The Troubling Fallacy 

Businesspeople, it seems, want to extend the same treatment to all of their customers.  They appear, mistakenly, to want to be perceived as fair and magnanimous.  So they proceed to offer all of their customers the same benefits within a loyalty program.  The problem with this approach is that no matter how egalitarian businesspeople want to feel, they cannot consider all of their customers to be of equal value to their business.  The hard fact is customers aren’t all equal.  They don’t all interact with businesses in equal ways and they don’t all yield equal profits.  In my book, Loyalty Myths, I described the three types of customers all businesses have.  Recognizing these three types provides a useful customer triage process for businesses to adopt. 

The Three Types of Customers 

While appearing outwardly similar, there are three basic types of customers based on how they impact a business’s bottom line.  Businesses have Breakeven Customers – those customers who neither add to nor subtract from corporate profitability (either they buy a lot but demand equally heavy servicing, or they buy very little).  Businesses also have Costly Customers – those customers who demand so much attention or such excessive price concessions that maintaining them as customers reduces a business’s bottom line.  Finally (and hopefully not least), businesses have Desired Customers – those cherished customers whose volume of purchases and reasonable requests for servicing makes their transactions highly profitable. 

A typical company’s customerbase when dissected into these three segments, will show about 20% as Desired, 60% Breakeven and up to 20% as Costly customers.  With this insight, it’s easy to understand one of the basic myths of customer loyalty; we’ve been misguided by the maxim to retain as many customers as possible.  Customer retention (and a loyalty program specifically) is appropriate only when directed at Desired, profitable customers.  The objective of any strategically sound loyalty program should be on keeping Desired Customers and trying to improve the profitability of current Breakeven Customers.  Any spending directed at retaining Costly Customers is a recipe for bankruptcy!

 Strategy or ?

But ask yourself, just how many loyalty programs actually start with such a basic, yet strategically sound objective?  The unfortunate truth is the genesis of far too many loyalty programs is some form of incentive or need for customer tracking, with only a modicum of attention directed at who to retain or which behaviors to reinforce.  It’s a sad truth that most loyalty programs are far more tactical than strategic.

I’ve often said that businesspeople regularly fail to appreciate customers until they lose them.  Suggest spending money on a customer retention program and businesspeople will find every reason not to.  Yet, when a customer defects, they’ll eagerly throw money at the defecting customer in an attempt to win them back - even when they may have no idea just how valuable the customer really was.  Thus the old adage, “you don’t know what you’ve got until you lose it…” confirmed.

Rigid Enforcement of Loyalty Criteria

Last year I blogged about the consequences of unwisely demoting customers (Stop Demoting Customers! – 4/23/2009).  Harrah’s was the subject of my criticism having demoted my wife and me because our casino play in 2008 didn’t live up to their targets (set during better economic times).  Now, Harrah’s is once again my focus.  This time for having spent lots of money to win us back, after having demoted us!

Atlantic City casinos (and others around the country) will often elevate a player to a higher reward status in their Players’ Club (loyalty program) based on the customer’s ability to show preferred status at a competing casino.  In the case of my wife and me, entering 2009 Harrah’s demoted us, but another Atlantic City property didn’t retaining us instead at their “preferred” level.  So you can perhaps anticipate the ironic situation I’m about to describe.  Recently we decided to again play at Harrah’s.  We showed the Total Rewards agent our higher status card at the competing casino and asked if they’d be willing to elevate us to their Diamond Status (the level from which they had previously demoted us).  Elevate us?  Absolutely!  But that wasn’t all.  As if to prove how wrong they’d been in previously demoting us, they also gave us $200 in playable cash and $50 in food credits!

Foolish Expenditures to Win Back Previously Loyal Customers

Now in my previous blog, I observed that Diamond-colored plastic doesn’t cost Harrah’s any more than Platinum-colored plastic.  Had Harrah’s not demoted Linda and me, we would have continued to play at their casinos throughout 2009.  But instead, in an apparent uncalculating move, they took away our preferred status and by doing so encouraged us to concentrate our play at a more beneficent (and strategically thinking) casino.  But then they spent $250 to get us back!  Which leads me to ask, “Which is the action with the highest return?”  It seems obvious that investing in your current customers (even if it means selectively modifying tier-criteria to retain customers who have proven to be profitable over a period of time) is smarter than spending money to later “buy them back”.  So, the next time you’re considering how to maintain a healthy customerbase, I encourage you to first consider what actions you should take to retain the profitable customers you already have.  Override their possible, scripted demotion, to maintain their long-term loyalty.  If you thoughtlessly demote them, you likely send them to your competitors and you commit yourself to the possibility of buying them back in the future!

The gaming industry is by no means unique in promulgating this “demotion/win back cycle”.  The cable TV industry, cell phone category and many other industries are rife with similar, thoughtless and expensive cycles.

