Hyped Loyalty Strategies Can Doom Your Company

By May 24, 2005

There are many myths floating around about what it takes to build and run a successful customer loyalty program.

One of the biggest myths is that long-term customers are less expensive to service than casual ones, and that retaining 5% or more of customers annually will increase profits by at least 25%, according to Timothy Keningham, senior VP and head of consulting for Parsippany, NJ-based Ipsos Loyalty, who spoke last week at the Conference Board’s 2005 Customer Loyalty Conference.

Keningham, citing his soon to be released book, Loyalty Myths: Hyped Strategies That Will Put You Out Of Business—and Proven Tactics That Really Work, pointed out that in the early 1990s, First Bank Chicago successfully proved that its most loyal customers actually cut into profits.

Then-chairman Jerry Jurgensen had found that just one-third of the bank’s customer base was generating an adequate ROI. The customers who were helping the bank make a profit were the ones using self-service channels (ATMs and banking by telephone).

“The customers who were using interpersonal technologies were helping the bank save money,” Keningham said. “But the ones who would come into the bank and chat with the tellers at a clip of three minutes a transaction were eating away at its profits.”

So in 1995, First Chicago announced it would charge some of its low-balance checking customers $3 per transaction if they chose to use a human teller for transactions that could have been done by ATM or phone.

Despite becoming the punch line for talk show hosts like Jay Leno and the target of boycotts by Congress—as well as seeing a decline in deposits—First Bank Chicago’s profits jumped 28%, and it eventually merged with national banker Banc One in 1998.

“Most observers were forced to admit that First Chicago’s unorthodox approach to customer relationships was highly successful,” Keningham said. “To this day it remains the most unloyal strategy I have ever heard of. But if you look around, a lot of experts are wrong about theories.”

As Keningham discovered, beating the competition wasn’t about keeping the most customers. Ipsos Loyalty’s research showed that loyal customers are not necessarily the less expensive ones to serve, and that some of a company’s longest-standing customers (and price-shopping customers) tend to exploit them, demanding more rewards for services as time goes on.

Loyalty planners must avoid the myths of loyalty marketing, understand which customers it needs to retain, be oriented to offers of real value to consumers, and monitor customer purchases in a way that ROI can be calculated and tracked, Kenningham concluded.