Are Happy Customers Really Loyal? Are Loyal Customers More Profitable?

Loyal customers are “good” because they do not churn, conventional wisdom suggests. There are other ideas we tend to take for granted: Satisfied customers are loyal; customers who give a firm high “net promoter scores” are satisfied and loyal; loyal customers have longer “customer relationship lifetimes;” and are “more profitable.”

Sometimes those assertions are correct; often not. Customer satisfaction might not translate into customer loyalty, defined as unwillingness to desert a current provider for another supplier.

“What we’ve found is that the relationship between loyalty and profitability is much weaker—and subtler—than the proponents of loyalty programs claim,” say Werner Reinartz, Professor of Marketing at the University of Cologne, and V. Kumar,  executive director of the Center for Excellence in Brand and Customer Management at Georgia State University’s J. Mack Robinson College of Business.

“Specifically, we discovered little or no evidence to suggest that customers who purchase steadily from a company over time are necessarily cheaper to serve, less price sensitive, or particularly effective at bringing in new business,” they argue. The researchers find “no evidence” to support such claims.

“In none of the four companies we tracked were long-standing customers consistently cheaper to manage than short-term customers,” say Reinartz and Kumar. “In fact, the only strong correlation between customer longevity and costs that we found—in the high-tech corporate service provider—suggested that loyal and presumably experienced customers were actually more expensive to serve.”

In business-to-business markets, that is perhaps easy to understand.  n business-to-business industries, high-volume customers often exploit their value to get premium service or price discounts from suppliers.

That arguably is not so true, if true at all, in business-to-consumer markets. “At the very least, the link between loyalty and lower costs is industry specific,” they say.

“Long-term customers consistently paid lower prices than the newer customers did—between fiver percent and seven percent lower, depending on the product category,” said Reinartz and Kumar. “What was surprising was that we found no evidence that such loyal customers paid higher prices in the consumer businesses.”

In fact, they argue, loyal customers--business or consumer--are more price sensitive than less-loyal customers.  That might help explain higher churn in telecom markets. If consumers believe loyalty should be rewarded with lower prices, then raising prices after an introductory period runs completely counter to that belief.

Churn, to be sure, is a key issue for most service providers, as getting new customers costs money. By some estimates, postpaid subscriber acquisition costs run about four months recurring revenue, while a new prepaid account might cost about one to two months’ revenue.

What is not so clear is the direct linkage between service provider programs and customer behavior (lower churn, less call center traffic).  Should service providers aim to “delight” customers, or only prevent and fix problems quickly? Should providers invest in relationships or not? If so, in which segments? The research is not so clear on such matters.


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