Economic downturns wreak havoc with customer relationships. Deep
cost-cutting compromises service. Layoffs and pay freezes leave
front-line employees demoralized. To make up for lost revenues,
companies sometimes look for ways to tack on new charges and fees,
which make customers feel they are being gouged.
Some companies tolerate this abuse of customers as unfortunate
collateral damage in a recession. After all, aren't competitors
exploiting customers, too? But the negative effects of lost
customer trust can be deep and long-lasting. And the advantages of
loyalty are even more pronounced in a downturn. Loyal customers
cost less to serve. They typically concentrate more of their
spending with companies they trust to meet their needs and treat
them well. They are less likely to defect than shoppers whose
attachment to a company is no deeper than the latest price
discount. Loyal customers also help stretch marketing dollars.
Their word-of-mouth referrals to friends and associates provide a
company with more like-minded customers, laying the foundation for
growth when the economy turns around.
The powerful advantages of customer loyalty help explain why the
biggest changes in market share occur during downturns. Many
companies do well when consumer spending rises and the economy is
expanding. But when spending drops, the companies focused on
protecting and growing their most loyal, profitable customer
segments often manage to stabilize their business. They may even
attract new customers as competitors falter. Until the equity
markets began to slide in 2008, for example, mutual fund companies
of nearly all stripes prospered. Many investors chased hot returns,
and many fund companies were happy to oblige them with an array of
trendy offerings. But as returns dropped, customers quickly sold
their shares. That didn't happen at Vanguard. The pioneer of market
index investing remained focused on keeping costs low, offering
funds with clear, easy-to-understand investment strategies, and
maintaining great service. That approach has once again enabled
Vanguard to outperform competitors during this recession: In 2008,
Vanguard enjoyed net cash inflows of $71 billion compared with net
outflows of $225 billion for the rest of the industry, according to
the Investment Company Institute. And Vanguard continues to gain
market share, as it has done through market downturns over more
than 25 years.
But maintaining customer loyalty in a downturn is a difficult
challenge. Nearly all customers, including the most loyal, are more
sensitive to price than before. Aggressive rivals may try to lure
them with discounts and rebates. If you aren't the low-cost
provider in your industry, you may not be able to match those price
cuts. And as we'll explain, that may not be the best strategy in
any case. Most people buy on value, not price alone. But the
situation does require new strategic thinking. How have your
customers' preferences changed? How long will those changes last?
How can you appeal to their new needs without diluting your
long-term competitive advantage?
In our experience, the companies that answer those questions
effectively and strengthen loyalty in a downturn share some common
- They steer clear of some deadly traps, such as trying to appeal
to every potential customer group, often through aggressive
discounting, indiscriminate cost-cutting, and reducing investment
in customer-focused innovation.
- They avoid confusion about their customer "sweet spot"-the
customers who matter most to the success of their business-and
selectively add segments that extend and reinforce the target
without diluting the brand or adding costly complexity.
- They ensure that those customers have the best possible
experiences where it counts the most.
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about how loyalty leaders are extending customer relationships in
Rob Markey is a partner with Bain & Company and leader
of Bain's Global Customer practice. Darrell Rigby leads Bain's
global practices in Retail and Innovation.