or the “The Tale of Granny Hinchcliffe”

invigor8’s Customer Loyalty specialist, Andy Clark, reveals all

The phrase “joined-up thinking” entered the Political Lexicon in the 1990’s and is no less important in business life. A business needs to know what market it is in, the kind of customers it wants to attract and what it needs to do to attract them. If these factors can be aligned profitably the business then needs to know what it has to do internally to make its target customers happy. That’s what we mean by alignment.

The rationale for this has been well reinforced through research findings over the last decade which have highlighted the connectivity between:

HAPPY CUSTOMERS and HAPPY EMPLOYEES and PROFIT.

Regularly in our work, we examine the connectivity between these three strands and the impact that changes in one strand can make on the other two.

During this time we have witnessed a virtually unchallenged principle emerge which has driven a mass of business activity. The principle is that if a business is to maximise profit it needs to keep all its customers loyal.

On the face of it, this principle makes sense – but new evidence suggests that it may need some qualification

Blind devotion to that principle has caused many to assume that all customers have identical relationships with their service organisations, that all customers are profitable and that all business activity should be geared to their loyalty.

This article examines the nature of Customer Loyalty and explores where it is right for organisations to challenge the belief that all customers are profitable.

Our starting point is that service is an emotional business and that customers are emotional beings. To paraphrase Basil Fawlty, this may appear to be a statement of “the bleedin’ obvious” yet it is a premise that is sometimes ignored by organisations.

Let us first look at the emotional side of service and its impact on customers and businesses.

While working with one of the UK’s Top 3 Retailers we encountered what can only be described as a “Service Parable”. It made a profound impact on all who heard it and it illustrates just how our behaviour as customers is influenced by what we experience and how we are also influenced by the experience of others. We now refer to this Service Parable as:

“Granny Hinchcliffe’s Tale”

This true story, going back sixty years, also demonstrates the power of the customer and the impact they can make on the bottom-line. In addition, it illustrates just what an emotional business we are in!

We were working with a group of Customer Service Managers from this award-winning retailer, exploring the lifetime value of customers to their business. We also looked at the cost to the business of customer defection when one of the delegates volunteered the story of Granny Hinchcliffe. She explained she had never before told this tale to anyone at work but the subject matter of the meeting had caused her to appreciate how her family’s spending pattern had been influenced by her Grandmother and how one business had been affected as a result.

The heroine of the tale is the eponymous Granny Hinchcliffe who lived in York. In 1942, at the height of the War she was aware that her youngest daughter’s birthday (our clien’’s grandmother) was just around the corner. Despite rationing she wanted to get her daughter some chocolate for a birthday treat.

With this in mind, Granny Hinchcliffe went into Thornton’s in York and asked the assistant for some chocolate, explaining why it was important to her. The assistant shook her head and politely explained that they had no chocolate to sell because of wartime rationing but offered some alternative such as a gingerbread man. Granny Hinchcliffe was disappointed but got out her purse to pay for the gingerbread man when she became aware that another customer had entered the shop. This lady was served by another assistant, who greeted her warmly, and said, in hushed terms: “Hello there. I’ve put some of your favourite chocolate by in case you came in”.

On hearing this, an indignant Granny Hinchcliffe asked the assistant who had been serving her why this lady had been offered chocolate when she, herself, had been refused. She was told: “I’m terribly sorry – but this lady is a special customer”.

Our heroine put away her purse and walked out of the shop saying that she would never be a customer of Thornton’s again – let alone a special customer!

Now, fast-forward 60 years to 2003.

At our meeting, Granny Hinchcliffe’s granddaughter who herself has grandchildren, suddenly realised the commercial impact of that service encounter 60 years previously.

She explained that Granny Hinchcliffe had kept her word and had never been into a Thornton’s shop since that event. Not only that, but none of her 3 children had been into one either. There was an understanding in the Hinchcliffe family, handed down a generation, that Thornton’s was not the place for them to buy their chocolate.

But it goes deeper still. Not only did Granny Hinchcliffe’s children express solidarity with her wish but also passed on the same message to their children, our client included. In turn their children have been indoctrinated with the same principle and their children’s children are currently being educated in the same way!

As our client expressed:

“This is now the fourth generation of the family who have never been into any Thornton’s shop only because of what happened to my Grandmother sixty years ago. Most of her great-grandchildren don’t even know why we have never shopped there – they just know you don’t go in”.

The commercial impact of this tale was profound. No member of the family had ever considered breaking the unspoken family rule. The realisation was that this well respected, high quality retailer had lost the business of 4 generations of the same family and didn’t even realise it. Over a 60-year period the potential impact on profitability from this one disaffected customer was significant.

The work we had been doing with this client revealed that the lifetime value of the average-spending customer to their business is £105,000. That’s the potential cost of a single defecting customer. What about the impact of customer defection when the cause triggers an emotional response that filters down a generation to family and friends – and does so again and again?

Granny Hinchcliffe’s tale confirms that the link between Customer Loyalty and Profitability is strong. It raises several obvious questions for any business such as:

Do you know the lifetime value to your business of one of your customers?

• Do you know how many customers stop doing business with you every day, week, month or year?
• Do you know how many people they tell and influence?
• Do you know why they stop doing business with you?
• Do you know what you can do to prevent defection or minimise the impact of it?
• Our experience tells us that, historically most service business have not been able to answer these questions with confidence. Technology has, however, provided a mechanism for the smarter outfits to find out this information.

