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A recent McKinsey study (November 2005) on customer loyalty amongst European bank customers across three different countries (Germany, Italy and Belgium) reveals that loyal customers generate - on average - 30-70% more value than "run-of-the-mill" customers.
Top-line findings confirmed by the study, include:
- Loyal customers buy more products and
are more accepting of higher banking charges
than moderately loyal / non-loyal customers.
- The majority of banks participating
in the study failed to adequately identify
and nurture their loyal customers - instead,
employing wider-ranging segmentation models
that prove largely "ineffective and counterproductive".
- The prevailing attitude of loyal customers
is that they will stay with a bank that
manages them well and offers value over
the long-term - even if their main financial
institution doesn't offer the optimum
deal on every transaction.
A detailed analysis of the profiles and
saving patterns of 1,000 customers in each
of the three countries demonstrates how
increased loyalty positively impacts 'share
of wallet' and churn rates. For example:
- High potential customers acquired at age 30 and remaining loyal during their active lifetimes are worth 30-70% more than high potential but non-loyal customers
- Loyal customers buy an average 40% more products than less loyal customers (2.8 products per customer versus 1.7).
A significant finding for marketers is that few of the banks involved in the study recognised the role and importance of customer loyalty in their segmentation models; rather, most institutions employed a mix of age, life stage and other socio-economic variables.
The studys' authors consider the failure to adequately factor loyalty into segmentation (and then track behaviour on this dimension) has two key commercial implications:
a. Missed opportunities to target the most profitable customers
b. The risk of alienating less loyal customers by offering new products - often as part of undifferentiated marketing campaigns - as they perceive that what is being offered is neither sufficiently relevant or valuable.
To address this segmentation "deficiency", argue the authors, banks should supplement existing customer data with specific customer loyalty measurement tools - allowing every customer to be assessed according to one of 5 "zones of loyalty" (anger, distrust, passive loyalty, active loyalty and advocacy) and share of wallet.
However, to fully leverage this segmentation framework, three additional factors also need to be in place:
- For new sales, a bank's frontline staff should only target customers with whom it has an established and close relationship
- Implement a proactive approach to growing relationships with high potential customers who have not contacted the bank in the preceding 6-12 months
- A concerted effort by frontline staff
to improve the handling of "moments of
truth" (i.e. highly emotional interactions
- both positive and negative - that endure
in the customer's mind over time and impact
loyalty).
The effective management of such events means ensuring salespeople recognise positive 'moments' as opportunities to cross-sell and respond appropriately to negative 'moments'.
The diagram below highlights the influence that both positive and negative "moments of truth" can have on customer behaviour:
Fig 1: Percentage of respondents who experienced "moments of truth" during past 24 months
According to the study, while implementing a loyalty-based segmentation model takes somewhere between 12-18 months to transform a full branch network and to develop the relevant frontline skills, the positive impact on customer profitability is demonstrable.
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