Loyalty Myths: Hyped Strategies That Will Put You Out of Business and Proven Tactics That Really Work

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Overview

Praise for LOYALTY MYTHS

"Keiningham et al. have fired a full broadside at the 'managerially correct' and seemingly unassailable notion that customer loyalty is all that matters. In examples, including First Chicago, Tansa, and Ryanair and through broadly researched data and analysis, they show that knowing what customers want and will pay for is the issue. This is a great place to start when doing a full review of the effectiveness of your marketing spend to find advantage in ...

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Overview

Praise for LOYALTY MYTHS

"Keiningham et al. have fired a full broadside at the 'managerially correct' and seemingly unassailable notion that customer loyalty is all that matters. In examples, including First Chicago, Tansa, and Ryanair and through broadly researched data and analysis, they show that knowing what customers want and will pay for is the issue. This is a great place to start when doing a full review of the effectiveness of your marketing spend to find advantage in your competitors' inabilities to differentiate themselves."
—GEORGE STALK, Senior Vice President, The Boston Consulting Group and coauthor of Hardball: Are You Playing to Play or Playing to Win?

"This book is a must-read for every executive who is interested in reshaping their loyalty programs. The authors have presented the 53 myths with excellent supporting materials, which make everyone rethink their firm's loyalty strategy. I have no doubt that this book will revolutionize the thinking behind the loyalty concept."
—V. KUMAR, ING Chair Professor, University of Connecticut and coauthor of Customer Relationship Management: A Databased Approach

"Loyalty Myths provides great insight as to why simple answers never work in customer loyalty. The authors show, with many real-life examples, how businesses can go wrong in adopting an unquestioned mantra of 'customer loyalty is all that counts' and illustrate how it will most likely not help, but hurt profitability. Finally, the book gives managers a guide to get started on a more comprehensive approach to customer loyalty that already whets one's appetite for the sequel to this must-read book."
—PETER JUEPTNER, Executive Vice President, The Great Atlantic and Pacific Tea Company

"Loyalty Myths is a must-read for anyone who manages customer loyalty. Keiningham and his colleagues mix their own considerable experience with the latest academic knowledge, and package it in an entertaining way."
—RONALD T. RUST, David Bruce Smith Chair in Marketing, University of Maryland, and Editor of the Journal of Marketing

"It's no joy to have your beliefs challenged, even rubbished, but it's very healthy! Anyone interested in customer loyalty will enjoy trying to prove the authors wrong."
—SENATOR FEARGAL QUINN, CEO, SuperquinnStores, Ireland, and author of Crowning the Customer: How to Become Customer Driven

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Editorial Reviews

From the Publisher
"Strong stuff...[the authors] offer some well-researched loyalty truths" (Telegraph, November 2005)

"...full of ideas and suggestions...likely to be useful to anyone working in the field." (Research Magazine, May 2006)

Soundview Executive Book Summaries
Many CEOs worldwide cite customer loyalty as their most important strategic objective, spending billions of dollars to hold onto their current customers. Thousands of books and even more articles have been written about customer loyalty and everyone agrees it is vital. But are they right? In Loyalty Myths, renowned authors from one of the world's premier business research firms reveal the ugly truth about customer loyalty — almost everything you've been told about it is wrong!

To set things straight, the authors critique 53 of the most common beliefs about customer loyalty and debunk them fully with hard science and even harder data.

The subject of Loyalty Myths is the evolution of thinking about customer loyalty. The serious reader will have to set aside many of the platitudes he or she has previously learned — they simply don't work in today's marketplace! The authors offer a truer picture of how businesses can leverage customer loyalty to help them survive and succeed.

The pursuit of customer loyalty can be a highly profitable strategy, but not by clinging to the myths that have developed surrounding the idea. Following the conventional wisdom that has been propagated about customer loyalty will almost surely cause firms large and small to suffer, the authors warn, which ultimately means that customers will suffer as well. If loyalty doesn't pay, then firms will have to pursue another strategy or they won't remain competitive. Loyalty Myths seeks to expose the myths for what they are so that in the end everyone wins — by being good to one another.

