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Understanding and protably managing customer loyalty

Robert Gee, Graham Coates and Mike Nicholson
Durham University, Durham, UK
Abstract
Purpose The purpose of the paper is to draw together the salient issues surrounding customer loyalty and customer relationship management (CRM) into a single coherent discussion. Various schools of academic thought are examined. The paper concludes with practical implications for managers. Design/methodology/approach The literature surrounding customer loyalty, customer satisfaction, effective CRM and managing loyalty in a protable manner are all reviewed. The paper allows managers to consider a wide range of material in the context of their business. Findings The need for businesses to retain customers is an important issue in todays global marketplace. To retain customers, a business must forge loyal and long-term relationships with protable customers. Reasons why customers leave a company are discussed, and preventative strategies are considered. Loyalty schemes are considered and their relative merits examined. Practical implications A key implication of this paper is the need to focus attention on managing customer loyalty in a protable manner. Certain theories hold the view that generating customer loyalty will automatically drive prots. This paper suggests that this is probably not the case. Given this, the paper calls for data analysis and database segmentation to be considered as an integral part of protably managing customer loyalty. Originality/value The paper provides both a broad and in-depth discussion of all the salient issues surrounding customer loyalty. By drawing together these issues into a single discussion, the paper offers a unique perspective that is not available in the current literature. Holistically considering all of the practical elements of customer loyalty allows academic researchers and marketing managers to compare and contrast different theories and principles. Keywords Customer loyalty, Customer satisfaction, Prot, Customer relations Paper type Literature review

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Received January 2007 Revised January 2008 Accepted February 2008

Introduction While a large body of academic research exists that focuses on specic elements of customer relationship management (CRM), no current academic paper attempts to draw together the salient issues into a single discussion. The purpose of this paper is to do just that. By reviewing current theories and principles, a best practice review of CRM can be outlined and guidelines for implementation within the business world considered. In todays global marketplace competition has intensied (Sivadas and Baker-Prewitt, 2000). Singh and Sirdeshmukh (2000) suggest that customer loyalty is rapidly becoming, the marketplace currency of the twenty-rst century. This is a commonly held view in the academic eld (Seth et al., 2005; Venkateswaran, 2003; Duffy, 1998; Kandampully, 1998), which advocates the need for businesses to adopt a customer-centric vision. Anderson and Narus (2004) believe customer retention is a more effective business strategy than continuously trying to acquire new customers in order to replace the defecting customers. This seems logical given that the

Marketing Intelligence & Planning Vol. 26 No. 4, 2008 pp. 359-374 q Emerald Group Publishing Limited 0263-4503 DOI 10.1108/02634500810879278

