How Customer Loyalty Differs Online

Aug 25, 2009 9:34 PM  By

Customer loyalty in the online world is not the same as offline. Substitutes are just a click away vs. down the street offline. Customers expect you to know everything that’s ever happened between you online, while they accept anonymity offline.

Understanding how these differences impact marketing is crucial to the right approach to developing more customer loyalty in an online world.

Customer loyalty is a reflection of preference and choice. Rational loyalty reflects the rational decisions to choose one provider over another for a given purchase. This is best observed in share of wallet, which reflects the choices a consumer makes between options.

Emotional loyalty reflects the attachment a consumer has to a brand, regardless of their spending on that brand. This is expressed via word of mouth, referrals, and participation in engagement programs and activities.

Looking at value and loyalty separately shows why spending magnitude is a poor measure of loyalty: It is easy to conceive of a high-value, low-loyalty customer, and just as easy to visualize a low value, high loyalty customer.

In today’s socially turbocharged world, high-loyalty customers may have low direct financial value, but high indirect value. But fundamentally, marketers understand that loyal customers are predisposed to become high-value customers, and generally are higher value than similar customers who are not loyal.

The major difference online is the ability to track nearly all customer behavior and transactions. In the multichannel world, this can be difficult. Without this limitation, online sellers can focus entirely on the driving customer value and loyalty directly.

This changes strategy in two important ways. First, multichannel retailers tend to focus on the customer experience and customer engagement before eventually moving on to increasing levels of data-driven CRM. Online rarely does this sequentially – customer experience, customer engagement, and data-driven CRM tend to evolve together, which has profound impact on the sophistication level needed for any given new tactic or capability.

Second, online lacks the built-in loyalty that location affords. Multichannel merchants can depend on natural foot traffic to account for a substantial portion of revenue – online must fight for every new customer on equal footing with competitors. This pushes frequency much higher on the list of needs for online merchants.

When you combine the need for thoughtful integration of experience, engagement, and CRM with the need for frequency, combined this can be a tremendous challenge for marketers. Any effort that can improve customer loyalty and sidestep the comparison engines, coupon aggregators, and affiliate malls that erode profitability can produce tremendous ROI, but will not be easy to pull off.

Every business is different. Increasing “devoted attachment” typically involves the following areas:

Improve the experience: As merchants get better at the shopping, purchasing, and fulfillment experience, customer loyalty improves. Enhancements to the experience stay on-brand, delivering faster, richer, and more informative sites.

Reward loyalty: A large portion of the population responds to rewards for their loyalty. This appeals to the rational loyalty element, in which a customer given two similar options for a product will tend to consolidate their wallet share with the one providing the most compelling financial reason to do so.

Clarify the brand: A portion of the population still responds to brand attributes, so ensuring your brand message is consistent will make it easier for customers to gravitate towards your brand.

Listen and respond: We’re seeing faster response to individual customer issues as a driver of customer loyalty. This is partly due to avoiding customer sharing of bad experiences with their friends and coworkers. The social network explosion has put customer care squarely in the middle of marketing – good marketers will now watch complaint rates and monitor social media for poor feedback.

Enable community: Allowing customers to share their experiences with others through reviews and forums increases the trust in your company and improves your site as a resource.

Communicate relevantly: Customers have less patience for irrelevant communications from online merchants, given exact knowledge of transaction history. Offers, promotions, new releases, events, and other content should be relevant, timely and useful. Assume your competitors have started such an effort, even if you haven’t seen erosion in revenue yet.

Minimize negatives: Often your best improvement is to “get to zero” in an area of weakness. Since bad experiences can spread far beyond the initial customer, working to avoid those poor touch points can result in good ROI. Improve an unpleasant experience so that it is neutral in its impact – or no longer the source of negative interactions – and you’ll shift emphasis toward your areas of strength.

Our experience with loyalty to online merchants suggests a strategy that incorporates all of these improvements – use a reward program as glue.

The most successful programs connect various loyalty drivers together into one comprehensive program. They aren’t frequency programs with a tiny link on the home page, or an e-mail program, or targeted offers on the site.

Rather, they incorporate all of the interaction media and engagement touch points with a point of view. They reward reviews, purchases, recommendations, referrals, visits, and other activities that are relevant to customer loyalty – not just customer value.

A holistic approach is a crucial step toward building long-term customer loyalty in a world where competitors, comparison engines, and substitutes are a click away. Online retailers must improve the core of what drives customers to think first about coming back directly – to build the devoted attention leading to greater value.

Michael Greenberg (michael@loyaltylab.com) is chief operating officer at loyalty marketing firm Loyalty Lab.