The Loyalty Ladder: A Sideways Look
Posted by Sridhar Mutyala at 01:07 AM · No Comments

The loyalty ladder is a relationship marketing concept that sees customers gradually moving up through relationship levels, starting at the bottom as prospects (those who have the intent to purchase but have not yet done so) and ending up at the top as advocates (intensely loyal brand champions). The loyalty ladder typically looks something like this:

According to the Wikipedia article: “The relationship marketer’s objective is to ‘help’ customers get as high up the ladder as possible. This usually involves providing more personalized service and providing service quality that exceeds expectations at each step”

In the conventional wisdom, loyalty is something that a business builds in its customers by consistently exceeding expectations. A customer’s enthusiasm for a company grows with every satisfying interaction until it reaches a peak level of support and the customer becomes a brand advocate and helps grow the business through championing and word-of-mouth.

There are two critiques of the loyalty ladder concept that I’m going to cover in this post: 1) Fred Reichheld’s take on customer loyalty in “The Loyalty Effect” and 2) the power of first impressions.

The Loyalty Effect

Reichheld’s basic premise is that some companies enjoy a loyalty premium over competitors: they have more loyal customers, more loyal employees, and more loyal shareholders. The increased loyalty of one group results in and from the increased loyalty of the others (i.e., happy employees create happy customers and, in turn, happy customers create happy employees, etc.). Companies that truly understand the importance of loyalty and commit to it from the leadership levels down simply outperform peers that pay it lip service. These loyalty leaders reap benefits such as lower cost of capital, increased customer lifetime value, and higher employee engagement.

Reichheld goes on to state that customer loyalty isn’t always something that a company can build. Loyalty leaders succeed because they target their customer acquisition efforts toward prospects who are more likely to be loyal in the first place. These companies recognize three basic principles:

  • Some customers prefer stable, long-term relationships
  • Some customers are more profitable
  • Some customers will be more responsive to your particular business strengths

For loyalty leaders, the marketer’s objective is, first and foremost, to find likely people to introduce to his or her business. Efforts to personalize service or “exceed expectations” for customer segments that have little chance of being profitable waste resources and frustrate employees. Relationship marketers have to start with the right segments and choose the relationships they want to build. It’s only then that personalization and high quality service can provide even greater returns for these qualified customer pools.

The loyalty ladder concept glosses over the inherent characteristics of prospects. Loyalty isn’t simply something that the relationship marketer builds. There’s a piece of sales wisdom: “You never know who’s going to buy.” Which means a good salesperson is always on. Questionable advice for a salesperson and disastrous advice for a marketer. Without targeting, without segmentation, without proper qualification of prospects, a marketer will burn up company resources and waste employee goodwill at the bottom rung of the loyalty ladder.

First Impressions

Customer championing, in Clive Humby’s Scoring Points, is pretty simple: “… if customers get an obvious benefit, then that benefit will become an aspiration for their friends and associates.” The question is: when is the benefit obvious to the customer?

The loyalty ladder has customers perceiving the benefit most intensely at the highest rung. This overlooks the power of first impressions. In Blink, Malcolm Gladwell writes on “our ability to gauge what is really important from a very narrow period of experience.” Through taste, temperament, and social conditioning, we like and dislike new things very quickly. We make snap judgments. Our first response (to a person and how they treat us and make us feel) is automatic, and it’s difficult to dislodge. We’re most enthusiastic about something (a song, book, restaurant, store, etc.) when we first discover it.

The loyalty ladder doesn’t account for the very real fact that we often commit on the first visit. This first commitment is instinctive and emotional. It springs from our basic sense and appreciation of something done right. Customers don’t scrutinize the relationship every step of the way. They take leaps. What they’re doing in subsequent visits is continuing to explore and revisit an original experience they’ve already committed to, not finding reasons to commit at a later date. In this view, the loyalty ladder is best seen on its side.

The customers who love you fall in love with you on the first visit. They’re at the core of every new pool of customers. With each subsequent visit, more of the customers who don’t love you fall away. With each subsequent visit, the customers who do love you make up more of the remaining pool. This is why customers who visit twice are more likely to return than customers who visit once (and customers who visit three times are more likely to return than customers who visit twice, etc.). It’s overstating things to say that customers who love you will never go away (people move, their needs change, etc.). But the main point is that the really important part happens on the bottom rung of the loyalty ladder.

The best way to build loyalty down the road, then, is to focus on loyalty and commitment on the first visit. Taking a cue from the arts world, it’s always opening night: there are always new faces in the crowd who are experiencing your business for the first time. Make the first visit special and everything else (loyalty, advocacy, lifetime value) will likely follow.

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