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well versed marketing maxim notes, It costs ve times more to acquire a new customer than to retain an existing one (Pfeifer, 2005). While the exact cost ratio is debateable (Sterne, 2002) the common viewpoint is that it makes commercial sense to look after your current customers before acquiring new customers (Walsh et al., 2005). The remainder of this paper now presents reviews of relevant literature in the following areas; examining customer loyalty, understanding and preventing the ending of relationships, managing loyalty in a protable manner, loyalty schemes and managerial considerations. To summarise, the paper presents key ndings resulting from the consideration of the aforementioned areas. Examining customer loyalty Customer loyalty is essential if a company is to retain its current customers. However, many debates are centred round what customer loyalty actually is, as Majumdar (2005) states, Customer loyalty is a complex, multidimensional concept. The complexity of customer loyalty is reected in the wide range of denitions within academic elds. Focusing on consumer attitudes, Oliver (1997) denes loyalty as A deeply held commitment to rebuy or repatronize a preferred product or service consistently in the future, despite situational inuences and marketing efforts having the potential to cause switching behaviour. Other denitions of customer loyalty focus on the pattern of past purchasing activity. A wealth of data suggests that most consumers are polygamous and are loyal to a portfolio of brands within a product category (Uncles et al., 2003). This has led to another denition of customer loyalty, an ongoing propensity to buy the brand, usually as one of several (Uncles et al., 2003). In a review of 50 operational denitions, Jacoby and Chesnut (1978) report a central theme that runs through all the denitions. Specically, that loyalty is related to the proportion of expenditure devoted to a specic brand or store. The lack of a uniformly accepted denition of customer loyalty is also reected in the academic work that attempts to understand the key factors than generate customer loyalty. Indeed, Dick and Basu (1994) note the need for a more in-depth assessment of the variables that coerce customer loyalty and retention. Furthermore, to leverage the greatest benets available from customer loyalty it is imperative to understand the antecedent drivers of loyalty (Terblanche and Boshoff, 2006). To do this, Crosby and Johnson (2004) recommend that a causal model of customer loyalty is produced, linking together the chain of events from touch points with customers through to inducing examples of loyal behaviour. Terblanche and Boshoff (2006) cite empirical and anecdotal evidence to support the notion that loyalty is a both a long-term attitude and a long-term behavioural pattern, which is reinforced by multiple experiences over time. Overall, customer satisfaction becomes important because these multiple experiences need to be satisfactory to lead to the positive predisposition of long-term loyalty. In a similar concept, Gustafsson et al. (2005) note three drivers of customer loyalty; calculative commitment, affective commitment and overall customer satisfaction. Calculative commitment is the rational and economic decision making, reviewing costs and benets. Commitment to the current brand or service is due to a lack of choice for similar products or services or high-switching costs (Anderson and Weitz, 1992). Affective commitment is a warmer and emotional factor, based on trust

and commitment. Indeed, Muthuraman et al. (2006) and McMahon-Beattie (2005) comment on the need for customer trust in building sustainable and loyal relationships with a brand or service. Commitment dimensions are described by Gustafsson et al. (2005) as forward looking and capture the strength of the relationship and the resulting commitment for the future. Empirical data from Gustafsson et al. (2005) suggest that calculative commitment has a consistent reduction in customer churn rates. This is interesting as the calculative commitment reects the viability of the companys offerings, thus demonstrating that consumers actively review the companys products and services against those of its competitors. Overall, satisfaction is described as a post consumption experience which compares perceived quality with expected quality (Sivadas and Baker-Prewitt, 2000). Gustafsson et al. (2005) report that when satisfaction is measured as an overall evaluation of performance, it indeed predicts churn. Furthermore, the results provide recommendations for customer relationship managers when reviewing customer retention. To maintain the competitive advantage the company holds, managers should consider both the overall satisfaction of its customers and the competitiveness of the companys products and services. The importance of overall customer satisfaction in inducing loyalty is noted earlier. The problem associated with this is that a consumers level of satisfaction is constantly adjusting. Dahlsten (2003) supports this concept: It is widely acknowledged that customer satisfaction is a function of the relationship between customer expectations and experience, that it is dependent upon value and that it is formed continuously. With this evidence in mind, satisfaction is considered an inherently unstable and temporary mental state (Reichheld et al., 2000). In an attempt to further understand those factors that induce customer satisfaction, the notion of service quality becomes increasingly prevalent within the academic literature (Oliver et al., 1997). Seth et al. (2005) suggest that many studies have found a direct positive link between service quality and customer behavioural intentions. One assumption sometimes made is that strong service leads to satisfaction, which in turn leads to loyal behaviour. However, Venkateswaran (2003) highlights the need for caution, An assumption that exists amongst companies that a satised customer is a retained customer may not be valid in the current context. In a review of customer defecting patterns, Reichheld et al. (2000) found 60-80% of customers who defect to a competitor said they were satised or very satised on the survey just prior to their defection. Some of the differences between empirical results focusing on satisfaction and customer loyalty may be due to the different denitions adopted by the authors. As such, there is clearly a requirement to understand how the positive effects of satisfaction can be made less transient and yield a more stable loyalty effect. To achieve this, Sivadas and Baker-Prewitt (2000) suggest that it is, not merely enough to satisfy a customer. Dahlsten (2003) believes there is the need to avoid the satisfaction rut and notes that, many companies have fallen into a self-perpetuating pattern in which practices that are not truly customer-orientated are reinforced. To rectify this situation, managers move past the measurement of quality and satisfaction and realign their practices on the actual customer experience (Crosby and Johnson, 2006). According to Dahlsten (2003), to drive customer satisfaction managers must move out of the satisfaction rut and have a more extrinsic focus. This requires an organic