‘A Recipe for Financial Disaster'
Customer loyalty as a business strategy is incredibly seductive. It fits perfectly with a sense of justice and fair play. Company leaders want to believe that good behavior leads to good outcomes — simply put, it is good business to be good. And a loyalty metric would seem an objective and perfect fit for such a noble business truism. However, the authors assert, many of the propositions used to create and support today's loyalty strategies just aren't correct. Most are patently false, they add, making their prescriptions financially dangerous.

The difficult truth regarding customer loyalty is that how it links to growth and profitability is far more complex than most managers have been led to believe, the authors write. A blind pursuit of customer loyalty is at best a case of misallocated resources. But at worst it is a recipe for financial disaster.

By disposing of the myths surrounding loyalty, the authors explain, a proper focus on customer loyalty can be stimulated. Treating customers and employees with decency and respect can pay substantial dividends.

The Right Way to Manage for Customer Loyalty
Without question, it is possible to make money, at least in the short term, by focusing on cost reduction and ignoring customer loyalty. And, unfortunately, there is no guarantee that focusing on strengthening customer loyalty is a long-term strategy. Even if an executive is sold on customer loyalty as a long-term strategy, he or she may still lose money if a strategy is based on a naive reliance on one or more of the loyalty myths. But when a customer loyalty strategy is based on sound foundations, building customer loyalty can be a very profitable business strategy.

The authors point out that the science associated with customer loyalty as a business strategy is relatively new and rapidly evolving. Our current knowledge has advanced to the point of finding flaws in the conventional positions — the myths. We can use the evolving science to demonstrate and prove the "loyalty truths" that are associated with profitable customer loyalty strategies. The authors write that to dismiss loyalty as a viable strategy because of the fallacious myths associated with it is to throw the baby out with the bath water.

According to the authors, these are the seven truths of customer loyalty:

  1. Don't manage for customer retention before you manage for customer selection.
  2. Customer loyalty takes more time to grow than most management teams have to give; planning and patience are required.
  3. Focus on customers' share-of-wallet. Don't disregard those customers with current low shares; customer polygamy is the rule these days. But don't accept your current share. Learn how to improve your share of your customers' loyalty.
  4. Loyalty requires mutually beneficial interactions; most loyalty programs are tilted in the company's favor.
  5. The chain of events from loyalty to profits is twisted and complex. Learn the specific response patterns of your customers and your industry.
  6. Satisfied and loyal employees can make a difference, but customer satisfaction and loyalty can and often do happen in the absence of employee satisfaction and loyalty.
  7. Customer loyalty and brand imagery are far from independent; you must manage them hand-in-hand.
Copyright © 2006 Soundview Executive Book Summaries


—Soundview Summary
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Product Details

  • ISBN-13: 9780471743156
  • Publisher: Wiley
  • Publication date: 9/2/2005
  • Edition number: 1
  • Pages: 272
  • Sales rank: 1,340,882
  • Product dimensions: 6.12 (w) x 9.12 (h) x 0.96 (d)

Meet the Author

TIMOTHY L. KEININGHAM is Senior Vice President and Head of Consulting for Ipsos Loyalty. He is the author of several books and articles on customer satisfaction and loyalty, and has won best paper awards from the Journal of Marketing and the Journal of Service Research.

TERRY G. VAVRA is Chairman Emeritus of Ipsos Loyalty. He is a customer satisfaction and loyalty consultant, a public speaker on these subjects, and the author of four books (including one of the first books on CRM) and numerous articles in these fields. He is also a former educator who taught at the graduate level.

LERZAN AKSOY is Assistant Professor of Marketing at Koç University in Istanbul, Turkey. Her research interests include customer satisfaction, loyalty, and relationship management. She has provided executive training on customer relationship management to executives from numerous multinational companies.

HENRI WALLARD is CEO of Ipsos in charge of Ipsos Loyalty.

