The Importance of Customer Loyalty in an Economic Downturn

-- by Peter Buschmann

The current economic downturn has the potential of destroying valuable customer relationships. Companies like American Express in the U.S. have cut credit lines of individuals with a 25 year history of paying their balances on-time. Cost-cutting initiatives have compromised service levels as well as the current rise of unemployment and pay cuts has left sales staff demoralized. In order to compensate for the lost revenues, companies have started to look for alternative ways to impose new charges and fees. Many customers feel betrayed.

Some companies seem to accept the attrition of customers as collateral damage in an economic downturn; however this train of thought is that their competitors are losing customers, too. This logic overlooks the fact that the bad customer experience may have a deep and long lasting effect. The customer, whose credit line has been cut, just when he or she needed the credit, may choose to punish the whole industry later. Not by going to a competitor, but by using cash again. The consideration of customer loyalty is even more pronounced in a recession. Loyal customers cost a lot less to serve and traditionally concentrate their spending with companies they like. They are less likely to churn than buyers whose loyalty to a company is no deeper than the latest price discount. Loyal customers also help stretch marketing dollars. Their word-of-mouth referrals to friends and family provide companies with more like-minded customers, laying the foundation for growth when the economy turns around.

The biggest change in market share occurs during downturns. The powerful advantages of customer loyalty help to explain these phenomena. It is easy to do well when consumer spending rises and the economy is growing. When spending however decreases, it becomes more challenging. The companies that have focused on protecting and growing their most loyal, profitable customer segments may have laid the foundation to stabilize their business even in a downturn. As a matter of fact, they may even attract new customers as competitors fail to serve them well.

However, maintaining customer loyalty in a downturn remains a challenge as well. Almost all customers, including the most loyal, are more sensitive to price than ever before. Low cost rivals may try to lure them with discounts and rebates. If you aren't the low-cost leader in your industry, you will not be able to match those price cuts in the long run. Regardless, this clearly is not the best strategy and the situation does require new strategic thinking.

Our approach to CRM and Customer Loyalty revolves around the customer experience. While the customers explore consume options, find product offerings, buy and enjoy the privileges and benefits associated; we see many opportunities to manage customer loyalty along the customer experience cycle.

We have the chance to gain unique customer and market insights even in a downturn. There is an opportunity to analyze the changed purchase behavior, e.g. sales volume and frequency, price sensitivity and especially the churn of customer groups. There might have been a redefinition of the most loyal customer groups. In other words, the customers that were the most loyal during the boom might not be the most loyal customers in a downturn.

This knowledge will empower companies to effectively redirect their marketing efforts. There might be an access to many new customers that were not on the target list prior to the downturn. A different target audience may require the utilization of more direct, integrated and cost effective communication channels.

The other mechanics are unaffected by the downturn. Once the customers that are loyal even in a downturn are targeted, we can be sure of their incremental business. It will then be of utmost important to service these groups right. These customers will stay when the spring comes, while other customers will come back.

In our experience, the companies that mange those different customer groups effectively and strengthen loyalty in a downturn will increase their market share and have changed the game for the good times to come.