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shift from focusing on todays problem in a reactive and cost-conscious way to concentrating on longer-term opportunities. To achieve this, the manager must gain an intrinsic knowledge of the customers needs and be able to deliver on these expectations (Lindquist, 2006; Bland, 2004). Gelb and McKeever (2006) support this idea and suggest that, organisations must strive to understand and manage expectations. However, Berman (2005) suggests that organisations must do even more than delivering on expectations and recommends delighting customers rather than merely satisfy them. It is suggested that customer delight is a construct related to, but separate from, satisfaction. This is in the same way that dissatisfaction is related to, but distinct from, satisfaction. Satisfaction is generally based on meeting or exceeding ones expectations, customer delight requires that customers receive a positive surprise that is beyond their expectations (Berman, 2005). When compared to satisfaction, delight, is a more positive and emotional response. Given the emotional response resulting from delight, it is suggested that satisfaction has a weaker memory trace than delight. The weaker memory trace resulting from mere satisfaction may offer an explanation to the unstable and temporary nature of satisfaction reported by Reichheld et al. (2000). If customer delight can be achieved then maybe this can provide the more stable loyalty that companies actively seek. Keiningham and Vavra (2001) provide empirical support for this notion. The study reviewed the effect of customer satisfaction levels on customer loyalty to Mercedes-Benz USA. The results found that there was only a 10 per cent chance of a dissatised customer bringing return business. If the customer was satised with the product and service, the likelihood or re-buy or re-leasing rose to 29 per cent. However, the likelihood of return business from those customers that were delighted was found to be 86 per cent. Berman (2005) employs the Kano (1984) model as an underpinning for explaining how customer delight may be achieved. Kanos model cites three levels of requirements: (1) must be requirements; (2) satiser requirements; and (3) attractive requirements. A must-be requirement is taken for granted by the consumer. If this requirement is not fullled by the product or service then customer dissatisfaction will result. A satiser requirement, as suggested by the name, has the ability to induce customer satisfaction. It is proposed that the more satiser requirements that are fullled, the higher the level of resulting satisfaction. The third requirement is attractive requirements; these are neither explicitly expressed nor expected by the customer. If these attractive requirements can be met, it is suggested that the result will be customer delight. To successfully compete, organisations must ensure they full all must-be requirements, while also offering the satisers available through key competitors. To generate competitive advantage an organisation must go above and beyond their competitors on those variables that generate delight. There is however, one nal complexity with regard customer satisfaction. Mittal and Katrichis (2000) report that the attributes viewed as important for newly acquired customers are different compared to customers who are already loyal. As

they comment, Often the attributes that enable a rm to acquire a customer differ from those that help the rm retain the same customer. These ndings would suggest that it is important for a rm to understand and explore those factors that elicit satisfaction and delight for different segments of its customer database. By doing this, a company can move towards the customer centric vision that Kale (2004) holds as imperative for true CRM. Understanding and preventing the ending of relationships The discussion in the section above provides an understanding of how delighting customers can increase customer loyalty. However, for any business, unfortunately there will be times when customers defect to competitors. In organisations that are to implement excellent CRM, these failures must be seen as an opportunity to investigate and improve problem areas. Reichheld et al. (2000) concur and note:
When desirable customers defect, its a signal that something is amiss. In a learning organisation, the departure of such a customer prompts a search for the root causes of the problem to learn more about what needs to be xed in the business.

