Customer loyalty in digital business

Dienstag, Dezember 6, 2016

He is ungrateful, moody, and changeable. She is not reliable, constantly changes her partners and is also very demanding.

No, it’s not what you think! I am not talking about past life companions, but about modern customers. Especially in the Internet, the most non-binding of all media, the customer is more often a disloyal partner than someone a vendor can rely on with confidence for his sales plans.

Customer loyalty and customer satisfaction – overview

Is this something new? Did not customers always have to be wooed? Was customer satisfaction and customer loyalty not always one side of the same coin?

In this short lecture I want to tell you how the relationship between customer satisfaction and customer loyalty has changed. In my agenda I will tell you something

The new customers
The need for loyalty
Customer centricity explained
Customer centricity tools in action

The new customers

What is new comparing today’s situation with a pre-Internet period is that customers increasingly have no personal contact with companies and their staff. The more people shop online, the more they only have a digital interaction.

Customers look at hundreds of sites, online stores and apps, all of them are very similar. Companies have to work on excellent customer experiences. For these experiences customer satisfaction is only a precondition. Customer satisfaction is a necessary but not a sufficient precondition for customer loyalty.

I had some personal learnings with customer loyalty in the last years when I founded and run an e-commerce business. I learned that focusing on and investing in customer relationship is profitable if it is in the center of the business. Every contact is a chance to improve customer experience, every mistake and customer complaint is also a chance to show the customer the trustworthiness of the company.

Customer loyalty has become more and more important because online vendors face a situation where it is an increasing effort to find loyal customers and build a successful bread and butter business. In the highly competitive environment of the Internet, it is increasingly expensive to acquire customers.

If customers do not become loyal to a company or a brand after they have purchased something, then vendors have to advertise again, to obtain the next orders. But the contribution margins from these additional ads don’t cover the high expenses. While cost per clicks are increasing and conversion rates are low it is not profitable when customers have to be acquired with paid advertising each time to sell online. This could be shown in an example and a small calculation from Google Adwords:

CPC: 0,93 €
Conversion Rate: 3 %
Cost-per-Order = CPC/CR = 1 € / 0,03 = 31 € (divide by)
Value of Shopping Basket: 75 €
Share of marketing costs = 31 €/75€ = 41,3%

So it is not sufficient to satisfy customers once and leave them with no further perspectives regarding the vendor as a preferred partner. But with customer centricity vendors are able to bind customers and convince them to be loyal. Customer centricity is a core strategy and a cultural approach of digital business. The key to customer centricity and to customer loyalty is an excellent customer knowledge.

What is Customer centricity – Explanation

Customer centricity is a strategy which is common to many leading digital companies. The background of customer centricity is the transparency of the internet as a sales channel. Customers check many online stores, websites and they communicate their experiences. They evaluate companies and products, they write reviews and give recommendations. If a customer is not satisfied and his or her expectations aren’t met, the danger is quite high that they will communicate their disappointments. And every post with negative evaluations remains online for a very long time. So the damage resulting from bad customer experience is much higher than the gain of delivering low quality in products and services. In contrast the value of satisfied customers who share positive experiences with many others can’t be overrated. This value is the result of a customer centric company which “focus like a laser on the customer”, a quote of Jeff Bezos, the founder and CEO of Amazon which became famous.

But how is customer centricity working?

At the center of the customer centric strategy is a focus on specific customer segments which are very valuable to a particular company. The segmentation is facilitated because most of the contacts and interactions between customers and companies take place in the digital channel. So usage of websites and online stores and communication feedback could be registered and stored as data which are the basis of analysis. With this data and with tools like Google Analytics customer centricity leads customers from satisfaction to loyalty.