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Read an Excerpt

Loyalty Myths


By Timothy L. Keiningham

John Wiley & Sons

ISBN: 0-471-74315-1


Chapter One

Loyalty Myths That Subvert Company Goals

Since we became a public company, we've had the highest retention of customers in the industry ... we are not going to surrender that leadership position. -John Chapple, Chairman, CEO, and President, Nextel Partners, Inc.

No industry provides a better example of the misconception of customer loyalty as a pervasive corporate goal than the banking industry.

The 1990s was a decade of great turmoil for the U.S. banking industry. Competition was emerging from a host of new, nonbank businesses that were cherry-picking some of the retail banks' most profitable lines of business. Customers were beginning to be allowed to write checks on money market accounts obtained through their brokers, arrange auto financing through automobile manufacturers, buy annuities through their insurance agents, and obtain credit cards from credit card-only financial institutions operating nationally. At the same time, interstate banking was coming into existence, guaranteeing that larger national banks would begin to compete in what were previously relatively local or regional markets.

Not surprisingly, banks were desperately seeking a solution for increasingly tighter profit margins. In a 1991 Journal of Retail Banking article, Frederick Reichheld (a loyalty advocate we've previously mentioned) and Bain & Company colleague David Kenny prescribed the following remedy:

Neither cost savings nor price increases will solve the branch profitability problem. To build sustainable profits, banks must "grow" deposits cost-effectively. And about the only way to do so is by raising customer retention rates.

Reichheld and Kenny were by no means lone voices addressing the U.S. banking industry during this time. In fact, the Bank Marketing Association (BMA) and its affiliate trade journal, Bank Marketing, were overflowing with appeals to compete on service for enhanced customer loyalty. The BMA was so convinced of the importance of loyalty in solving banks' profitability problems that in 1989 it established a separate organization, the Quality Focus Institute, with the stated aim of achieving "greater customer satisfaction and retention."

THE PARABLE OF THE COSTLY CUSTOMER: FIRST NATIONAL BANK OF CHICAGO

During the early 1990s, First National Bank of Chicago (now Banc One) would definitely have been classified as suffering profitability problems. Despite having the largest market share in the Chicago area and the greatest reach of any Chicago institution, the bank's return on equity was a pathetic 5 percent, compared to the industry benchmark of 15 percent. To combat the problem, the company named Jerry Jurgensen, a former First Chicago CFO, to head the community banking group in 1993. As a numbers man, Jurgensen did not dodge the company's earnings problems. "First Chicago's profitability as a retail bank is a problem. It needs to earn more, there's no question about it."

One of the first things that First Chicago did under Jurgenson's supervision was to examine the profitability of its customer base. What they found was not pleasant: only one-third of the customer base was generating an adequate return. The search for distinguishing characteristics between its profitable and unprofitable customers revealed that the profitable segment was more accustomed to using the self-service channels the bank offered. In a concurrent review, the bank examined the costs associated with its operations. It determined that interactions with its branch tellers were one of the most costly means of delivering its routine banking services. ATM and banking by telephone (the primary modes of self-service) were obviously far more cost effective. Weighing the costs of servicing its different customer groups, the bank resolved to persuade some of its low-balance customers to use the less costly interaction modes. As a result, on April 25, 1995, First Chicago announced that it would begin to charge some low balance checking customers $3 if they sought teller assistance (for transactions that could have been completed through an ATM or by bank-by-phone). "If they change their behavior, it's a win-win," Jurgensen said. "And if they don't, at least they're paying fairly for the way they use the bank."

Not surprisingly, the public outcry was immediate and merciless. Magazine and newspaper articles excoriated First Chicago's decision. Some of the resulting headlines included:

"Thanks for Your Deposit. That'll Be $3" (Business Week, May 15, 1995).

"Tack on $3 for that Trip to the Bank Teller" (Chicago Tribune, April 26, 1995.)

"Fees from Hell: How Fiendish Is Your Bank?" (Money, July 1995).

"Need a Teller? A Big Bank Plans $3 Fee" (New York Times, April 27, 1995).

