How Well Do You Know Your Customer?

“Despite all the money invested to promote loyalty among high-value customers, it is increasingly elusive in almost every industry,” say Stephanie Coyles and Timothy Gokey after completing a two year study of customers approach to purchasing decisions and ‘loyalty’ to organisations from 16 industries, covering a diverse range of products and services, from airlines to consumer products, (McKinsey Quarterly, 2002, p.81).

They found that managing migration, in respect of customers who spend more, as well as customers who spend less, was a crucial next step in understanding customer behaviour. They found, in fact, that many more customers change their spending behaviour, leading to a more significant impact on organisational performance than those customers who ‘defected’ to competitors.

Coyles and Gokey found that “managing migration not only gives companies an early chance to stem the downward course before their customers bolt entirely but also helps them influence upward migration earlier.” The also found that “by learning to understand why customers exhibit different degrees of loyalty and combining that knowledge with data on current spending patterns, companies can develop loyalty profiles that define and quantify six customer segments,” (p.82-83).

Three of the key segments are related to customer loyalty profiles and the other three to downward migrators.

The three loyalty profiles are;

1) Emotive customers are the most loyal, feeling strongly that their current purchases are right for them and that their chosen product is the best, they rarely assess purchasing decisions. Coyles and Gokey’s research showed that emotive customers generally spend more than those who deliberate over purchases, and hence, are a primary focus for organisations and their marketing efforts;

2) Inertial customers rarely assess their purchases, but unlike emotive customers their inaction results from high switching costs or lack of involvement with products. Utility and life insurance companies are good examples of this segment. Also they noted that these customers aren’t prone to spend more or less than they currently do;

3) Deliberators are on average the largest customer segment, representing 40% of all customers across all industries. However the rewards from influencing deliberators can be twice as high as the other two segments, above. Deliberators frequently reassess their purchases by criteria such as products; price and performance and the ease of doing business with an organisation.

For the other three segments, Coyles and Gokey found that the downward migrators have one of three reasons for spending less;

1) Their lifestyle has changed (for example, having lost a job or having a baby);

2) They have developed new needs that the company isn’t meeting; as they continually reassess their options and have found a better one; or

3) They are actively dissatisfied, often because of a single bad experience.

Coyles and Gokey highlight how “although changing needs are often dismissed as uncontrollable, our work shows that they can be addressed, especially if a company invests in a new product or channel. Meeting these new needs is a smaller but relevant part of the overall loyalty opportunity,” (p.85).

It’s also been shown that loyalty profiles differ across industry sectors, and that each industry has an average behaviour pattern that influences customer decisions. Where these patterns are generally determined by five structural factors;

1) How often purchases are made;
2) The frequency of other kinds of interaction (e.g. service calls);
3) The emotional or financial importance of a purchase;
4) The degree of differentiation among competitor offerings; and
5) The ease of ‘switching.’

Coyles and Gokey’s research adds a third dimension to developing specific customer-centric strategies. Most customer profiles analyse the product or service in relation to the industry and the micro target-market segmentations. Now organisations can develop detailed three dimensional customer profiles for their products or services, in relation to the industry segment, the appropriate target markets, and their related loyalty or migratory segment. This allows organisations greater clarity and focus in developing effective customer-centric micro-strategies that will improve customer relations and loyalty, increase sales, and critically ensure that the marketing budget is spent in the most appropriate three dimensional quadrants.


References:

Coyles, S. and Gokey, T.C. (2002). Customer retention is not enough. The McKinsey Quarterly, No.2, p.80-89.