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Loyal Customers Are Less Expensive to Service than Nonloyal Customers?
Loyalty Myth: Loyal Customers Are Less Expensive to Service than Nonloyal Customers
The fallacy that loyal customers are less expensive to service tha nonloyal customers has its origins in the manufacturing environment At its foundation are two seminal findings that dramatically influenced' the strategy and tactics of manufacturers around the world. The first is commonly referred to as the experience curve (also called the learning curve), originally popularized by the Boston Consulting Group.

In essence, the theory behind the experience curve states that the costs of complex products and services will decline approximately 20 to 30 percent with each doubling of accumulated experience. Experience curve strategies have been integrated into the strategies of companies since the 1960s.

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The other source of this myth rests in the quality movement of the 1980s and 1990s. Manufacturers found that improving quality produced greater cost savings than the costs of improving operations. In essence, improved quality created operating efficiencies that lowered manufacturing costs.

Both the experience curve and the operating efficiencies of quality have consistently proven true in the manufacturing environment. As a result, it would appear intuitive that they should likewise hold true in the service environment. It is important to remember that the customer retention and customer loyalty movement—initially, at least—revolved around services, which is why Reichheld and Sasser's seminal Harvard Business Review article was entitled "Zero Defections: Quality Comes to Services."

Reichheld argues that customer loyalty translates into cost savings for companies, stating that "your operating costs to serve them [loyal customers] decline" over time. The reason: "As the company gains experience with its customers, it can serve them more efficiently." Given the results that manufacturers experienced through learning efficiencies and quality improvement, Reichheld's assertions sound not only plausible but probable.

But the separation between appearing probable and occurring is all too often a chasm. In none of the companies Reinartz and Kumar tracked were loyal customers consistently less expensive to manage than short-term customers. The only correlation they could find was in the high-tech service sector, and here loyal customers were more ex¬pensive to serve.

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While a company may know more about its loyal customers, loyal customers know the firm better as well. As a result, they may be more demanding of the company through better knowledge of the inner workings of the system. This allows them to seek recourse for what they believe to be inadequate treatment, and they are more likely to get perks from the relationship, which cost money to administer and fulfill.

We end discussion of this myth with a statement made by a senior officer of a large airline when he was presenting to officers of the firm. In particular, he was discussing the complaints of flight attendants regarding the airline's high-mileage frequent-flier customers. He noted that the crew complained of these passengers being difficult and demanding. His reply: "Yes, but they're ours."

LOYALTY MYTH : Customer Satisfaction Brings Customer Loyalty
Without a doubt, customer satisfaction and customer loyalty are linked. But the linkage is not straightforward and it isn't linear. Clearly, dissatisfied customers are more likely to defect than are satisfied customers. The problem with the customer satisfaction-customer loyalty link, however, is that most firms do not have a sufficient groundswell of dissatisfied customers to make them notice the severe impact of dissatisfaction. If they did, they would not be in business for long.

Most companies have customers who are moderately satisfied. For almost all business enterprises worldwide, greater than 85 percent of their customers would be classified as satisfied. As a result, satisfaction (the absence of dissatisfaction) is typically not a point of competitive differentiation.

With regard to the relationship between satisfaction and loyalty, we need to think of satisfaction as falling into one of three general categories: dissatisfied, merely satisfied, and delighted. It is not until customers achieve this upper level of satisfaction, delight, that satisfaction meaningfully influences customer loyalty.

Even when satisfaction reaches delight levels, however, it is important to remember that several additional factors influence customers' levels of loyalty:

• Costs of switching (time, money, effort, etc.).
• A strong predisposition to switch service providers or brands (i.e., some customers enjoy variety seeking).
• Competitive actions (for example, discounts, coupons, promotions).

While customer delight may be a necessary requirement for customer loyalty, it does not guarantee customer loyalty.

Source : Timothy L. Keiningham, Terry G. Vavra, Lerzan Aksoy and Henri Wallard, Loyalty Myths: Hyped Strategies That Will Put You Out of Businessand Proven Tactics That Really Work, . You can find this excellent book here