Other media joined the criticism, including the late humorist Erma Bombeck in an article entitled "Our Friendly Bankers Have Become Greedy Thieves." Jay Leno's opening monologue on NBC-TV's Tonight Show skewered First Chicago. Leno's punch line: "For $3 you can talk to a human teller, and for $4, they'll talk dirty to you."

Politicians and consumer groups leaped at the opportunity to denounce the bank. Representative Maxine Waters (D-CA) called for a boycott of the bank. Waters and Joseph Kennedy (D-MA), both members of the House Banking Committee, threatened to postpone legislation to expand banking powers because of the banking community's seeming disregard evidenced by the fee.

Competitors quickly moved to take advantage of the situation with advertisements lampooning the fee in aggressive attempts to woo First Chicago's customers. Harris Bancorp took out a full-page advertisement in the Chicago Tribune assuring "free and unlimited access to our tellers." First Illinois Bank's advertisement declared: "There's no such thing as a $3 bill." In yet another ad, under a photo of a bank teller, MidCity Financial Corporation's ad proclaimed, "At our banks, this is not an endangered species." And another bank's television advertisement had a confused customer approaching a bank window and asking, "Are you a teller?" The response: "Yes, that will be $3 please."

From the sublime to the ridiculous, several Chicago-area banks actually paid customers who visited teller windows. Lake Forest Bank Trust Co. gave $3 to customers after their transactions were finished. Harris Bancorp gave out $1 bills to customers who asked if it charged teller fees. Northview Bank & Trust offered a $3 rebate for new accounts that required a teller transaction. And First American Bank offered $10 to customers for switching from First Chicago, supporting the offer with print ads questioning, "Why pay to bank there when we'll pay you to bank here?"

Competitors' cash incentives were hardly the only inducements for customers to switch banks in the wake of First Chicago's decision. An American Banker article reported that Chicago-area banks, in general, averaged less in fees than First Chicago per $100 of deposits. Survey research conducted that same year for U.S. Banker magazine among depositors suggested that First Chicago's approach was guaranteed to erode loyalty to the bank. Nearly 54 percent of participants in the survey said that they would change banks if required to pay a $3 teller fee. First Chicago officials did admit to losing hundreds of checking customers (although they kept the exact number proprietary). Examination of Federal Deposit Insurance Corporation data clearly showed that First Chicago's average deposits per branch declined following the initiation of the new teller fee plan. (See Figure 1.1.)

First Chicago's approach was far from a conventional customer retention strategy. Ruth Susswein, then executive director of the consumer group Bankcard Holders of America, disparaged the difference between most banks' stated focus on building loyalty and First Chicago's fee-for-service strategy. "On one hand, banks are saying they want relationship banking so that consumers can do all their banking at one institution," she noted. "But on the other hand, they are tearing the relationship apart by tacking on all these 'nuisance fees.' What are customers getting if they can't go to a teller anymore?" And given Reichheld and Kenny's assertion that for banks "about the only way to build sustainable profits" is "by raising customer retention rates," Jurgensen's strategy should have sent First Chicago into a death spiral. What exactly did happen?

In the first full month following the announced charges, self-service ATM transactions at First Chicago doubled, and then increased an additional 50 percent a year later. Teller transactions dropped by one-third. By the end of 1995, more than 80 percent of depositors' transactions were being conducted electronically, and more than two-thirds of all account deposits were being made through ATMs or automated clearing houses (ACH).

As a result, the bank made an adequate return on 44 percent of its customers (compared to only 33 percent before the change) and profits jumped 28 percent! Most observers were forced to admit that First Chicago's unorthodox approach to customer relationships had been highly successful. The title of a 1996 Journal of Retail Banking Services article summed up the general consensus: "First Chicago's Account Realignment Succeeds."