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While a universally accepted theory of relationship ending does not exist in academic literature, Michalski (2004) cites Hirschmans (1974) exit-voice-loyalty framework as highly inuential. One result from the EVL framework in particular has gained a consensus within the literature. This nding suggests that a dissatised customer will either simply leave the company and exit, or, they will voice there issues rst. In the case of those customers who rst voice their concerns, the likelihood of the relationship ending falls (Michalski, 2004). Further, six distinct categorizations were found regarding relationship ending based upon three triggers. Situational triggers are those that are driven by the customer, for example, moving house or an increase/decrease in income. A reactional trigger is a company driven reason and can be due to factors such as, poor service, reduced product quality or if the company denies the customer a service (e.g. a bank loan). According to Gustafsson et al. (2005), reactional triggers cause the consumer to evaluate present performance more closely, which may put customers on a switching path. Finally, inuential triggers are competitor driven reasons to induce a customer to defect from the current company. Triggers include price, perceived value for money or service quality. According to Reardon and McCorkle (2002), The choice for a consumer to choose one distribution channel over another can be viewed as an optimization problem. Therefore, it is proposed that consumers review the potential gains of switching to another company against the costs of leaving the current company. Building on the work of Reardon and McCorkle (2002), Burnham et al. (2003) propose three different switching costs; procedural, nancial and relational. Procedural switching costs are the time and effort a customer must put into initiating a relationship with a new company. Financial switching costs are those monetary costs that companies put in place in an attempt to reduce customer defections. Finally, relational switching costs relate to the loss of personal relationships with employees of the current company. While all three costs can be employed by a company to reduce customer defection rates, Jones et al. (2000) provide a cautionary warning. That is, if customers are not satised with the current company but feel trapped due to negative barriers such as high-nancial switching costs, they

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may engage in company-focused sabotage such as negative word-of-mouth. Conversely, positive barriers such as interpersonal relationships can act as a more effective barrier to defection. Again however, the company must be careful. High-staff turnover or losing key members of staff could result in customer defection if the bond to those staff is stronger than the ties to the company itself. Given the review of customer switching behaviour, the pertinent question becomes what companies can do to reduce customer defections. According to Michalski (2004), companies must take a holistic approach, noting there is little point in focusing on the effect of one trigger and ignoring the effects of other triggers. For example, consistently reviewing the quality of service or products may only have a limited effect if, for example, prices are too high. This is because the inuential triggers of competitors could outweigh the potential benets of the improved service. According to Michalski (2004), management must understand the whole picture of an ending process to realize and to decide which actions are necessary to keep customers or regain lost customers. The results from Gustafsson et al. (2005) research support this holistic approach; they suggest that managers should consider both the overall satisfaction of its customers and the competitiveness of the companys products and services, or in their terminology, the calculative commitment of the customers. While companies can attempt to provide complete satisfaction there will unfortunately be times when a customer feels the need to complain. Effective customer complaint handling becomes imperative given the Hirschmans (1974) exit-voice-loyalty framework and the importance of reactional triggers highlighted by Gustafsson et al. (2005) and Michalski (2004). Indeed, Grifn (2001) cites the results of a Rockefeller Foundation study, which found that of those customers who left a company for a specic reason the most inuential factor was poor customer complaint handling. rst (2005) report that complaint satisfaction has a strong effect on Homburg and Fu customer loyalty and propose that successful resolution of a customers complaint can become a signicant driver of customer loyalty. Interestingly, Smith and Bolton (1998) note that An excellent recovery can increase customer satisfaction and loyalty beyond the degree before failure. Therefore, it appears that while a company must continue to reduce the desire for customer defection in the rst place, it must also focus on ensuring loyalty is also borne from effective complaint handling procedures. Managing loyalty protability The preceding sections have considered both the need for creating customer loyalty and the factors that can cause customers to switch to a competitor. While customer loyalty is important for generating a strong, reliable customer base these customers must be protable for the long-term success of the organisation. Understanding the intricate links between customer loyalty and business prots is an area which needs more in-depth understanding and discussion (Uncles et al., 2003). Previous research on loyalty has advocated that if customer loyalty is gained, prots will follow (Chen and Chang, 2006; Reichheld, 2002). Reinartz and Kumar (2002) state the past mantra, Win loyalty, therefore, and prots will follow as night follows day. Garland (2005) agrees stating, Customer loyalty has been widely regarded as a necessary precursor to individual customer protability. The viewpoint that gaining loyalty automatically generates prot is now under scrutiny.

