Customer loyalty: are loyal customers really profitable?

I've been doing quite a bit of research into customer loyalty and customer loyalty programs for a paper I've written for the Executive Master of Information Management Programme I'm attending at TiasNimbas Business School. The literature on loyalty and loyal customers seems to suggest that investing in a loyalty management program does provide a company with a source of competitive advantage. In other words: loyal customers help to improve the performance of your company!

I've just stumbled upon an interesting blog post by Timothy Keiningham and Lerzan Aksoy over at Harvard's Conversation Starters blog. Timothy and Lerzan are working on a book on customer loyalty and outline why customer loyalty can also be a bad thing:

The fly in the ointment is that typically only 20% of a firm's customers are actually profitable. And many — often most — of a company's profitable customers are not loyal.

Timothy and Lerzan argue that in the current downturn companies focus too much on lowering prices in order to gain more customer loyalty.

But the simple solution to improving customer loyalty in a down market is to offer price deals. In fact, firms that track their customer loyalty can be guaranteed that loyalty scores will increase with each substantial decrease in price all things being equal.

But that's a bad loyalty strategy. No, this doesn't mean we should not find ways to be more efficient so that we can pass cost savings on to our customers. But price-driven loyalty is always the lowest form of loyalty. It means that we aren't offering differentiated value to our customers.

The key in their argument is the fact that truely loyal customers and profitable loyal customers are created by focussing on providing an added value and differentiated offer for your customers. Only then do you get a competitive advantage from loyalty management.

Be sure to check out Timothy and Lerzan's book Why Loyalty Matters and read their full blog post.