Loyalty is a concept often associated with the past. The Blitz spirit, ration books, Prime Minister Harold Macmillan insisting you never had it so good. The ‘good old days’ when you shopped at your local grocer and community spirit held people together. In the materialistic 21st century, where consumers are faced with more choice than ever, what relevance does loyalty have?

For IT leaders, perhaps it has become more important than ever.

Every sales and marketing expert is taught that it costs much more to win a new customer than to retain an existing one.

In his book, Loyalty Rules (Harvard Business School Press, 2001), Fred Reichheld, a Fellow of management consultancy Bain & Company, claimed that a five per cent increase in customer retention rates leads to a 25 to 95 per cent increase in profits.

That is a statistic likely to make any chief executive sit up and take notice. And increasingly, the way to generate loyalty is through technology.

‘By 2010, consumer expectations will be the primary driver for IT and customer service strategies,’ says Gartner research director Michael Maoz.

‘The modern enterprise continues to focus first and foremost on growing revenue and profits while lowering costs. As rational as these priorities appear, the reality is that there is a more successful strategy for growing revenue: focus on the customer and the customer’s intent in interacting with the company.’

Even then, assumptions about declining loyalty may be misleading. According to research looking at the role of loyalty in today’s society, undertaken by think-tank the Global Future Forum (GFF) on behalf of O2, and provided exclusively to Computing Business, 76 per cent of people in the UK believe that loyalty is as relevant today as it has ever been. Perhaps surprisingly, the figures are highest among 16- to 34-year-olds, where more than four in five people rate the importance of loyalty to their relationship with the companies they buy from – this among the most IT-literate generation there has ever been.

But what is loyalty? How can it be created and maintained, and what role does technology play in this digital age?

‘Understand what motivates customers,’ says Maoz. ‘Organisations need to better understand what motivates customer loyalty and to record that information in software systems.’

Defining loyalty

A common misconception is that a happy customer is a loyal one.

‘Customer satisfaction is not the end goal,’ says John Ragsdale, research director at analyst Forrester Research.

‘Companies in more industries are realising that loyalty, not satisfaction, is the Holy Grail for more profitable customer relationships. Reaching satisfaction must be viewed as a logical process. Customers, either consciously or unconsciously, decide they are satisfied based on how well the company meets their expectations for fulfilment, value, convenience and trust. But to reach loyalty, customers must make a leap beyond logic to feel an emotional tie to a company or its products.’

Bob Tyrrell, former chairman of marketing consultancy The Henley Centre and now an independent consultant, says a common facet of companies that generate loyalty is simply that they like people.

‘It is very difficult to fake sincerity if you genuinely like people,’ he says.

‘It is a characteristic of many families who stick with each other through thick and thin. It is like that with employees and customers, there is a kind of commitment and passion – they like each other. The nation still loves Marks & Spencer, and when it fell from grace there was a sense of people rooting for it to get back in there. That is the ultimate test of loyalty – even when you are giving bad prices and bad products, there is a kind of underlying loyalty there.’

Equally importantly, according to Tyrrell, the characteristics of loyalty-creating firms are the same whether dealing with consumers or clients in the business-to-business environment.

‘The nature of the way you conduct the relationship will be different, but the principle is broadly the same,’ he says.

‘If you do not have the long-term interests of your customer at heart it is not going to work.’

Jill Griffin, president of US loyalty consulting firm Griffin Group, in her book Customer loyalty: How to earn it, how to keep it (Jossey-Bass Publishers, 2002), defines 12 laws of loyalty, which can be summarised as:

1 Build staff loyalty Firms that treat their staff well tend to treat their customers well. It is hard to build customer loyalty with a staff that is in constant turnover.

2 Practice the 80/20 rule Typically, 80 per cent of revenue comes from 20 per cent of customers. Segment customers by value and monitor activities to ensure high-value customers get their share of special offers.

3 Know your loyalty stages and ensure your customers are moving through them Loyalty is built one step at a time. By understanding where in that process customers are, firms can work out how to move them to the next stage.

