New Research on How Loyalty Drives Future Sales

In an earlier post, 'Is the Loyalty Myth Killing Your Profits', I suggested that rather than focus on building 'loyal' customers, companies should focus on building profitable ones instead. Some customers may become loyal along the way, but that is not the primary aim. Profitability is the primary aim.

The challenge is thus to understand which CRM activities have the biggest impact on profitability. And as not all customers are created equal, which groups of customers to apply these activities to, to grow their profitability. Companies only have so much CRM budget to spend, so managers must spend it where it will have the biggest impact on profitability.

The relationship between CRM activities, customer loyalty and customer profitability is a complex one. There are a great number of potential activities, there is no single universally agreed definition of loyalty and there is little robust loyalty research based upon actual customer behaviour (and its associated profitability) with which to establish the direction and strength of any relationships. Most loyalty research to-date has looked at loyalty intentions, but not at how that translates into what customers actually buy in the future. Even where there is robust loyalty research, there are usually limitations to the research which limits its general applicability to other companies.

One of the newest studies to look at the relationship between loyalty and profitability is Vogel et al's paper on 'Customer Equity Drivers and Future Sales', (forthcoming in the Journal of Marketing). Unlike most other studies it tries to link value equity (the customers’ objective assessment of the utility of a brand), brand equity (the customers’ subjective assessment of a brand)and relationship equity (the customer’s intention to stay in a relationship with a brand over and above their objective and subjective assessments) to loyalty intentions (intention to repurchase plus commitment to the brand), and then to link actual prior sales and loyalty intentions to actual future sales, for customers of a German DIY chain.

The findings of the study shows that value equity and brand equity are the most influential drivers of loyalty intention, but all three factors only accounted for about 45% of the variation in loyalty intentions. Loyalty intention is the most influential driver of actual future sales, but both factors only accounted for about 35% of the variability in actual future sales. The study's authors recommend that managers focus their CRM investments on increasing value equity and brand equity. As in Reinartz & Kumar’s research, this research shows that loyalty intention is not a very good predictor of future sales. Even though the subjects of the study were members of the DIY chain’s loyalty programme, who you might expect to show a stronger relationship. And it says nothing about customer profitability at all or about the behavioural differences between individual groups of customers.

The message should be coming across loud and clear. If even the most recent loyalty research, (research that actually looks at the real world of loyalty intentions and actual future sales), cannot find a strong relationship between them, what chance do you have? Rather than focus on building loyalty in customers, companies should focus on those CRM activities that drive customer profitability. And on just the groups of customers who have the greatest growth potential and who offer the greatest returns on the budgets available to invest in them. If groups of customers become more loyal in the process, that is great, but only in so far as it influences the growth in their profitability.

What do you think? Are you still clinging to customer loyalty as the raison d’etre for your CRM programme? Are have you moved beyond loyalty to look at how individual CRM activities drive customer profitability?

Post a comment or email me at graham)dot)hill(at)web(dot)de) to get the conversation going.

Graham Hill
Independent CRM Consultant
Interim CRM Manager

Further Reading:

Graham Hill
'Is the Loyalty Myth Killing Your Profits'
CustomerThink.com

Vogel et al
'Customer Equity Drivers and Future Sales'
Forthcoming in the Journal of Marketing