Customers are fickle. They move from shop to shop, they change brands frequently and they alter suppliers on a regular basis. The concept of being loyal to a brand or suppliers is rapidly dying out.
New research from McKinsey suggests that customer loyalty is actually rather elusive. The study looked at 125,000 consumers across a wide range of purchasing areas. It found that there were only three out of 30 categories in which loyalty played a part. Those sectors were mobile phones, investment and car insurance. Indeed, for these three categories, the main driver of purchasing was loyalty. However, in almost all of the other categories, loyalty was a bit-part player, barely entering the chart for half of the areas under investigation.
If you run a business you might like to think that your customers love you. In reality, though, they are prepared to set themselves free from buying your products and services at a moment’s notice.
Which rather begs the question, what are those top three categories doing for their customers that the rest of the firms in the study are not doing? What are car insurers doing so special to make their customers loyal?
Lock-ins versus loyalty
The answer is probably nothing. Go on an MBA course and they’ll tell you that there are only four ways of creating value in a business. These are novelty (having something new), efficiency (doing it better than the competition), complementarities (providing additional services and products) and lock-ins (making it tough for customers to leave).
Many businesses who think they have loyal customers have no such thing. What they have set-up is a business with “lock-ins” making it harder for people to leave and go somewhere else. The mobile phone industry is adept at this. They provide you with a “free” phone in return for a 24-month contract for their phone service. Then, when the contract is about to expire they offer you a nice new shiny phone without any charge and also provide you with a “special deal” for another 24 months. For most people that is so much easier than shopping around.
The same is true for the car insurance sector. Even though it is relatively straightforward to go to an insurance comparison website, the vast majority of people do not do so. They just simply stick with their old insurer because they make it easy for them to carry on using them. This is more of an emotional lock-in, but a bunch of paperwork and a letter saying “you don’t need to do anything to carry on being insured” is all the firms need to convince people it is easier to stay.
The investment sector also locks you in emotionally. The company has looked after something highly personal for you for the past year or more – your money. They know you simply won’t move out of fear that an alternative company would reduce your pile of cash. Better the devil you know – unless you are a high risk-taker.
Customer loyalty is a myth
In the podcast “Rethinking Customer Loyalty” from the research firm Forrester, the presenter points out that customers are “restless”. We are all relatively happy to move away from existing brands and suppliers.
We need to realise that customers are not loyal to a brand or a business, but instead are loyal mostly to themselves. The reason they might stick with a brand has nothing much to do with what that company does. Rather it is about what the individual thinks the company does for them. It is all “me, me, me”.
The so-called loyalty that people have to a mobile phone company isn’t loyalty. Indeed, it isn’t really “lock in”. Instead, it is the customer saying “my time is my own as I don’t have to trudge around looking for new deals.” They could also be thinking “my new phone will be the envy of all my friends”. Plus they might also be saying “there are too many choices anyway and I don’t understand the differences so I won’t waste my time trying to find out”.
The result is the so-called loyalty is nothing of the kind. What is happening is that the customers are focusing on themselves and thinking about what it means to change supplier.
It’s not like the olden days
In the olden days, people were seemingly loyal. They always bought their clothing from the same shop. But that wasn’t real loyalty. It was just lack of alternatives. That’s not an issue anymore. You have an almost unlimited choice of clothing suppliers these days, all a simple click away.
In the olden days, if people went into a supermarket they bought the same items. But that was only because they were the items the supermarket stocked. And why did they sell them? Well, that was because it was what their customers bought. The customers didn’t change from brands and so the supermarket buyers didn’t switch suppliers. Everyone thought it was loyalty when it was just lack of variety.
Today we have the Internet…! Switching brands and suppliers is convenient and quick – unless it is a complex choice like mobile phones or there is a significant emotional component such as our investments. For the rest of the things we buy, there is no barrier to change. We can – and we do – switch brands and suppliers much more readily now than before.
Facing up to the loyalty issue
Nowadays, for many businesses, loyalty is a dream. Increased competition and online shopping combined with the human need for convenience have all but destroyed loyalty for many products.
That doesn’t mean loyalty is not possible, but we need to approach it from a different angle. The more we focus on what our products and services do for people, the more we focus on what our products and services mean to them, the more we’ll be talking their language. And as the mobile phone companies and car insurance firms demonstrate, that language is “convenience”. The more convenient you make it for your customers to buy your products and services, the more likely they are to be loyal.