Customer centricity tools in action

There is a specific workflow of customer centricity which helps to create customer loyalty with a digital platform. This workflow is influenced by the lean startup method of Eric Ries. At the center of this workflow is the digital platform. In e-commerce it is the online store, but also apps and social media pages belong to the digital platform. After building and publishing the online store a vendor starts with collecting data about customer satisfaction. But he can also monitor user experiences with bugs and usability problems. The functions of the store should be monitored in reverse order from the end of the checkout process to the beginning. The reason is quite simple: The later a step in the checkout process takes place the bigger is the loss when this step fails because of bad user experience and unsatisfied customers.

To implement customer centricity there are important tools in digital business. The tools for increasing customer loyalty are

targeting,
lock in – build the relationship
collecting responses about customer experiences,
webanalytics,
digital customer relationship management and
customer loyalty programs.

The customer centricity approach starts with transforming the segmentation in addressing the right customers. Customer could be targeted with using tracking, keyword marketing and social media marketing. These marketing instruments allow us to focus on more and more precisely determined segments.

If a company has targeted a group it should give the potencial customers incentives to register on the digital platform. An alternative or additional method can be that the customers are motivated to register for the newsletter of the onlinestore. With registration and lock-in the company has the potencial to collect data and address the customers regularly.

In the next step it is important to collect customer responses according to the site usage. These revelations of customer experience are the most valuable milestones to obtain customer loyalty. If they are positive every other customer can read them. The general impression about the companies’ performance becomes positive. If a customer commentary is negative it gives the company the chance to respond to it immediately and solve the issue.

The companies’ response has a frontend and a backend element. In the frontend part it should address the customers concern and be published. A published answer to a customers comment is part of a digital dialog which give the company the opportunity to show customer centricity and service orientation. The backend element gives opportunity to solve the problem and reduce the risks of future customer concerns.

In the next step it is important to introduce webanalytics to monitor comprehensively customer reactions on the digital platform. Webanalytics provides a lot of measures and at least kpi to get information about the customer journey and any particular touchpoint of the customer. Social media marketing stimulates customers to report their user experiences. Social media marketing can be defined as interactions between individuals on a digital platform.

Webanalytics has to be introduced from the very start with the implementation of the digital platform. The earlier the collection of data begins the more data about usage will be available. The customer centric company is also modelling an ideal customer journey and define targets and measures for every step of this journey. Most important measures are

Retention rate
Return rate
Conversion rate
Shopping basket value
Number of visitors.

The most important kpi for customer loyalty is the customer lifetime value . It is more a modell than a single kpi. You have to calculate the current costs of acquisition and also the future contribution margins which could be predicted as profits from loyal customers. In order to estimate the customer lifetime value, a digital customer relationship management has to be established.

With digital customer relationship management an online vendor is at least able to connect web analytics with online sales data and data concerning all other customer reactions. Companies are getting a comprehensive view of customer behavior and preferences. If this data and the entire relationship is managed in order to satisfy the customer they will reward it with loyalty.

At least are customer loyalty programs such as Amazon Prime tools to manage and improve the customer relationship. The programs give incentives to visit the platform, engage on it and shop above the average. The conversion rate of Amazon Prime customers is at nearly 50%, the value of all Prime customers is round about 120 Billion USD.

Conclusion

With these tools and methods the chance to satisfy customers will increase. In addition customers feel understood and find a company which shares identical values. But customer centricity is not only a strategy for e-commerce companies only. Every company which becomes digitally transformed should put customers in the center and use digital tools for loyalty. Just try this out.

Literature

Peter Fader (2012): Customer Centricity. Focus At the Right Customes for Strategic Advantage, Philadelphia

Tony Hsieh (2009): Delivering Happiness: A Path to Profits, Passion, and Purpose, New York

Avinash Kaushik (2009): Web Analytics 2.0: The Art of Online Accountability and Science of Customer Centricity, Hoboken/NJ.

Eric Ries (2011): Lean Startup: How Constant Innovation Creates Radically Successful Businesses, London

Brad Stone (2014): The everything store: Jeff Bezos and the Age of Amazon, New York