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Author:JenniferMcEnroeTarrbcCustomerLoyaltyContributors:KaraGruver,RumaSanyalMarch1998Copyright©1998Bain&Company,Inc.Reviewer:RobMarkey2LoyaltybcCustomerLoyaltyAgenda•WhatisLoyalty?•EvolutionoftheLoyaltyPractice•LoyaltyEconomics•HowBainHelpsClientsMaximizetheValueoftheirCustomerBase•Example•LoyaltyTools3LoyaltybcWhatisLoyalty?Loyaltyisaperspectiveonbusinessstrategywhichemphasizesthedeliveryofsuperiorvaluetothebestcustomersandemployees.Sincetheirloyaltyiskeytoprofitandgrowth,theiracquisition,defection,shareofrelevantwalletprovidefocalpointsformeasurement,learningandimprovement.CustomerLoyalty4LoyaltybcCustomerLoyaltyBain&Company...isresponsibleforvirtuallyalltheeconomicresearch,financialanalysisandconsultinginthefieldofcustomerretentionandrecoveryCouncilonFinancialCompetitionLoyaltyisaBain&CompanyInnovation5LoyaltybcCustomerLoyaltyAgenda•WhatisLoyalty?•EvolutionoftheLoyaltyPractice•LoyaltyEconomics•HowBainHelpsClientsMaximizetheValueoftheirCustomerBase•Example•LoyaltyTools6LoyaltybcEvolutionoftheLoyaltyPracticeCustomerRetentionCustomerLoyalty•Keepingcustomers:Good•Losingcustomers:Bad•Customerswhobuymore:Good•Somecustomerswillneverbuymore•ROS/RMSdoesn'tworkinservices•Quantificationofretentioneconomics•Credit/casualtylosses•Lowspendersornon-borrowers•Shareofwalleteconomics•MarylandNational•MBNA•Commercial•BaxterIVD&IVsystems•AmericanExpress•StateFarm•BankInter•FirstCommerceFundamentalinsights:Whatledtotheinsights:Someexamples:Overtheyears,thetrainingonloyaltyhasevolvedfrom“don’tloseanycustomers”to“howdoImaximizethevalueofmycustomerbase”.EarlyinEvolution:CurrentView:CustomerLoyalty7LoyaltybcCustomerLoyaltyRetentionvs.LoyaltyWhatisthedifferencebetweenretentionandloyalty?•Loyaltyisanapproachtobusinessstrategythatemphasizestheretainingandgrowingofprofitablecustomersegments.Itisparticularlypowerfulinclientswhoareinlowfixedassetbusinesses(i.e.,servicebusinesses)•Retentionisatoolweuseindiagnosingandmeasuringaclientssuccessinmaximizingthevalueoftheircustomerbases.Othertoolsincludeshareofwalletandcustomersegmentation.•Retentionisoftenconfusedwithloyaltybecausetheearlyinsightsoftheloyaltypracticewerearoundtheretentionofcustomers.However,usingretentionratealonetoassessloyaltymaymisleadclientsandnotmaximizevalue.Remember,notallcustomerscreatevalue.Wewanttohelpclientsretainvaluablecustomers.8LoyaltybcProfitabilityDrivers-ROS/RMS(Profitvs.Share)BeerIndustrySoftDrinksIndustryAnheuser-MillerSchlitzPabstOlympiaOperatingIncome10%9876543210(PercentofSales)RelativeMarketShare3.0x2.01.00.70.40.30.20.10.050.5BuschCottDr.PepperR.C.7-UpPepsiCokeRelativeMarketShare3x210.70.50.40.30.20.1.050OperatingProfit22%2018161412108642(PercentofSales)Westartwiththeempiricallybasedbeliefthatinmanyindustries,marketshareisthekeydriverofprofitability.CustomerLoyalty9LoyaltybcProfitabilityDrivers-ROS/RMS(Profitabilityvs.PortfolioSize)R²=.022*ClaimsandexpensesasapercentofpremiumincomeSource:Best's,Property&CasualtyPremiumRankingsInsuranceIndustryExample0%50%100%150%200%0%50%100%150%200%AmicaUSAACasualtyNationwideMutualFarmersExchangePrudentialPropertyAetnaCasualtyLibertyMutualAllstateStateFarmProfitability(CombinedRatio*)RMS(NetPremiumsWrittenin1989)CustomerLoyaltyHowever,manyserviceindustries(orotherlowfixedcostbusinesses)shownorelationshipbetweenRMSandprofitability.10LoyaltybcProfitabilityDrivers(Profitabilityvs.Retention)Fortheseindustries,retentionisabetterdriverofprofitability.Companieswithhigherretentionutilizetheircustomerassetsmoreeffectively.R²=.82*ClaimsandexpensesasapercentofpremiumincomeSource:Best's,EstimatedRetentionRatesInsuranceIndustry120%100%80%75%85%95%PrudentialPropertyLibertyMutualAetnaCasualtyFarmersExchangeAllstateNationwideMutualStatefarmUSAACasualtyAmicaProfitability(CombinedRatio*)CustomerRetentionRateCustomerLoyalty11LoyaltybcProfitabilityDrivers(Profitabilityvs.Retention)MidwestGothamChesapeakeLibertyGreatLakes0%1%2%3%4%70%80%90%100%Profitability(Pre-TaxROA,5YearAverage)RetentionRateOmnicomWPP*FC&BGreyInterpublicLeoBurnett0%2%4%6%8%10%12%14%16%18%Profitability90%92%94%96%98%100%RetentionRateCreditCardIndustry(Disguised)AdvertisingIndustryCustomerLoyalty12LoyaltybcSource:BainSurvey,Bain&CompanyCustomersatisfactionwasthetraditionalmeasureofqualityinservicebusinesses.Butthereislittlecorrelationbetweencustomersatisfactionindicesandfinancialmeasures.012345020406080CustomerSatisfactionIndicesRevenue100Revenue(40)(30)(20)(10)00204060801001020304050RevenueChange(%)CustomerSatisfactionIndiciesRevenueGrowth04080120160200020406080100CustomerSatisfactionIndicesProfit240ProfitCustomerSatisfaction≠ProfitabilityCustomerLoyalty13LoyaltybcCustomerLoyaltyAgenda•WhatisLoyalty?•EvolutionoftheLoyaltyPractice•LoyaltyEconomics•HowBainHelpsClientsMaximizetheValueoftheirCustomerBase•Example•LoyaltyTools14LoyaltybcCustomerValueThefirststepinviewingcustomersaslongtermassetsiscalculatinglifetimecustomervalue.$15,000$15SinglepurchaseRetainedfor10YearsNomatterhowvaluableIwastellingthemacustomerwas,ourpeopleneededtohavethatmagnitudeintheirmentalbalanceshe