4 Serve first, sell second Savvy customers know they can shop around. They believe you earn their business with service that is pleasant and personalised. If you don’t deliver, they will leave.

5 Aggressively seek out customer complaints The majority of complaints are never heard – the unhappy customer simply takes their business elsewhere. Make it easy for customers to complain.

6 Get and stay responsive This is an area where technology is particularly important. The internet has changed the customer’s perception of responsiveness. Technology tools, such as customer self-service, email management and live chat or web call-back, are proving increasingly critical.

7 Know your customer’s definition of value Value means different things to different people, but firms need to research and understand how it is perceived and how well they deliver.

8 Win back lost customers Customers are increasingly promiscuous and change suppliers often. Companies should not only focus on acquiring new customers and retaining existing ones, but track former customers and find ways to win them back.

9 Use multiple channels to serve the same customers well Research suggests customers who engage with a firm through multiple channels exhibit deeper loyalty than single-channel customers. But the service provided by each channel must be equally good.

10 Give your front line the skills to perform Staff at contact centres need to be multi-skilled, capable of providing good face-to-face and telephone-based service as well as writing proficient emails and navigating web sites.

11 Collaborate with your channel partners Developing supply chain relationships for the greater good of the customer creates value that is hard for competitors to match. For example, car manufacturers increasingly share information with distributors and dealers to maximise their combined knowledge of customers.

12 Store your data in one centralised database An effective loyalty strategy means capturing all customer contacts and details in one place. Without it, the organisation is greatly handicapped in its efforts to serve the customer.

Changing attitudes

But the nature of customers is changing, and companies need to understand the demands of the modern buyer.

Whether or not the relevance of loyalty has changed, people’s attitudes towards what the concept means has certainly altered in recent generations – see story here.

‘One of the big drivers today is autonomy. People want to be in control,’ says independent consultant Tyrrell.

‘If you look at the road rage phenomenon, it is all about when autonomy is compromised and people lose control. It is a problem when technology inhibits c ontrol – such as call centre option menus where you have to listen to all of them before you can continue. When people are confronted with something inanimate or recorded they are less patient. This is where technology can often create rage.’

In some cases, even the highest customer service and the best loyalty processes will not be enough.

‘People are becoming more open-minded and promiscuous about their suppliers,’ says Tyrrell.

‘Research took place a couple of years ago called the multi-satisfaction paradox. Academics looked at a number of companies that had sustained or even improved their levels of customer satisfaction but were still losing customers.

‘They looked into the reasons, and found that people were simply changing more often. They gave a supplier 10 out of 10 for customer satisfaction, but when asked if they would buy from them again they said no, because they just wanted a change.

‘There is an argument that defection levels may rise regardless of what the company does.’

But smart CIOs will be showing the board how IT can be used to create, maintain and improve loyalty to their company.

The role of technology

In recent years, the main technology focus related to loyalty has been customer relationship management (CRM) systems – although evidence of genuinely successful programmes has been patchy.

The danger is that CRM often becomes a one-way tool, focused internally on the requirements of the sales, marketing or service department.

‘Many organisations integrate customers into their processes, but rarely make customers’ needs a high priority,’ says Gartner’s Maoz.

‘The future of IT investment lies in meeting evolving customer demands in the most profitable way possible. IT and business process investments that fail to align with customer intent neglect the fundamental goal of the organisation.’

The aim of collecting data about customers and their buying patterns should be to understand them better, says Rob Fraser, group IT director of high-street retailer Boots, operator of the Advantage card, one of the UK’s most successful loyalty programmes – see case study, here.

‘We don’t look on the Advantage card as a loyalty scheme – we see it as a customer insight scheme,’ he says.

‘Customers are loyal because you serve their needs better than anyone else. We have found that trying to lock a customer in is short-termist and ultimately fails.

‘You need to continually understand the customer better, and ask how do I service those expressed or unexpressed needs better than anyone else. That is the killer way to get loyalty.’

The GFF/O2 loyalty research shows the importance of different technologies in creating a positive feeling towards a particular brand or company .

