Customer Loyalty And The Pareto Tyranny.

Customer loyalty is much prized and much misunderstood. The obsession with it is such that companies often confuse habit for loyalty. They see their healthy sales figures and believe they have loyal followers rather than habitual customers. They believe this right up until the point when a competitor disrupts their market and their "loyalists" suddenly jump ship.

Last week, at an airline innovation forum, I also saw that this leads to customers misinterpreting loyalty. They were heavy users, they were anointed by loyalty schemes and they were not satisfied. They had a sense of entitlement derived from the belief that their perceived loyalty should be rewarded.

But are they really loyal or are they merely conditioned by habit and the switching costs implicit in reward schemes? Haven't they essentially made their purchase decisions of their own volition? Haven't they decided that this was the best value available to them? Shouldn't that be enough? They've assigned their lazy loyalty and if they didn't think it worthwhile wouldn't they have moved on?

Apparently not. These customers felt the key to the airline's future was to serve them, the heavy users, better. And many businesses feel that too - citing a bastardised confluence of Pareto and the idea that it costs more to get a new user than to retain an existing one.

The latter is technically true, but if it leads to customers expecting special bonuses then it's not far from competing solely on price. If they say they want more for the same price, it's not very different from saying they want the existing offer for less and, as we know, if you compete on price you're saying you don't really value your offering.

This is the heart of the loyalty conundrum and the received wisdom that companies should focus on the 20% who provide 80% of their profits. There can be no argument about focusing on keeping them happy by providing the best product/service but that should be a given for all customers. It's smarter still to exploit their "loyalty" and profitability by trying to sell them ancillary products and services which will contribute to the growth of a business.

But how much extra profitability can be wrung out of them? Too many businesses overlook the potential for real growth that lies in nurturing a proportion of the less profitable 80% towards true loyalty and greater profitability. If you can generate true loyalty in them via excellence of customer service, constant improvement or alliance with some shared belief, their sheer numbers mean they can have a significant impact on your bottom line.

Without knowing the actual numbers involved, I'd hazard a guess that an airline that could engender that in the back of the plane might reap rich rewards. Indeed if they could get economy passengers to pay a ticket price a couple of percentage points higher than that of the competition, they might, in fact, be doubling the profit margin of the largest part of their customer base.

The key to customer loyalty is not the creation of a pampered elite, it's about maximising the number of profitable customers.

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It's Spreadable Marketing, Not Viral.

In a New York bar last month, a (non-media) university friend of his asked the rest of the table to explain what Faris actually did - apart from use very long words that she didn't understand? We laughed, he pled guilty and we continued drinking.

This month, he's written an excellent post derived from his own thinking and his attendance of MIT's Future Of Entertainment conference. It gives us the simple language with which to clarify what viral marketing really is.

What we mean when something goes 'viral' is that LOTS OF PEOPLE CHOOSE TO PROPAGATE IT. It requires people to do something. Voluntarily. For their own reasons. It is not simply a new way to broadcast our messages through populations. It suggests we push, when in fact they pull

In other words, it's not interruptive advertising. As Henry Jenkins said at the conference, it's much more about gifting and

you don't put a catalog in a gift! That's gauche advertising. And viral advertising is basically this: "here's free media, give it into your friends as a gift, also it includes advertising!"

That doesn't work because, as Douglas Rushkoff said

"People don't engage with each other to exchange viruses; people exchange viruses as an excuse to engage with each other."

This is where marketing is going. This is where it has to go.

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A View from the CFO's Office. . .

I recently attended MIT Sloan's annual CFO Summit in Newton, Massachusetts; not just to earn the CPE credits needed to maintain my CPA certification, but more importantly, I wanted to gain an understanding of CFOs' perspectives in this difficult economic environment. This is something that every CMO should understand to help optimize their management strategy as well as their tenure.

It was no surprise that the theme of the conference was "Relentless Volatility". Jack McCullough, one of the two co-chairs of the event, put it well in his opening remarks: "My investment banker friend in London described this environment as being similar to a divorce but worse. . . 'I've lost half of my net worth, but I'm still stuck with my husband.'" I'd like to summarize several key comments from the event that may offer you some ideas for how best to not only ride out the storm in the upcoming year, but even perhaps to leverage the situation to improve your position and take share in this tough market:

• As part of your annual and intra-year planning process, ensure that you leverage scenario planning to best identify what challenges you may encounter in the next quarter or year, as well as what steps you need to take to minimize the potential damage from these risks;
• Communication in this volatile environment increases in importance. . . not just with your functional team, but also with senior management; (i.e., don't be intimidated to better engage your CEO and CFO, especially when you need help or need their advice)
• Ensure that your executive team knows that you not only understand the current challenges you face, but that you also have a plan to address them; (and meeting with the CFO offers a great chance to ensure that your plans are grounded in reality, as well as a chance to share your vision and increase their comfort level with your management framework and strategy)
• "We've spent a significant amount of time reallocating our budgets to ensure that we're focusing on investment in the high growth, high profitability areas vs. in the "harvest" areas that may not need as much investment", Norman Robertson, CFO Progress Software; (e.g., IDC CMO Advisory Practice research indicates that the average technology vendor allocates 38% of their marketing budget to newer, higher growth business areas or product lines vs. existing, more mature business areas or product lines)
• The large companies will no doubt be reducing their on-campus recruiting efforts this year. Therefore, now is a great opportunity to hire the best and brightest individuals from the top schools.
• And finally, continue to drive innovation within your team, motivating individuals to take chances in an effort to change how they do business today. We need to give our staff the opportunity to be leaders, stepping into the light that no one else may see.

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That's Not Marketing Either.

Actually, no. A brand should exist solely to meet a customer need and, if it does, then its needs and those of the customer will be congruent. A construct doesn't have independent needs.

On the other hand, a company does have independent needs and this suggestion is more a reflection of the interconnectedness of marketing and corporate strategy than anything else.

Successful corporate strategy connects the needs of customers to the need of a company to achieve a return on investment. Not vice versa.

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Breaking Up Is Hard To Do.

Rightly or wrongly, I stopped looking at my blog stats well over a year ago. That way neurosis lies. But, via my RSS reader, I am informed of how many of you kindly subscribe using that tool.

Overnight, not having blogged in two days, I lost three subscribers and that got me thinking. Had I (or Loren Feldman) offended readers with my Motrin post, had I bored them into submission, had they just lost the blog-reading habit or had readers switched to another RSS system? I have no way of knowing.

And it's important to know why people don't want what you're offering. Not because you should shape it to every person's whim, but because it's as informative to understand people's aversion to your product/service as it is to understand their loyalty. Motrin's biggest failing was not being ready to deal with that aversion and thus not engaging with it.

Keeping your current customers happy is a crucial business skill, but your new customers (and thus growth) are people who don't yet use your product/service and who just might share the views of those who are leaving you. Do you bother to find out what those views might be?

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The Shaky Foundations Of Neuromarketing.

That is the problem with all neuroscience. We don't really know what we are seeing when we watch the brain work. Is it the thing itself - the thought, the flash of insight - or just an aspect of it, the bark rather than the dog.

Professor Lawrence Parsons - Sheffield University.

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Marketing Headache, Motrin-Style.

There has been a little kerfuffle in interweb land this past weekend. Most people won't have noticed it. But some people got quite excited because Motrin were very slow in reacting to the "noise" and didn't apologise and/or explain that they had been joking as quickly as they should.

The whole sorry saga is detailed here and includes what I had intended to be my only comment on the furore.

But I was forced to blog about it because of the intervention of the honeymooning Loren Feldman who gives an alternative perspective.

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