Business leaders know the power of customer loyalty. It drives many positive results for a company including efficiencies, repeat buying, higher margins and referrals. But is pursuit of customer loyalty always a good idea?
Loyalty versus Discipline
The dilemma for companies occurs when the needs and preferences of loyal customers start to change. Imagine a college student in need of a reliable, low-cost automobile. For the auto maker with superior focus on producing reliability at low-cost, there is a great opportunity to create loyalty with that customer. That customer may become a raving fan, refer others and buy again. But what happens when that student graduates from college, starts a family or reaches a higher income level? In pursuit of loyalty, should that same auto maker start to move into producing mini-vans? Luxury vehicles?
For many decades research has shown companies that have higher levels of focus and discipline are more successful than their rivals. In the 1980s when Tom Peters and Robert Waterman wrote In Search Of Excellence they identified several success themes including one called “stick to the knitting”. They found that the successful companies they studied tended to stay within the industries, target markets and products and services they knew well.
More recently in Collins and Hansen’s’ book Great By Choice, the authors put forward “Fanatical Discipline” as one of three core behaviors found in high-performing firms (companies they call 10X’ers). One example from this book is Southwest Airlines, a firm so fanatical about discipline that it had a specific recipe of operation for decades which included rules like only flying 737 aircraft and resisting expansion via interlining. In contrast, the comparison firm to Southwest (Pacific Southwest which is no longer operating) pursued all sorts of non-core strategies including expansion into other regions, aircraft and other offerings like hotels and food services.
The Balancing Act
So how can a firm balance the need for focus while at the same time pursue customer loyalty?
It starts with deliberate strategic thinking, including a deep understanding of your firm’s core competencies and target market. A company should not simply follow the changing needs of their loyal customers if those needs don’t match up to the firm’s defined competencies and strengths.
This may sound easy, but the temptation to adjust services and products can be strong. This is especially true for small and mid-sized firms who rely on a small number of clients for a large percentage of their revenue. Further, in environments where there is high cost and effort to acquire new customers, there may be even more tension to want to “keep that customer” or “get more of that client’s business” rather than finding other customers that fit.
Secondly, have discipline around these processes to help resist the temptation of change for the sake of following your customer outside of your core focus areas:
- Maintain your strategic planning rhythm and regularly revisit and clarify your target market and core competencies.
- As part of this planning process, make deliberate and holistic strategic choices with consideration of all internal and external factors. Be sure that decisions to move into new markets or products and services are made for all the right reasons, and into areas where there is an opportunity to maintain differentiation with other players in the space.
- Beware the drift and be on the lookout for small changes that your team is making to serve or placate clients which may be pulling your firm out of its core focus areas.
- Celebrate graduation of clients when they have moved outside the definition of your target market, or when their needs change. Also be willing to “fire” customers that don’t fit.
- Always keep the new client acquisition funnel full to reduce the dependence on existing clients.
Customer loyalty is a powerful outcome which should be pursued and fostered. However balancing the pursuit of loyalty with the pursuit of focus is the true path to greatness.