- January 22, 2016
- Posted by: DoctorProjectManagement.com
- Category: Franchising
As Harvard Business Review (HBR) has reported, companies with high scores on two often-overlooked (and closely related) market research metrics—brand loyalty and customer loyalty—not only grow revenues 2.5 times faster than industry peers, but also deliver two to five times the returns to shareholders over 10-year time frames.1 The fact that brand loyalty—a long-term commitment to make repeat purchases of a particular brand—is not dependent on price makes this metric a particularly powerful driver of both profit and profitability (i.e., profit relative to expenses).
The primary reason that brand loyalty is so important to profitability is straightforward: 65% of revenue in most companies comes from repeat business with existing clients.2 Not only do existing customers loyal to brands purchase 90% more frequently than new customers, but maintaining the brand-loyal segment is also far less expensive than marketing to attract new customers.3
In the wake of plummeting sales during the 2020 pandemic, it is more important than ever for businesses in every industry to ramp up investment in marketing programs designed to retain every company’s most valuable asset: their existing, brand-loyal customer base.
- Brand loyalty—repeat purchases of a particular brand based on the perception of higher quality and better service than any competitor—is not dependent on price.
- Companies with high scores on brand loyalty grow revenues 2.5 times faster than industry peers.
- Brand-loyalty leaders also deliver two to five times the returns to shareholders over 10-year time frames.
- The first and most important condition for brand loyalty is quality. No matter how large the marketing spend, poor quality will kill brand loyalty.
What Is Brand Loyalty?
Unlike customer loyalty, which is money-based (prices and discounts), brand loyalty is perception-based (image and experience). Brand-loyal customers believe that a certain brand represents both higher quality and better service than any competitor—and the price does not matter. Brand-loyal customers might make fewer total purchases, but the profit margins on their purchases are larger. Once established, brand loyalty is fairly easy to retain—assuming, of course, that product quality and service level remain high. Brand loyalty is also less expensive to retain than customer loyalty, which requires constantly offering low prices and regular discounts to maintain best-deal-on-the-market status.
How to Build Brand Loyalty
Most established brand-name products operate in highly competitive markets, jockeying for market share with new and old rival products, many of them barely distinguishable. To thrive in this dynamic, marketing departments employ various tactics to create and maintain brand loyalty, including monitoring buying trends, analyzing spending data, and designing advertising campaigns targeting their existing-loyal and likely-to-become-loyal customer segments.
Here are some of the most frequently cited strategies to create and maintain the brand-loyal customer base that can take your business to the next level.4
Best-in-Class Quality: The first and most important qualification—the essential condition— for brand loyalty is quality. No matter how large your marketing budget is or how many celebrity endorsements you have, low-quality products and services will always be ridiculed on social media. On the other hand, companies that consistently deliver best-in-class quality will convert customers into brand-loyal advocates who spread positive word-of-mouth and never feel the need to shop elsewhere.
Customer Service: Exceptional customer service is expensive—24/7 chat reps, social-media managers, phone operators, support-ticket staff—but ensuring that customers always receive first-class service is an investment that drives the level of brand loyalty that generates big returns. In fact, in a crowded market, first-rate service that makes customers feel valued might be the only thing that sets a brand apart from its competitors. For customer service to maximize brand loyalty, customers must have access to user-friendly systems to submit feedback and register complaints—and a dedicated team of associates should be trained to address their submissions promptly.
Brand Ambassadors: In addition to brand-loyal customers, who provide free word-of-mouth advertising on social media, companies hire spokespersons to function as brand ambassadors for their products. In addition to having a solid marketing background and an established online presence with an engaged network across platforms (via blog, emails, webinars), a successful brand ambassador should have an authentic, professional presence, in-depth knowledge of products and services, and highly developed expertise at building loyal customer relationships. Beyond this, the best brand ambassadors are also skilled at gathering the critical customer and competitor intelligence that can translate into profitable business improvements.
Loyalty Programs: Establishing a program to reward existing customers for their business is one of the most direct ways to build brand loyalty. It is worth repeating that—no matter how expensive the redemptions for store credits, discounts, and free products are—investing in the retention and loyalty of existing customers is far less expensive than marketing for new customers. This is especially true for premium-priced brands, because an exclusive discount for loyalty-program members can be just the right incentive to choose the pricey brand over a less expensive option.
Online Community: As e-commerce continues to accelerate—U.S. online spend for 2022 is expected to hit $1 trillion—building an online community to drive brand loyalty is essential for businesses across industries.5 Unlike static advertisements, social media has a range of tools to forge deeper, more personal connections with customers, from hosting Q&As and live streams with employees to taking customers on behind-the-scenes tours of the business. Not only does a digital community serve as an easy access point to interact with customers who spend hours online, but—as an extension of the website—a community can also serve as a bridge from social interaction to purchase conversion.
