You Don’t Have to Buy Your Customers’ Loyalty. You Can Sell It to Them.

At nearly every business one of the key marketing goals is to retain customers longer. A number of strategies can be adopted to achieve this goal, but on the whole they fall into three basic categories: product/service strategies, incentive strategies, or relationship strategies.

Product/service strategies. Obviously, offering a higher quality product or service at any given price level, relative to your competitors, is likely to improve customer loyalty. But in a highly competitive world it’s nearly impossible to use this strategy to get any kind of lasting competitive advantage. Product quality at the vast majority of companies in the developed world is already good enough that it's hard to differentiate yourself. A few firms might sustain a product or price advantage for years or decades, but they are the exceptions that prove the rule. It might be because their sheer scale leaves little room for others (like Walmart, for instance, in the US), or the business model itself is based on a cascading network effect (like Google and a few other online firms).

Incentive strategies. Loyalty programs represent a second path to improved retention. By identifying your highest value customers and offering incentives as well as special services or benefits, you can increase an individual customer’s likelihood of staying loyal. Frequent flyers often focus on just one or two airlines, for instance, in order to ensure that they accumulate enough mileage on each to qualify for early boarding or complimentary upgrades. And retailers use loyalty programs to provide individualized offers to customers based on their past purchases, a benefit that becomes more valuable to the customer as he or she frequents a particular retailer more often. The problem is that the incentives in loyalty programs cost money. Points and mileage are like a currency, and while this may be somewhat of an over-simplification, in a competitive market with a number of companies each offering its own loyalty program there’s not much difference between trying to buy a customer’s loyalty with points, and trying to buy it with discounts or better service. At its core, a loyalty program is really a more sophisticated kind of product/service strategy, offering higher quality or lower pricing to one customer at a time, based on the customer’s transactional record.

Relationship strategies. In contrast to both product/service strategies and incentive strategies, however, an individual customer relationship can in fact provide a lasting competitive advantage. This type of competitive advantage, however, won’t extend to the entire market; it will apply only to one customer at a time, based on the strength of your relationship with that particular customer. This is because the strength of a relationship is based not just on your own investment in the relationship, but on the customer’s investment in it, as well.

If a customer tells a business what she needs or prefers, and the business is able to change how it treats her to accommodate those specifications, then a relationship has been created. From that point forward, the company is likely to enjoy a lasting competitive advantage in maintaining that customer’s loyalty. In the first place, when you engage a customer in an interactive, give-and-take relationship like this, it becomes more likely that an emotional bond will develop between your brand and the customer, cementing that particular customer’s loyalty more tightly.

But in addition, even if your competitor has the same capability you have and offers to customize its treatment for this customer in the same exact manner, the customer is still not likely to be tempted away. This is because, in order to reach the same level of product/service quality with your competitor, the customer would first have to expend her own time and effort re-specifying her preferences. The more she has already “taught” your company about how she wants to be treated, the less likely she will be to want to go to the trouble of re-inventing the relationship all over again.  

Whenever you engage a customer in an interactive, context-rich relationship, in other words, you are actually making it more convenient for the customer to stay loyal than to switch. You’re no longer competing on the same terms for that customer’s next dollar of spending.

The bottom line is, with an individual customer relationship based on this kind of co-creation, you don't have to be in the business of buying the customer’s loyalty with points or discounts. You are in fact selling the customer the opportunity to remain loyal in order to continue enjoying the convenience of the relationship. And the more convenience you and the customer mutually build in to the relationship, the higher your price can actually be.