The smartest organisations can go even further. They are the ones who have addressed the less obvious, but somehow even more critical questions that underpin the whole subject of customer loyalty and profitability. They include:

• Do you have a clear idea of the customers you are trying to attract?
• Do you know what those customers want from you – including “trade-offs” and priorities (such as, product quality vs. processing speed or price vs. personal service)?
• Do you know where and how to attract them?
• Do you know which customers are your most profitable ones over the short, medium and longer term?
• Do you know what you need to do to convert unprofitable customers into profitable ones?
• Do you know what to do with the unprofitable ones?

And the rationale for this deeper level of analysis?

Simple – not every customer is a profitable one.

This thought contradicts an implied principle we sometimes encounter – that all customers must be valued because they are profitable. Granny Hinchcliffe’s Tale could be used to support that principle but to follow it without question could be misleading.

“The customer is always right” is one maxim that enshrines a laudable philosophy but ignores the propensity for some customers to be downright unreasonable.

“Customer satisfaction” is another phrase which suggests a misleading aim – some organisations have it as their “Holy Grail” in exhorting their people to aim for repeat business when the reality is that satisfied customers tend to be six times more likely to defect than ones who are delighted or totally satisfied.

So it is with Customer Loyalty and Profit. It is commonly heard in Boardrooms that the best customers are the loyal ones. They are the ones who know us best, cost less to service and therefore produce most profit. Customer Loyalty is, therefore, the driver of business profit. This philosophy has resulted in the development of a host of Loyalty Programmes in businesses of all sizes.

The top 16 retailers in Europe collectively spent a staggering $1 billion in the year 2000 alone on developing and running such Loyalty Programmes.

So, is this the solution for a service business – install a Customer Loyalty Programme?

“Not necessarily” is the conclusion reached in a study conducted and reported in 2002 by Reinartz and Kumar in the Harvard Business Review. They have conducted in-depth research with businesses in the US and Europe to explore the linkage between Customer Loyalty and Profitability.

A typical example featured a business that had introduced an elaborate costing scheme to track the effectiveness of their newly implemented Loyalty Programme. After running the scheme for 5 years the business was able to determine the profitability of each of its customer accounts over time. The results shocked many in the business who had sanctioned the $2 million annual investment in the Loyalty Programme.

About half of the customers who bought regularly from the business for at least 2 years - and who were consequently regarded as “loyal” – generated hardly any profit at all. Conversely, around half of the most profitable customers were “promiscuous” – buying a lot of high margin products in a short space of time before disappearing.

This pattern was confirmed throughout their research. Without this awareness the tendency for most businesses eager to “dialogue” with their customers is to distribute mail-shots like confetti. Customers who should be ignored receive mailings whilst those who should have been cultivated are ignored.

This is not to conclude that Loyalty Programmes are of no value. It is, perhaps, more accurate to say that their effectiveness should not be judged merely by their ability to deliver profitable customers.

The Tesco Clubcard, for example, underpins a programme that rewards customers ostensibly for their loyalty. At a deeper level, however, it has allowed Tesco to develop a vast amount of information about its customers – who they are, what they buy, where from and how often. This, in turn, allows them to target specific products and services at particular customers. It is this ability that can produce the profit, not the mere existence of a Loyalty Programme.

So, what is the message from all this?

Firstly, know your customers – the types of customer you want to attract and the ones you have already. Next, get to know which customers provide you with most profit and the projected duration of their relationships with your business.

Finally, you should select an appropriate Customer Loyalty Strategy for each kind of customer. The basis of this is that different customers need to be treated in different ways. Sound common sense but not common practise – yet!

Reinartz and Kumar have developed as a result of their study, a matrix through which they define customers based on a combination of the Length of Relationship and Profit Generation. For example, they have defined 4 different customer groupings, described as:

• Butterflies – customers who are highly profitable but over a short term
• Strangers – low profit yielding and short-term relationships
• Barnacles – low profit yielding but long-term relationships
• True Friends – customers who generate high profitability over a long term.

If a sheep-dip Loyalty Strategy is developed which treats all of these customers in exactly the same way a business will achieve some success but waste significant amounts of capital, time and energy. The secret is to develop a targeted Loyalty Strategy for each customer group if the business is to increase profitability from each one.

For example, with Butterflies the challenge is to “milk” their accounts but only for as long as they are active. This means recognising when to stop investing in prolonging the relationship. With Strangers the strategy could be to make no investment at all in the relationship to maximise the profit on every transaction. The size of potential business from Barnacles needs to be analysed. Depending on the results of the potential spend the solution could be to focus on cross selling or to make only minimal investment. True Friends need to be communicated with consistently but not too often. The solution here will be to defend and retain them.

At play here is a two-sided coin – on one side is the management of customer loyalty and on the reverse, managing relationships for profit. We see many outfits that do one or the other and some which do bits of both. The key message is to distinguish between managing customers for loyalty and managing relationships with them for profit – and to do both rigorously at the same time.

If you would like to explore how you can manage both of these dimensions, Andy Clark can be contacted at invigor8:

+44 (0) 1132 87 85 88
andy@invigor8.eu