Marketing
Issue No. 7 - October/November 2002
Are Loyalty Programmes Worth It?
by Dr David Corkindale
An article in the recent Harvard Business Review(1) says that much of what is claimed about the value of customer retention “is bunk".
This conclusion is based on a study of the comparison of the profitability of short-term versus long-term customers across three fast moving consumer goods businesses in the US, France and Germany; the relative profitability of 16,000 customers was studied. Previous reports on the worth of customer retention has tended to come from what are called subscription businesses: those where customers make a once a year purchase decision and then give all their business to one provider. Insurance and mobile phone contracts would be typical. The authors of this new study found that short-term customers could be profitable and that some long-standing ones were not. They therefore question the claim that the longer you keep a customer the more profitable they are and, by implication, that it is a waste of time having loyalty programs to retain customers.
Are they right - is customer retention as a route to profitability a fallacy?
What do practitioners think?
Caroline Rowe is MD of The Loyalty Factor, a Halifax Street-based consultancy specialising in this area: “We are not surprised by these findings. If you do not manage your customers for profitability you can end up having many who stay with you for years, don't give you all their business and to whom you keep providing excellent, expensive service. They make small, frequent transactions and are the first to complain and demand attention. Meanwhile you have other customers who are much more profitable and easier to service — keeping them and gaining others like them should be the main focus. A simple loyalty program may not be the answer.” Her colleague, fellow-Director Terri Gilden says “If over time you keep your customers and the revenue from them stays the same, your profits will decline as costs inevitably go up. ...