It would be hard to find a more poorly received and seemingly anti-loyalty strategy than that of First Chicago's introduction of teller fees. Clearly it was designed to change customer behavior (either through the use of less expensive bank channels, or by encouraging customers to leave the bank), but First Chicago's success is also a testimony to the fallacy of loyalty myths as they influence and confuse company goals. Around the time that First Chicago was raising its profitability by instituting what most would consider an anti-loyalty strategy, the Bank Marketing Association was closing down its Quality Focus Institute because of a distinct lack of success stories and the corollary growing disillusionment among member banks at the lack of returns forthcoming from traditional customer loyalty initiatives.

Jay Leno and others may have gotten the first laugh, but First Chicago laughed last and laughed best.

The Moral of the Costly Customer

To be profitable, businesses don't always have to blindly follow the folklore that urges the wholesale retention of all customers. A business should first understand which of its customers are profitable for it and why. Then it's appropriate to incent customers to engage in behaviors that are economically beneficial for the business. Just as was the case in the U.S. banking industry of the 1990s, ill-conceived customer loyalty objectives tend to pervade many companies' corporate goals today. The myths driving this orientation have become folklore in corporations worldwide and are so widely believed that they've been virtually unchallenged-until now. In contrast, organizations like First Chicago who aren't afraid to challenge myths have helped alert the marketing community to the fact that not all of the loyalty mandates from the so-called experts necessarily apply to their business, nor lead the way to greater profits.

LOYALTY MYTH 1: The Number One Goal of Any Firm Should Be Customer Loyalty

In 1960, Theodore Levitt wrote "Marketing Myopia," one of the most widely-quoted and reprinted Harvard Business Review articles. The article warned of the dangers from firms shortsightedly focusing on their products and, in doing so, overlooking the needs of their customers. Levitt insisted, "the organization must learn to think of itself not as producing goods or services but as buying customers, as doing the things that will make people want to do business with it."

Without question, Levitt was absolutely correct. Firms exist to satisfy customer needs and wants and survive only by doing so. During the time of Levitt's article, however, many firms had lost sight of why they existed, arrogantly believing that "the market will buy whatever we choose to sell." This was during the same era that Japanese auto manufacturers were making inroads into the U.S. market by listening to consumers' concerns and building smaller vehicles. U.S. auto manufacturers continued to churn out large, gasoline-guzzling vehicles not because of their inability to make smaller cars, but because the profit margins were significantly higher on larger vehicles.

The world has changed a lot since then. Today most managers recognize that losing sight of customer needs is a recipe for disaster, though we might argue about how their firms actually address these needs.

Levitt's words still ring true, however. The problem is how the misinterpretation of Levitt's maxim has evolved in the modern era, which can loosely be summarized "customer loyalty is the number one goal of any firm." Though the emphasis may be exaggerated, business news stories demonstrate that the message is often forgotten. It is not difficult to find articles like the following:

* "Broke But Beloved," which begins "Say this for WINfirst, the troubled cable, telephone and Internet provider: It has very loyal customers. Since filing for Chapter 11 bankruptcy protection in March ..."

* "Loyal Following Couldn't Keep Jacksonville, Mich.-Based Jacobson's Going."

* "Garden Botanika, Inc., the Redmond-based cosmetics and personal care products company, announced today it has filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code.... Garden Botanika remains an industry leader with high sales and extremely loyal customers."

In fact, many of the dot-com disasters could have reported similar results: loyal customers but no profits.

The fundamental purpose of any business is to identify and satisfy customer needs at a profit, an idea Theodore Levitt certainly embraced. The problem is that customer loyalty can be purchased, and frequently is! But to paraphrase an old saw, "You can't buy things for a dollar, sell them at 99 cents, and make up the difference in volume!"

LOYALTY MYTH 2: Firms Should Emphasize Retention Efforts Rather than Acquisition Activities

The underlying logic of this myth rests on the trade-off between the costs of acquiring new customers and the costs of maintaining current ones. Conventional wisdom (seeded by the maxim "It costs less to retain a current customer than to win a new one") suggests that, all other things being equal (which is most often not the case), your odds are greater of receiving some return from investing in a current customer rather than chasing a potential one. This myth is further fueled by the beliefs that customers purchase more as their lifetimes lengthen (promising even greater than linear returns) and that they help recruit additional customers through positive word of mouth. Because marketing departments have traditionally overspent on advertising and have underspent on retention, the message also carries some novelty.