Here are two examples of companies who have made highly profitable investments in brand loyalty by prioritizing quality and customer service. Not only can these brand-loyalty leaders charge more for their products, but they also save on marketing costs—social media and email marketing to existing customers is a fraction of the cost of attracting new customers.
Apple: In 2021, Apple had an outstanding brand loyalty score of 92%—the tech giant retained a higher percentage of existing clients than any other company in any industry.6 Apple’s status as the world’s most valuable brand is based not only on revolutionary technology and state-of-the-art design but also on unparalleled brand power and stellar customer service. Anyone who has ever seen a line of customers wrapping around an Apple store in anticipation of the latest release understands that brand power impacts the true value of a product as much as—or more than—any other driver of market performance. As Apple rolls out fee-based services, including Apple TV and gaming, the company is likely to add to even more share of wallet (SOW)—the dollar amount a customer spends on one company’s brand at the expense of competitors.
Nike: One of the most important reasons that Nike is the most valuable sports brand in the world is an industry-leading membership program that delivers four drivers of brand loyalty: 1) exclusivity (access to exclusive perks: tickets and product launches); 2) community (free workout classes, training support); personalization (birthday and anniversary gifts, personalized product recommendations); 4) omnichannel experience (in-store, on-site, mobile app).7
Statistics on Brand Loyalty and Profitability
The correlation between brand loyalty and profitability has been well documented for decades. Here are a few impressive statistics:
Customer Retention: In 2020, Harvard Business School reported that—“in industry after industry“—increasing customer retention rates by 5% increases profits by at least 25% and up to 95%—a statistic that “set off a rush to craft retention strategies, many of which continue to pay large dividends.”8
Customer Lifetime Value (CLV): One of the most significant statistics linking loyalty to long-term rewards was reported by Microsoft: a 7% increase in brand loyalty increases the customer lifetime value (CLV) of each client by 85%. (CLV, a metric to measure the growth of a company, is the total expected revenue earned from a single customer over the lifetime of the relationship.)9
Customer Service: 83% of customers would switch brands because of a bad customer service experience.10
Consistent Quality: 74% of consumers say that product quality is the main reason to stay loyal to a brand.11
Corporate Social Responsibility (CSR): 25% of Gen-Z and Millennial consumers will spend more for a brand that takes a strong stand on corporate social responsibility (CSR) issues.12
Brand Loyalty: Customer Capitalism vs. Shareholder Primacy
One might ask—if the connection between profitability and customer metrics like brand loyalty is so well-established—why do businesses often neglect their most valuable customers? The Harvard Business Review (HBR) proposes a few interesting answers to that question: financial accounting and shareholder primacy.1
The HBR article argues that, because financial disclosure rules and corporate accounting practices require almost no reporting on customer value, a short-term mentality that prioritizes quarterly earnings over customer relationships has blinded both management and shareholders to the crucial role that loyalty plays in profitability. Compounding the financial reporting omissions, two very different profitability strategies—shareholder primacy vs. customer capitalism—have affected how customer metrics like brand loyalty are ranked as profit drivers.1
On one side, in the 1950s, Peter Drucker, who was called “the father of business consulting” by Forbes and “the greatest management thinker of the last century” by GE Chair Jack Welch, said that “the true purpose of a business is to create and keep customers.”1314 On the other side, in the 1970s, Milton Friedman said that companies exist to maximize shareholder value—period—an argument that HBR said introduced “the age of shareholder primacy.”
Current adherents of the “customer capitalism” approach argue that companies that put customers—not shareholders—first can create even greater value for shareholders. For example, in 2019, the New York Times reported that CEOs from the Business Roundtable—including power players like Tim Cook of Apple, Jeff Bezos of Amazon, Mary Barra of General Motors, Robert F. Smith of Vista Equity Partners, and Larry Fink of BlackRock—broke with decades of corporate orthodoxy by issuing a statement that “the purpose of a corporation” is no longer to advance only the interests of shareholders. Instead, companies must now deliver value on several new fronts: both directly to customers and indirectly by supporting customer values on issues like protecting the environment and dealing ethically with suppliers.15
Why Is Brand Loyalty Important?
The primary reason that brand loyalty is important is that it is a major driver of profitability: 65% of revenue in most companies comes from repeat business with existing clients—and existing customers loyal to brands purchase 90% more frequently than new customers,
What Is the Difference Between Brand Loyalty and Customer Loyalty?
Brand loyalty is perception-based (image and experience); customer loyalty is money-based (prices and discounts). Brand-loyal customers believe that a certain brand represents higher quality and better service than any competitor—and price does not matter. Customer loyalty requires offering low prices and regular discounts to maintain best-deal-on-the-market status.
What Are Brand Ambassadors?
Brand ambassadors are professional marketers that companies hire to serve as spokespersons for their products. To succeed, brand ambassadors need an established online presence with an engaged network across platforms, in-depth knowledge of products and services, and highly developed expertise at building loyal customer relationships.