The Importance of Customer Loyalty in an Online World

Customer loyalty and growth

Customer loyalty is widely believed to be one of the more important factors in realizing long term growth and profitability. The traditional take on loyalty is that it’s important because it is less expensive to retain an existing customer than acquire a new one, thereby making existing customers more profitable. Loyal customers are also seen to be more likely to make subsequent purchases from a firm over time leading to greater revenue generation than a new customer. Another, perhaps less common, way of looking at loyalty is to see loyal customers as the gateway to other potential customers. One definition of loyalty that follows this line of thinking is “a willingness of someone to make an investment or personal sacrifice in order to strengthen a relationship.” In the same way that multiple purchases can be viewed as an “investment”, when a loyal customer puts their own reputation on the line by referring a friend to use a product or service, they are making a “personal sacrifice.” Therefore, loyal customers really are one of the keys to long term success.

Recognizing the importance of loyalty, many researchers have tried to come up with measurement tools to help harness the power of this metric. Retention rate and customer satisfaction, for example, are two of the most popular substitutes for loyalty. In the article The One Number You Need to Grow (Reichheld, 2003) the author aptly points out a number of pitfalls with the traditional measures of loyalty. These are:
1. Most measures of loyalty are overly complex.
2. Traditional measures are difficult to assimilate into every day operations.
3. Retention rates help measure profitability but not necessarily growth in that they track customer defections. Additionally, retention is not necessarily indicative of loyalty as customers may be held hostage by high switching costs or other barriers.
4. Customer satisfaction may indicate a customer’s feelings regarding their most recent experience but it does not necessarily predict future behaviour or growth.
As a result of these issues, Reichheld and his team undertook significant research to find the silver bullet of measuring loyalty. Through research of thousands of customers in multiple industries, they determined that the question “How likely is it that you would recommend [company X] to a friend or colleague?” ranked 1st or 2nd in terms of accurately predicting future purchases and or referrals. Given the impact of this one question, marketers should be looking for ways to capitalize on this long standing, and often inexpensive, way of advertising.

Word of Mouth Advertising

One way that marketers may begin to utilize word of mouth to their advantage is to look at web 2.0 functionality. Traditionally, word of mouth advertising involved trying to get customers to tell their friends about a product. This can be accomplished naturally, by having really great products or services, or companies can provide incentives to existing customers to recommend their product or service. With the capabilities provided by the internet, word of mouth now includes social networking, blogs, videos and other “user generated content”. The article Word of Mouth Marketing: Winning friends and influencing customers (Williamson, 2007) explores this exciting “new” driver of growth. With the power and reach of the internet, word of mouth advertising is becoming not only bigger, but more effective as well. The article points to research indicating that more consumers are relying on advice of all types in making their purchase decisions. As seen in the chart below, in 2007, 66 million adults shared advice on products and services; this number is expected to grow to 72 million by 2011. Put another way, 91% of US adults regularly or occasionally seek advice from other consumers.
Before delving deeper into the nuances of online word of mouth advertising, it’s important to understand the differences between offline and online word of mouth.

Offline word of mouth:
o involves spoken word
o usually takes place among acquaintances or family
o is more challenging to measure

Whereas online word of mouth:
o uses written words, video/audio
o more likely to take place between strangers or people who only know each other online
o is searchable and trackable
o can expand the impact of word of mouth exponentially
Note that the differences are really not that significant, however as the last two bullets point out, online word of mouth is often a more fruitful avenue than offline, because of the ability to track it as well as the scaleability of the medium.

The Online Opportunity

As mentioned earlier, there are many different types of online word of mouth advertising. The majority of internet users, employ customer reviews to garner their information. Blogs are also a growing influence on consumer decisions and in fact 17.5% of blog readers do so for recommendations. While viral videos and microsites are exciting and often humorous, consumer pass-along is still relatively low for these media. One of the reasons for the successfulness of online word of mouth is that consumers typically view traditional advertising as less trustworthy. People are more comfortable taking advice and opinions from someone online, even though they’ve likely never met. Adult internet users typically report that they can get to know and trust a regular online contact’s judgment and that familiarity is developed with regular online contact, even if this simply involves reading a few of their messages. Before you start thinking that traditional interaction is a thing of the past when it comes to word of mouth, it’s important to note that 70% of word of mouth activity happens face to face, while only 8% happens online. This means that the internet is a critical resource for educating consumers, however the actual act of sharing information still mostly happens the old fashioned way. Therefore, while word of mouth advertising may cost less than other media, it should not be a matter of all or nothing. Online word of mouth advertising is best used as one component of an integrated on and off line approach.

Marketing Takeaways

Given the importance of online word of mouth advertising marketers should put more focus on developing and encouraging online discussions about their products. Currently, only 25% of online stores use customer reviews because of the fear of losing control of the marketing message. While this may be a realistic fear, it’s more important to remember that consumers will talk about your product or service regardless of whether you provide them with the opportunity to do so directly on your site. By allowing this type of feedback and discussion directly on a company site, you will be in a much better position to hear what your customers are saying and actually do something about it.


References
Reichheld, F. (2003, December). The One Number You Need to Grow. Harvard Business Review, 46-54.
Williamson, D. (2007, June). Word of Mouth Marketing: Wining Friends and Influencing Customers. E-Marketer.