Some 46 per cent of the 1,013 respondents said a web site helps generate loyalty; 44 per cent say the same of call centres, and 46 per cent cite email contacts.

But 46 per cent say that an automated voice service makes them feel negative towards a company, and only 35 per cent respond to the use of CRM-type data to understand their preferences and tailor products to their needs.

Most tellingly, 76 per cent say access to people who can help with enquiries encourages them to feel positive towards the brand. Technology can help but people still respond best to people.

‘The companies that have the most loyal customers are not necessarily those that give points for prizes but simply give great service,’ says Tyrrell.

‘But equally, research indicates that people recognise that technology, appropriately applied, can provide better service and therefore greater grounds for commitment and loyalty to a supplier.’

IT can also help firms listen to their customers better and monitor opinions and complaints that might not be expressed directly to the company.

Chat rooms and blogs are increasingly used as a means for airing grievances, and firms can easily use RSS (Really Simple Syndication) tools to monitor online discussions about their products and services. In 2002, cable TV company NTL went as far as acquiring an independent web site that customers were using to discuss their complaints – although many of those users simply set up another site outside of NTL’s control, and the original site, www.nthellworld.com, now has a message from NTL that says: ‘Following a comprehensive review and careful consideration we have decided not to relaunch this site.’

But while IT can help develop loyalty, it can also help customers avoid it.

‘Consumers embrace technology to escape brands’ smothering grip,’ says Forrester analyst Hellen Omwando.

‘The internet has tipped the balance in favour of consumers. It has brought down switching barriers by enabling consumers to easily compare product offerings and prices. UK online travel buyers visit, on average, almost four web sites to find the cheapest fare.’

But one key area for generating loyalty where technology is essential is personalisation, which is often associated with loyalty programmes, such as those provided by retailers or airlines.

‘Technology has the capacity to personalise service very quickly and cheaply,’ says independent consultant Tyrrell.

‘My local newsagent gives me a personal service and knows what paper to keep for me without asking.

‘Technology applied well can provide that personalised service. It has a big part to play in building customer loyalty.’

The Nectar card, a scheme used by Sainsbury’s, Debenhams and BP, sends some 65 million emails to its customers per year. Quarterly postal mailings with cardholders’ statements have more than five million unique, individualised variations.

‘Personalisation and relevance is the buzzword, more than communication or frequency. That is something we focus on a lot,’ says Roger Sniezek, ecommerce director at Nectar operator Loyalty Management UK – see case study, here.

But Tyrrell says the type of personalisation must be appropriate to the service provided – the same methods will not work for all companies.

‘One of the characteristics of good service is when you feel the company is personalising what it does for you in a way that doesn’t grate with other customers,’ he says.

‘If you think of the airlines, they have found ways of identifying customers that give them repeat business, and the more business the customer gives the more privilege they receive – access to lounges, special check-in, and so on. The interesting issue is, in a democratic, egalitarian world, where consumers like to feel equal, how can you introduce privilege? Imagine if banks or supermarkets had gold check-ins, there would be riots in the aisles.’

But collecting data for personalisation does have a potential backlash in the privacy concerns of consumers who fear the Big Brother elements of companies knowing their personal behaviours.

Clothing retailer Benetton was forced to scrap plans to use radio frequency identification tags in garments to improve its supply chain and better understand shoppers after privacy lobby groups complained.

The key here is to make sure customers understand the quid pro quo of providing you with such information, says Forrester’s Omwando.

‘Consumers will relinquish privacy for status,’ she says.

‘Truly loyal clients will happily part with personal details to receive an exclusive gadget or service from their favoured brand.’

Ultimately, creating an organisation that has loyal customers requires changes to business processes as well as use of IT. But CIOs play a vital role in achieving this goal.

‘Technology alone will not create customer loyalty,’ says Forrester’s Ragsdale.

‘Such a transition will not occur without changes to organisational structures and core company philosophies, as well as capitalising on new service technologies. Increasing customer loyalty must be an ongoing effort.’

See also - IT and loyalty - a marketing view

What do you think? Send your views to feedback@computingbusiness.co.uk