Empirical research by Reinartz and Kumar (2002) suggests that the relationship between loyalty and prots is far weaker than those scholars, who advocate loyalty programmes ( Reichheld et al., 2000; Hallowell, 1996; Reichheld, 1993), would suggest. Their research found the following correlations between customer prot and customer tenure. A French grocery retailer 0.45, corporate service provider 0.30, a German direct brokerage rm 0.29 and just 0.20 for an American mail-order company. The results do not provide support for the theories linking customer loyalty with prot. In turn this suggests that businesses need to strive for customer loyalty that also delivers prot. While the overall correlations between customer tenure and protability are low, there remains the possibility that these low gures mask other underlying advantages of customer loyalty. Other cited advantages of customer loyalty are that: . loyal customers costs less to serve; . they will pay higher costs for a set of products; and . they will act as word-of-mouth marketing agents for the company ( Reichheld, 2002, 1993; Zeithaml, 2000). In their empirical research, Reinartz and Kumar (2002) found no conclusive support for any of the posited outcomes of customer loyalty. As Garland (2005) concludes there is little to suggest that customers who bought regularly were any cheaper to serve, any less price sensitive or any more zealous about recommending the company to others. Although Reinartz and Kumar (2002) nd little evidence of the link between loyalty and protability, this does not mean there is no correlation. As they note, In our opinion, the reason the link between loyalty and prot is weak has a lot to do with the crudeness of the methods most companies use to decide whether to maintain their customer relationships. Traditionally, models such as the recency frequency monetary value model are used to assess whether a customer warrants further investment in order to generate future sales and prot. For a more in-depth discussion of traditional models and methods of managing customer relationships (Kumar et al., 2006). In order for a company to manage customer loyalty and protability more effectively, Reinartz and Kumar (2002) provide a framework for customer segmentation. The framework builds on the protability and longevity measures from Reichhelds (1993) work on customer loyalty and that of the loyalty typology posed by Dick and Basu (1994). The nal framework is based upon a special case of event-history modelling. For a complete explanation of the model see Reinartz and Kumar (2000). The customer segmentation concept borne from event-history modelling is a 2 2 matrix based upon protability and customer tenure. This produces four different types of customer classication; butteries, true friends, stranger and barnacles. The resulting analysis from the model allows tailored marketing and customer relationship strategies to be developed for each of the four segments. For those customers who are classied as low prot and short-term tenure, dened as strangers, the model advocates a simple policy, Identify early and dont invest anything. Those customers who are termed true friends are long-term protable customers, who need nurturing and every effort should be made to develop relationships with them. Highly protable customers who exhibit little loyalty to the company require a strategy that ensures they are exploited before they it off (Garland, 2005).