We Can’t Trust Survey Respondents?  You’re Kidding Me! 

A journal that I (used to) respect, the Journal of Consumer Research is printing an article in its August issue, that ‘reveals’ a truth that most of us who can remember black and white television were taught in marketing research 101.  This astounding fact, (hold on to your seats) is that one can’t always trust the results of surveys or opinion polls, because not all respondents tell the truth!  Now perhaps the editors of the JCR simply thought it was about time to remind readers and the marketing community of this truism, but they surely can’t consider it a significant new finding!  When researchers, perhaps like the author of this article, struggle to find topics to research, sometimes absurd topics emerge.  Apparently  this article’s author decided to re-investigate the veracity of marketing surveys and polls, but the article certainly doesn’t extend the state of current knowledge! 

That’s Why Dichter Created “Projective Questions” 

Social scientists, at least those candid enough to admit to the failings of their profession, have always recognized that respondents’ answers to survey questions need to be carefully interpreted.  Some respondents–it is hoped–tell the truth (as far as they know or understand it).  But other respondents lie or fabricate answers either to confuse, mislead, impress or please the surveyor or to safeguard their own image.  Ernest Dichter, father of motivation research in marketing, applied principles of Freudian psychology to create the “projective question”.  This questioning technique allows respondents to project into a relatively ambiguous question, their own (sometimes impure) feelings and beliefs without sullying their own persona - much the way one sees butterflies and witches in Rorschach inkblot tests

Inherent Bias

The reality of any data gathering in marketing is always that respondents who fabricate their responses will unfavorably influence (bias) the survey results.  So, in addition to using options like Dichter’s projective question, smart marketing researchers have built fail-safes into their questionnaires.  First, researchers will attempt to somewhat mask their intention for asking questions.  This neutralizes those out to mislead or please the surveyor.  Next, researchers use procedures to identify or trap those telling lies so that their answers can be excluded from the final survey tally.  (The systematic identification and exclusion of “yea-sayers” and “nay-sayers” and other “liars” is probably [unfortunately] less practiced than it once was.)  But most of all, good researchers know the limitations of survey research and therefore are disciplined in the amount and type of information for which they ask respondents.  And finally, good researchers warn that even the most accurately collected survey responses are still only right up to some probability.

Caveat Cluens (Client)

These realities impose serious mandates on the responsible survey researcher.  First, one should never ask what one can’t logically expect respondents to honestly reveal.  Second, questions need to be strategically framed and worded.  Third, responses must be carefully and wisely interpreted.  And finally, fourth, the limitations of the survey research process should be fully explained to the client and anyone else hoping to utilize the information gathered.

 (The article referenced is: Ashok K. Lalwani. “The Distinct Influence of Cognitive Busyness and Need for Closure on Cultural Differences in Socially Desirable Responding.” Journal of Consumer Research: August 2009.)

The newest roll-out of the Hyundai Assurance Program features a “marketing fee” offered to customers during their first six months of owning a new Hyundai.  One commercial says, “You’ll probably talk to your friends about your new Hyundai, and that’s marketing.  Why shouldn’t you get paid for it? [my interpretation].  Another in the current pool, says “You’ll talk to your friends through the Internet, text messaging, and telephone about your new Hyundai.  You call it social networking, we call it great PR and we’re willing to pay you for it!”

Word of Mouth Works

I’ve written several articles about the value and efficacy of word of mouth, I truly believe that it can be a potent force accelerating the adoption of good products and similarly killing bad products.  Hyundai, taken at face value, appears to be similarly impressed with it.  They appear to be betting a substantial amount of money for it…up to six months of payments in most of the ads I’ve seen.

But Wait, Not so Fast!

My major problem with the concept is that I don’t really believe in “sponsored word-of-mouth”.  True word-of-mouth is valued by those who receive it because it is perceived to be completely objective and unbiased…without motive.  But, when a manufacturer begins to encourage it by paying its customers (assuming they’re being complimentary about their product), the word-of-mouth can be perceived as losing much, if not all, of its objectivity.  It is no longer unbiased.  This is similar to campaigns launched by other companies (like P&G) over the years in efforts to cultivate product “sponsors” or “advocates”.  I tend to doubt the effectiveness of such “mercenary marketing agents”.

“Sponsorship” Debases Word of Mouth

Setting aside the possible blasphemy of adulterating an otherwise pristine source of information, I question how, if at all, Hyundai intends to prompt and fortify customers’ communications to others.  Over the years I’ve advocated corporations manage evidence about their products and services.  This suggestion comes from a frank recognition that consumers rarely fully appreciate all of the value delivered to them in the products and services they buy.

How About an Information Stimulus Package?

