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Is loyalty in customers a good trait or a bad one?

It might seem like a silly question. After all, executives and marketing professionals have viewed loyalty as a kind of Holy Grail for consumers. If a customer is loyal, he or she will stay with you and that gives your bank a stable customer base and stable revenue for years to come. Loyalty is so important that most metrics used to assess consumers, like a promoter score, focus on that trait and that trait alone.

But loyalty has its drawbacks. In fact, a focus on retaining and servicing your most loyal customers might be hindering your bank’s growth, rather than fueling it.

Here’s why:

Loyalty Costs You Money. For many industries, like restaurants and retail, a lot of time and energy used to be placed in loyalty programs. The strategy was to make offers to ensure that customers kept coming back, and discounting products and services gave consumers a warm feeling about the store or brand. Banks have taken the same approach, frequently extending special offers for existing, “loyal” customers. But that approach doesn’t make sense. Why should you have to discount products or services for customers you already have? After all, if they’re truly “loyal,” wouldn’t a customer pay a full price? That loss of profit margin for existing customers makes it harder to manage margins on discounts for customers you don’t have and want to attract.

Technology Tests Loyalty. Technology has changed the way banks do business, and it has also changed consumer behavior. “Shopping around” for the best rate or deal used to require some work on the part of a customer. Now, even your own marketing could unexpectedly lead you to lose business. Send a special offer to a loyal customer and, in a few thumb-swipes on her phone, that customer can comparison shop and engage with a competitor with more attractive terms. Loyalty is a behavior, not a frame of mind. It’s not true loyalty if it can be tested so quickly and easily and leads to a customer leaving in an instant.

Loyalty Does Not Equal Lifetime Value. You know that customer you have who comes into a branch each week to make a deposit? He’s been doing that routine for over a decade. Love him, right? You should, because he is probably truly never going to leave you. He is also not going to do any other business with you, either. What your data portrays as a loyal customer is simply one who is comfortable with a routine, isn’t likely to do more transactions and certainly doesn’t want the hassle of changing banks. The value to your bank’s bottom line is static. Retain him by all means, but don’t expect to increase the lifetime value of that customer over time. You have a better chance of growing your business with a new customer.

That isn’t to say that loyalty has no role. Indeed, loyalty allows you to figure out how to retain and affirm the relationships of your customers. But metrics you use to develop marketing and business strategies – and to support your bank’s long-term growth – can’t stop at figuring out who among your existing base is simply loyal. You have to get customers to do more business with you, and bring in referrals, as well. You also have to have data that drives discussions about what drives the behavior of those energized customers so you can tailor marketing programs to target new customers and win that business.

Loyalty, or any flat measurement you use to assess your business, doesn’t get you very far.

 

For more information on Informa Research Services' customer engagement and loyalty research and The SEA Score™ program, contact us at 800.848.0218 or email info@informars.com.

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