? When did he/she purchase last? And when did he/ she purchase in between? Once these questions are answered, customers can be grouped Into separate loyalty strategies – Butterflies, True Friends, Strangers and Barnacles. These loyalty strategies help companies evaluate the varying strengths of customer relationships. Part B. Implications for Application 1 .
Through studies conducted, it appears there is not much merit to the claims that it sots less to serve loyal customers, loyal customers pay higher prices, and loyal customers help market the company. Strong positive correlations were not found in any of these three areas, which is a surprising contradiction to the way many companies designed loyalty programs for years. Companies must reevaluate the way customer relationships are handled and how much time is worth investing in them on a case-by-case basis.
Determining which customers are both profitable and loyal will enable companies to create stronger and more efficient loyalty programs and boost overall profitability. Loyalty should be measured on customer attitudes as well as behavior. While helpful observations can be drawn from studying the behavior of customers, analyzing their attitudes can provide a much clearer picture of overall loyalty, which in turn helps establish how profitable investing in specific customers truly is. 2.
Building and understanding a correlation between loyalty and profitability benefits companies immensely. This strategy lets companies determine when to let go of customers, which will improve the return on their investments in loyalty. Some companies spend extreme amounts of money on loyalty incentives for customers, not ally knowing how these efforts pay out over time. An example from the article is the corporate service provider that spent $10 million dollars annually on developing customized web sites for Its top 250 clients.
With so much money at stake, I believe It is vital for companies to ensure such a escalating Investment Is truly worth It. In my opinion, bridging the gap between loyalty and profitability will lead to smarter financial choices and stronger, more relevant relationships with customers. 3. After analyzing customer’s profitability and projecting the duration of their relationships, Barnacles. Although Butterflies and True Friends have high profit potential, companies should take different steps in crafting relationships with these groups.
Strangers and Barnacles possess low profit potential, and again, both groups should be handled with different approaches. By combining similar customers into these four categories, the task of determining how much investment is warranted can be simplified. Companies can more easily distinguish between good and bad relationships, and implement a system to retain and nourish high profit potential customers, while letting go of customers that may never be worth the overall investment.