Even if the underlying reasoning were correct (which it is not, as will be demonstrated later in this book), it is ridiculously simplistic. Attracting and retaining customers are both critical processes. Economic success cannot be achieved by focusing exclusively on customer retention to the detriment of attracting new customers. Even with an ardent focus on retention, customers will defect and will need to be replaced. Therefore, a blind adherence to this myth will be nothing short of disastrous.

The most obvious flaw in this misconception is its complete disregard for the product life cycle (PLC). There are four generally accepted stages in a product's life cycle: introduction, growth, maturity/saturation, and decline. A typical PLC pattern is depicted in Figure 1.2. Firms operating in each of these various phases have different strategic objectives that weigh heavily on the cost of acquisition versus retention.

1. Introduction: With the launch of a new product, success hinges on building a critical mass of early adopters. In this stage, product awareness and acceptance are the key strategic objectives.

2. Growth: The product is now accepted by the larger market, so consumer demand increases and the market expands. In this stage, brand awareness and market share are the key strategic objectives. (Continues...)



Excerpted from Loyalty Myths by Timothy L. Keiningham Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Myths.

Preface.

INTRODUCTION: The Myths of Loyalty: Did the Gods Mislead Us?

Chapter 1. Loyalty Myths That Subvert Company Goals.

Chapter 2. Loyalty Myths Contaminating Company Management Practices.

Chapter 3. Loyalty Myths about Customers: Their Needs, Behaviors, and Referrals.

Chapter 4. Loyalty Myths Concerning Loyalty Programs.

Chapter 5. Loyalty Myths about Loyalty, Share of Business, and Profitability.

Chapter 6. Loyalty Myths Regarding Employees.

Chapter 7. The Foundations of Customer Loyalty.

Chapter 8. The Right Way to Manage for Customer Loyalty.

Acknowledgments.

Notes.

Index.

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Customer Reviews

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Sort by: Showing all of 2 Customer Reviews
  • Anonymous

    Posted December 18, 2006

    New take on customer retention

    Many business people believe in Pareto¿s principle, which states that 80% of your business comes from 20% of your customers. As a result, businesses have invested a lot of time and money developing that crucial minority of loyal customers. However, according to Timothy L. Keiningham, Terry G. Vavra, Lerzan Aksoy and Henri Wallard, some of the customers you¿re working so hard to retain may actually be costing you money. Even worse, if you follow the advice of many marketing experts and focus narrowly on retaining old customers rather than on finding new ones, you can kill your business. The authors effectively demolish each of 53 myths about loyalty using helpful statistics and case studies on the one hand, and some enigmatic charts and corny cartoons on the other. In the end, you may wish they¿d spent a little less time on demolition and a little more time on presenting the 'proven tactics' they promise in the second half of their subtitle. Nonetheless, we recommend their book to marketers who wonder why their customer loyalty programs are not working and who want to make a change.

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  • Anonymous

    Posted September 19, 2005

    Dispelling Loyalty Myths

    Loyalty Myths does an outstanding job of dispelling commonly held beliefs ¿ some almost sacrosanct ¿ about customer loyalty through an effective mixture of anecdotes, research, and theory. It reads much more easily than most business books while not being completely quantitative. The authors, customer loyalty consultants themselves, disprove some of the most fervently held beliefs about loyalty such as an increase in customer retention of 5% leading to an increase in profits of up to 100%, how it costs 5x as much to acquire a new customer as it does to retain one, long-term customers being more valuable than short-term ones, etc. The authors show how and where these beliefs go wrong and how to correct where possible. At the end of the book, they present 7 loyalty truths that organizations can use to implement better loyalty initiatives. This is a highly valuable book both for those looking to implement loyalty efforts as well as those evaluating existing efforts. I highly recommend it.

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