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It is essential that a company identies the right point in time to cease trading with a buttery. The common mistake that managers make is attempting to generate loyalty as our research shows that attempts to convert butteries into loyal customers are seldom successful (Reinartz and Kumar, 2002). The nal segment, termed barnacles, are loyal but have a negative impact on company protability. The rst stage in developing a strategy to deal with barnacles is to review the nancial potential, otherwise termed the wallet-size, of the customer. If the customer is low wallet-size, then the company should ensure pricing controls are in-place so that the customer is managed protably. If the wallet-size is high, the focus should be shifted towards cross-selling and up-selling to increase wallet share and thus maximise sales and prots. Therefore, the company should attempt to convert barnacles into true friends, or, as Zeithaml et al. (2001) assert, from lead into gold. Although different models have been presented, there is one common element that runs throughout all of them. Specically, this is the need to target nite company resources at those customers that generate the largest prots for the company. As Garland (2005) notes, While companies may want to treat all customers with superior service, they nd it is neither practical nor protable to meet (and certainly not exceed) all customer expectations. If a company tries to look after all customers in the same manner then the highly protable customers end up subsidising the service for low-prot generating customers (Zeithaml et al., 2001). Loyalty schemes Various academic theories have been discussed regarding how customer loyalty can be gained and maintained. Loyalty schemes are designed to induce long-term loyalty from customers. Building upon the discussion regarding management of loyalty in a protable manner, it is now important to consider the inuences of loyalty schemes. According to Uncles et al. (2003), there are two main aims of loyalty schemes employed by companies. The rst aim is to increase an individual customers sales otherwise seen as increasing the share of wallet, or to cross-sell and increase the range of products bought from that company. The second aim is more defensive in its nature. It is hoped that by building closer bonds between the customer and the company, customer defection rates will reduce. With reference to the work of Burnham et al. (2003), it is hoped that the relational costs of switching to a competitor are perceived to be so high that switching behaviour is made less likely. The use of loyalty schemes is increasingly prevalent within the business world (Lewis, 2004). However, within academic literature there are mixed views on the economic viability and success of loyalty schemes. One often cited advantage of loyalty schemes is their ability to collect sales data to allow trends analyses to be conducted. For example, Stone et al. (2004) propose that the information a loyalty scheme generates can be used to tailor the companys offerings, and thereby full its customers needs. Furthermore, Rowley and Haynes (2005) note that a successful loyalty scheme allows a business to move beyond an analysis of which products are popular, to who buys those products, and what other products they buy at the same time. As Wood (2005) concurs, Loyalty schemes are a method of gathering information on customers, which then allows appropriate strategies to be applied to different customer segments. With a less supportive view of information analysis, Uncles et al. (2003) posit that often the vast volume of data make insightful analysis impossible. Furthermore, they suggest that

often too little of the right kind of data are collected by a loyalty scheme. For example, a lack of data on non-customers does not provide a complete view of the marketplace. Another area of contention is whether loyalty schemes actually induce loyal customer behaviour. Lewis (2004) proposes that to increase loyalty a loyalty scheme must have a structure that motivates customers to view purchases as a sequence of related decisions rather than as independent transactions. In a review of purchasing behaviour, when collecting stamps to receive a free coffee, Kivetz et al. (2006) found that, to earn one free coffee, customers bought two more coffees than they would have otherwise. As Wood (2005) suggests, the behavioural assumption of a reward programme is that it can motivate customers to base their purchasing decisions both on the current environment and on a long-term goal of achieving a frequent buyer reward. Interestingly, Kivetz et al. (2006) also suggest that consumption accelerates the closer the customer is to receiving the reward goal, in the case of the coffee experiment, a free cup of coffee. However, in a response to the search for loyal customer behaviour, Uncles et al. (2003) state, Customers appear not to want to watch one television station, eat at one restaurant, patronize one hotel, drink one brand of wine . . . etc. Another criticism of loyalty schemes are the opportunity costs of implementing such a scheme (Uncles et al., 2003). It is important to consider the relative impact that could be achieved by investing the same nancial resources in new marketing channels, establishing an everyday low-price strategy, or further product development. Finally, if a loyalty scheme is seen as a success, it can be quickly imitated by competitors and thus eroding the original competitive advantage it provided (Uncles et al., 2003). Given the potential advantages and disadvantages of loyalty schemes, managers must be careful when considering their implementation. Managerial considerations Building on the previous sections, the following discussion aims to provide recommendations that managers can implement. This section outlines further theories and concepts that managers can consider in context with their organisation. CRM initiatives have become increasingly popular in the business world. Kale (2003) denes CRM as the, holistic process of identifying, attracting, differentiating, and retaining customers. In addition to this, CRM focuses on nurturing business relationships with the belief that long-term customer relationships yield better results than an orientation focused on short-term transactions (Raman et al., 2006). However, despite the enthusiasm for CRM, Reinartz et al. (2004) report that 70 per cent of CRM projects result in either losses or no bottom-line improvement. According to Kale (2004), there are seven deadly sins that result in ineffective CRM programmes. The factors cited are; a lack of management support, underestimating the effects of change management, inexible business processes, undervaluing data analysis, losing sight of customers, ignoring customer lifetime value (LTV), and focusing solely on technology. With an understanding of those factors, which result in ineffective CRM practice, businesses must adopt a relevant strategy for implementing successful CRM initiatives. Given that the C of CRM stands for the customer, it is imperative that a business develops a customer centric vision (Thakur and Summey, 2005; Kale, 2004). According to Day (2003), a customer centric approach is achieved when the belief that customer

