The serial adultery of the modern customer; The best way to make shoppers loyal is to give them what they want

February 3, 2014 5:02 pm

The serial adultery of the modern customer

By Andrew Hill

The best way to make shoppers loyal is to give them what they want

The eulogies last week for Justin King, outgoing chief executive of J Sainsbury, make clear he won his crown as Britain’s most successful grocer by reconnecting with his loyal subjects – the shoppers – after years of neglect. But his abdication as chiefexecutive of the country’s second-largest supermarket chain, after a decade in charge, is a good moment to ask whether customer loyalty really matters any more.

It obviously matters to Mr King. His senior team tries to identify what they call “points of Velcro”, to encourage customers to spend more time and money there. A shopper who opens an account with Sainsbury’s Bank, for instance, will typically spend more on food, while a customer using a store for a “click-and-collect” purchase will often stop to buy something else.

But the hard truth is that poorly directed customer loyalty campaigns can also attract as much annoying fluff and dirt as a Velcro fastener.

Loyal customers are not necessarily cheaper to serve, according to a 14-year-old study by Werner Reinartz and V Kumar. Their research, which seemed to run against the grain of advice from most marketing experts at the time, divided customers into true friends (long-term and highly profitable), butterflies (transient but profitable), strangers (with the lowest potential for profit), and barnacles, who “create additional drag” unless they are scraped off or somehow converted into better customers.

British supermarkets seem to be attracting more butterflies. To a degree, their customers have always been fickle. The big grocers change the price of aboutfour in 10 items every week as they race to outpromote each other. But even at Tesco, the market leader and loyalty programme pioneer, less than a third of shoppers are “highly loyal” – in that they spend 50 per cent of their grocery budget there. According to Kantar Worldpanel, the figure for Sainsbury is less than 16 per cent. Mr King’s successor could see a further decline as shoppers shift from out-of-town shopping parks to smaller, high street outlets, further dividing the contents of their weekly shopping basket between rival brands.

These “disloyal” customers are spending an attractive chunk of British household budgets, though. Less than 3 per cent of Marks and Spencer’s grocery customers are highly loyal. Yet sales of its high-end food continue to strengthen, prompting one rival retailer to muse how “promiscuity is valuable”.

Of course, nobody gets too emotionally attached to the source of their pint of milk or loaf of bread. The serial adultery of the modern customer will come as more of a shock to companies that have grown used to a devoted, monogamous relationship such as hotel chains, car manufacturers and consumer electronics groups.

In their new book, Absolute Value , Itamar Simonson and Emanuel Rosen say these are now “open marriages”. Customers evaluate each new model of camera, car or computer on merit rather than on marketing or prior preference.

The uncertainty is an opportunity for some. If a well known brand is only as good as its next product, an upstart can mount a challenge with a better one – as Asus laptops didwhen they took on Dell and Hewlett-Packard.

But the change is undermining the usefulness of fidelity measures such as the “net promoter score” – based on customers’ willingness to recommend products to others – which is worthless unless they actually make the recommendations. Social media, peer reviews and near-perfect online information are also punching an internet-shaped hole in attempts to measure the “lifetime value” of customers, as they may well spend their lifetime flitting unpredictably between brands.

Marc Benioff, chief executive of Salesforce.com, which sells online customer relationship applications, recently declared this to be “the age of the customer”, to nods from other World Economic Forum delegates in Davos. Yet the same connectedness that makes it tougher for companies to avoid a disappointed customer and easier for them to identify a satisfied one is also making it harder to guarantee that those customers will stay faithful.

The solution is for companies themselves to get back to basics. Instead of obsessing about customer loyalty, they need to refocus on quality, service and consistency – exactly the virtues, as it happens, that persuaded shoppers to rally to Mr King’s Sainsbury.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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