CEO Forum

Protect and grow customer loyalty

Loyal customers cost less to serve. They concentrate spending with companies they trust. And their referrals to friends lay the foundation for growth when the economy rebounds.

By Rob Markey

Published on June 30, 2009
min read


Deep cost-cutting compromises service. To make up for lost revenues, companies sometimes add new charges and fees which infuriate customers. But the negative effects of lost customer trust can be deep and long-lasting. On the other hand, the advantages of customer loyalty are more pronounced in a downturn. Loyal customers cost less to serve. They typically concentrate more spending with companies they trust. Their referrals to friends lay the foundation for growth when the economy rebounds. These powerful advantages of customer loyalty help explain why the biggest market share changes occur during downturns. When spending drops, the companies focused on protecting and growing their most loyal, profitable customer segments often stabilize their businesses. They may even attract new customers. But maintaining customer loyalty in a downturn is difficult and requires new strategic thinking. Companies that succeed share some common characteristics. First, they avoid the trap of chasing revenues by appealing to every potential customer group, often through aggressive discounting. New customers attracted by lower prices often fail to buy more when prices recover. Saks Fifth Avenue encountered this trap during the 2001 recession, implementing deep price cuts that temporarily boosted revenues but undercut its luxury status for many customers. Sales were slower to recover than that of competitors. Second, loyalty leaders apply practical disciplines that keep their most important customers front and center. Their management teams identify an attractive customer core that becomes the prime focus of their energies and investments. We call this group the design target—the heart of the segment to which your company sells. Even though the design target may be small, it represents a broad range of customers. BMW, for example, designs its cars for the relatively small group of people who treasure high performance and attention to detail at a reasonable price. Yet its products appeal to a broad range of buyers who may never make full use of the engine's power or the suspension's precise road handling. One way to find this elite inner circle is to first identify discrete customer segments based on their different needs, attitudes, and behaviors. Next, sort current customers in each segment by profitability and potential value. Then group them into "promoters," "passives," or "detractors" by asking them to rate on a scale of zero to 10: How likely are you to recommend our company's products or services to a friend or a colleague? Those responding with scores of 9 or 10 are promoters, your company's biggest boosters. Those answering with a 7 or 8 are passives. Those giving a score of 6 or less are detractors. They are apt to drive away potential new customers through negative word-of-mouth. Subtracting the percentage of detractors from the percentage of promoters yields a company's Net Promoter® Score (NPS), which measures the degree of loyalty among a company's customers. Concrete metrics like NPS help identify what loyal customers like most about today's products and services, and actions that drive them away. Third, customer-focused companies identify the critical moments of truth that have the greatest potential to delight customers. One way to determine which touch points matter most is to ask customers directly and then feed that information back to the front line. U.S. auto insurer Progressive Corp. shortened its payment cycle to reimburse customers whose vehicles had been damaged beyond repair. The result: its NPS jumped more than 50 percentage points. Loyalty leaders have distinct advantages during a downturn. At a time when companies are seeking every possible advantage they can wield, keeping loyal customers front and center can make a critical difference—both now and in the long term. Rob Markey is a partner and leads Bain's Global Customer practice.

Deep cost-cutting compromises service. To make up for lost revenues, companies sometimes add new charges and fees which infuriate customers. But the negative effects of lost customer trust can be deep and long-lasting.

On the other hand, the advantages of customer loyalty are more pronounced in a downturn. Loyal customers cost less to serve. They typically concentrate more spending with companies they trust. Their referrals to friends lay the foundation for growth when the economy rebounds.

These powerful advantages of customer loyalty help explain why the biggest market share changes occur during downturns. When spending drops, the companies focused on protecting and growing their most loyal, profitable customer segments often stabilize their businesses. They may even attract new customers.

But maintaining customer loyalty in a downturn is difficult and requires new strategic thinking. Companies that succeed share some common characteristics.

First, they avoid the trap of chasing revenues by appealing to every potential customer group, often through aggressive discounting. New customers attracted by lower prices often fail to buy more when prices recover.

Saks Fifth Avenue encountered this trap during the 2001 recession, implementing deep price cuts that temporarily boosted revenues but undercut its luxury status for many customers. Sales were slower to recover than that of competitors.

Second, loyalty leaders apply practical disciplines that keep their most important customers front and center. Their management teams identify an attractive customer core that becomes the prime focus of their energies and investments. We call this group the design target—the heart of the segment to which your company sells.

Even though the design target may be small, it represents a broad range of customers. BMW, for example, designs its cars for the relatively small group of people who treasure high performance and attention to detail at a reasonable price.

Yet its products appeal to a broad range of buyers who may never make full use of the engine's power or the suspension's precise road handling.

One way to find this elite inner circle is to first identify discrete customer segments based on their different needs, attitudes, and behaviors. Next, sort current customers in each segment by profitability and potential value. Then group them into "promoters," "passives," or "detractors" by asking them to rate on a scale of zero to 10: How likely are you to recommend our company's products or services to a friend or a colleague? Those responding with scores of 9 or 10 are promoters, your company's biggest boosters. Those answering with a 7 or 8 are passives.

Those giving a score of 6 or less are detractors. They are apt to drive away potential new customers through negative word-of-mouth. Subtracting the percentage of detractors from the percentage of promoters yields a company's Net Promoter® Score (NPS), which measures the degree of loyalty among a company's customers.

Concrete metrics like NPS help identify what loyal customers like most about today's products and services, and actions that drive them away.

Third, customer-focused companies identify the critical moments of truth that have the greatest potential to delight customers. One way to determine which touch points matter most is to ask customers directly and then feed that information back to the front line. U.S. auto insurer Progressive Corp. shortened its payment cycle to reimburse customers whose vehicles had been damaged beyond repair. The result: its NPS jumped more than 50 percentage points.

Loyalty leaders have distinct advantages during a downturn. At a time when companies are seeking every possible advantage they can wield, keeping loyal customers front and center can make a critical difference—both now and in the long term.

Rob Markey is a partner and leads Bain's Global Customer practice.