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retention is of the highest priority transcends through all departments of an organisation. As a guiding principle, Reichheld et al. (2000) suggest that customer repeat purchase loyalty must be the basic yardstick of success. If a business can successfully achieve repurchase behaviour, then it is on the way to generating customer loyalty. In agreement, Kumar et al. (2006) comment, second-time customers are more likely to become third-time customers than rst-time customers are to become second-time customers, and so on. To generate repeat purchase behaviour, a business must understand exactly what is important to its customers. Kale (2004) believes that a company needs to precisely ascertain what knowledge about customers is required in order for it to retain, grow, and delight its most valued customers. Berman (2005) concurs and explains that a company must deliver attractive requirements, providing delight for the customer, in order to generate future sales. In addition to this, a company must understand the different expectations from distinct segments of its customer database (Mittal and Katrichis, 2000). To understand customers requirements, data analysis becomes increasingly important. Indeed, to undervalue data analysis is one of Kales (2004) seven deadly sins. Importantly, this data analysis can be relatively simple in practice and does not have to require expensive CRM software (Bland, 2004). If a business can develop a database, which allows analysis of customer requirements across different customer segments, it can begin to serve its customers better. The internal data warehouse held by a company is an extremely important asset. Jackson (2005) suggests that if everything else is equal, internal data is the one differentiation and competitive advantage available to a company concerning its customers. Furthermore, Boulding et al. (2005) note that rms with the required customer information in place exhibit superior performance. Effective data analysis also enables a company to manage loyalty protably (Reichheld and Detrick, 2003). With the right data and appropriate analysis, Raman et al. (2006) report that a business can identify protable customers with whom to further relationships, and identify unprotable customers with whom remedial action is required. Thomas et al. (2004a) comment, Stable, healthy growth is built on the protability of customers, not their raw numbers or their loyalty. While some authors suggest that the prot gained from some customers deems them not worth serving (Reinartz and Kumar, 2002), in practice this does not seem a viable option for most companies (Wood, 2005). According to Wood (2005), a company cannot afford to reject the business of any customers, since even low-value customers still produce revenue. A question posed is whether the overheads of a company would fall by 10 per cent if it did not serve the 50 per cent of its customers who only contribute to 10 per cent of its revenue. Again, according to Wood (2005), the answer is always negative. Therefore, what businesses must do is to manage and adopt sensible operating costs for different customer segments. In addition, data analysis can be used to effectively manage marketing spend on different customer segments. Analysing the LTV of a customer allows appropriate allocation of a companys resources (Day, 2003). According to Kale (2004), LTV can be dened as, the estimated protability of a customer over the course of his or her relationship with a company. Ryals (2005), along with Reinartz and Kumar (2003), provide methodologies for LTV calculation methods. Kale (2004) cites Harrahs casino, which segments its customer database based on LTV. The majority of marketing spend is devoted to its top platinum customers as they provide 85 per cent of the revenue.