If customers really are “at a loss for words”, then sponsored word-of-mouth can’t be very effective.  It seems obvious that if Hyundai is expecting its customers to say good things about their automobiles, they’ll need to supply their customers with facts, figures and product comparisons that act as an “information stimulus package”.  A good example of this is a video tape I helped develop that was placed in the glovebox of each new Rolls-Royce as it left the factory.  The thought was that Rolls owners might get questioned about why they would spend so much on “four wheels”.  The video provided more than enough examples of the craftsmanship that went into the creation of their Rolls-Royce such that they could more than “romance the brand”.

When customers are prepared and “armed” with information, they can act as credible spokespeople and their social networking will be more likely to produce good images of a manufacturer’s products.

On  or about April 23 of this year my wife and I received a relatively unique video plea from you to contribute to Thirteen during an “Emergency Campaign”.  Because we believe in the value of public television and enjoy your programming, we responded…fairly generously in these times.  The timing of this contribution, as your records should indicate was extraordinary, as we generally make only one gift at the end of each calendar year. 

You correctly acknowledged our gift and my wife and I took satisfaction knowing we’d helped in a time of need and our commitment to Channel Thirteen was strengthened in the process. 

Then, on May 8 - approximately 15 days later, we received an email thanking us for the previous donation and asking if we couldn’t make “one more gift”!  We disregarded this disappointing follow-up solicitation.  Now, on the Saturday afternoon of the Memorial Day weekend, I just hung up on your second telephone call asking for yet another donation!! 

As a loyalty specialist, I have to say I’m appalled by your brazen pursuit of our pocketbook and in so doing your apparent disregard for the relationship my wife and I feel we have with Thirteen.  It would appear fundraising at Thirteen is ruled by RFM (recency, frequency and monetary value).  This is a customer scoring tool which I (and many other writers) have hoped to make obsolete.  It is a technique which disregards a donor’s relationship with an organization in favor of maximizing immediate revenue generation.  It exploits a small segment of a donorbase until they are either dried up or have been chased away.  Most of the not-for-profits that I work with have evolved from this outdated donor pursuit system to more realistic, relationship-sensitive scoring and management systems.  In addition, organizations are beginning to modify their outreach respecting the donor’s calendar, not being selfishly driven by their own, internal, campaign-oriented calendar. 

I’m deeply disappointed that Thirteen believes it should continue to pursue (and harass) those “members” who were compassionate enough to respond to its “special” outreach.  Apparently it wasn’t that special….and apparently the station is more than willing to jeopardize relationships with long-standing members to simply make another “quick buck”.  Let me remind you, charitable giving depends on trust in the organization and a strong emotional bond.  When a donor senses he or she is valued only for the size and frequency of his/her giving rather than the longevity of his/her support, the donor’s continued participation is put at risk.  Too many donors, these days, have already become cynical of their role with charitable organizations.  They sense they’re only objects of revenue-generation, not truly valued members.  The proof?  The primary reason they hear from organizations is to be asked for more money. 

These are, indeed, tough times for not-for-profits.  But even more important then, that not-for-profits guard and nurture the trust and relationship that current supporters believe they share with the organization.  The exploitative tactics of RFM-driven appeals will only drive members away.

I just returned from NASCAR at the Richmond International Raceway.  What a blast!

Most entertainment and sports events industries appear oblivious to the current recession, having continued to raise admission prices to stratospheric levels.  Not so NASCAR.  The Association has adopted a more realistic pricing strategy.  President of RIR, Doug Fritz explains it this way, “We have the best, most loyal fans in sports.  We recognize that times are tough and we want to offer our fans a lower entry point to be able to continue to enjoy the thrill of live NASCAR racing.”  RIR, as other NASCAR venues, has actually lowered prices of a limited number of tickets to below 2008 prices!  The venues also continue to allow fans to bring their own food and beverages into the stadia, making NASCAR still an affordable family outing.

What a unique idea!  NASCAR has recognized that if they raise prices in these dollar-scarce times they’ll chase away all of their current, loyal fans.  They’ve adopted a truly long-term approach, keep the fans coming now, and they’ll be around in the future (when increased ticket prices - if necessary - may be more affordable).  Few of sporting’s national associations appear to have understood the severity of the current recession as well as NASCAR.  And very few others have acted to respect and preserve the value of the long-term relationship they have with their loyal fans!

Diamond-colored plastic (as far as I know) doesn’t cost anymore than Platinum-colored plastic.  And, the few additional freebies allocated the Diamond player aren’t going to break a casino.  Yet, Harrah’s has been so restrictive in awarding the higher player level that their rigid enforcement is actually chasing good customers away!  I believe good customers should be given the benefit of the doubt.  If they consistently fail to return to their level of higher spending then perhaps their perks should be reduced.  But, premature or overly aggressive enforcement of “mileage or spending hurdles” will only damage the relationship these once valuable customers have had with a business.