New customer acquisition is regarded by most companies to be near the top of the marketing agenda (Banasiewicz, 2004). The directional policy matrix (DPM) highlighted by McDonald (2005) allows a company to compare different markets or market segments. The DPM reviews market segments categorised by potential and therefore attractiveness to the company, the rms relative strengths in those markets, and the relative importance of each market segment. With a review of all potential markets and the rms strengths and weaknesses, strategies can be highlighted to acquire customers in the best tting market segment or segments. However, while acquiring new customers is important for the growth of a company, this must produce incremental business for sustainable growth. If new customers simply replace the attrition of past customers, then the turnover of the business will not grow. With this in mind, companies must also focus on recapturing deviating customers. Grifn (2001) found that 68 per cent of customers leave for no special reason. Therefore, companies must put in place an effective win-back strategy to sustain the customer base. Data analysis allows a company to highlight customers who have stopped purchasing and whom should be the focus of the win-back strategy. Furthermore, appropriate analysis will allow a prole to be generated of those customers who are likely to defect. This insight allows at risk customers to be given special attention where appropriate. There is also a positive strategic reason for targeting the win-back of old customers over the acquisition of new customers. Thomas et al. (2004b) found there is a 20 per cent to 40 per cent chance of successfully repeat-selling to a lost customer, and only a 5 per cent to 20 per cent chance of successfully closing the sale on a brand new customer. Grifn (2001) suggests that a company should regularly grade and segment lost customers. The company must then focus on understanding the lost customers needs, and, with this, develop a communication plan to reinstate the customers condence in the business. With this method, Grifn (2001) suggests lost customers can be induced to return. However, there is a cautionary note. A companys win-back strategy should think big but start small. Evaluation and renement of the win-back strategy will then allow the company to increase the effectiveness of the strategy. With the correct database, analysis, customer acquisition strategies and win-back strategies in place, managers must not lose focus on other changes that are required for managing customer loyalty and effective CRM. While a customer delight programme will enable customer loyalty to be developed, the business must be in a position to implement such a programme. Berman (2005) provides a checklist for readiness in implementing a programme. Effective business processes must be in place to allow promises to be delivered (Little et al., 2006). Terblanche and Boshoff (2006) note the requirement for training and educating staff in handling of interpersonal calls. This is particularly relevant given the need to effectively handle complaints (Homburg and rst, 2005). Well trained, helpful staff can also provide positive switching barriers Fu (Jones et al., 2000). Indeed, managers must also focus on employee satisfaction to yield customer satisfaction (Johnson and Chiagouris, 2006). A study by Rucci and Kim (1998) discovered that a 5 per cent rise in employee attitude scores resulted in a 1.3 per cent increase in customer satisfaction and a 0.5 per cent increase in revenues. Finally, given the review of loyalty schemes, managers must decide whether this is a relevant and viable option for the company. Any managers wishing to implement or review a current loyalty scheme are referred to the checklist provided by Uncles et al. (2003).

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Key ndings While this paper draws on a number of areas of business, there are several key ndings, which can be considered as general in that they are relevant to different environments. The purpose of this section is provide a synopsis of recommendations based upon the theories, ideas and studies presented in the earlier sections of this paper. As a summary, and in the interests of providing succinct conclusions and recommendations, bullet points are now utilised: . Organisations must understand what drives both value and delight for their customers. Adopting a customer centric vision enables an organisation understand their customers, deliver customer delight and drive for loyalty. . Different customers have different requirements and will be delighted in different ways. Database segmentation and data analysis are critical if an organisation is to generate loyalty from different customer segments. . Positive switching barriers should be implemented to increase the likelihood of customer retention. . Customer segmentation based on prot is imperative. Operating costs for customer segments should be monitored to ensure they are not disproportionate to the prot the organisation receives from these customers. . Analysing the LTV for different customer segments allows marketing spend to be proportioned to deliver maximum return on investment. . By utilising the DPM and proling current protable customers a customer acquisition strategy can be produced and implemented. . Appropriate monitoring of customers is important to ensure that customer defections are not masked by customer acquisitions. This is essential for the sustainable growth of an organisation. . A win-back strategy is recommended as previous customers are less costly to win-back compared to the costs of acquiring of new customers. . Analysis of defecting customers allows an organisation to prole at risk customers. Where appropriate preventative measures can be put in place to reduce customer defection. By considering the ideas and recommendations discussed above, managers should be better informed to manage loyalty in a protable manner within their organisation. Further research is required to continue to develop the concepts and theories discussed throughout this paper. Future empirical studies targeted to understanding the relationship between customer loyalty and business prots would prove a useful addition to the currently available literature.
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