What Are the Different Customer Loyalty Models?

The basic core of the customer loyalty model was proposed by Reichheld and Sasser in 1990. At the time, the view was that, depending on the industry, every 5% increase in customer retention increased profits by 25% to 85%.

Customer loyalty model

Right!

The basic core of the customer loyalty model was proposed by Reichheld and Sasser in 1990. At the time, the view was that, depending on the industry, every 5% increase in customer retention increased profits by 25% to 85%.

The customer loyalty model is a long-term strategic strategy used by commercial enterprises to meet the expectations of customers and relevant stakeholders, so as to improve their loyalty so that the enterprise can achieve its work goals, or even surpass it.

An example of a classic related model is: product quality or service determines customer satisfaction, loyalty and even the profitability of a company.

Chinese name

Customer loyalty model

Foreign name

Loyalty Business Model

Presentation time

1990

Presenter

Reichheld and Sasser

Proposed by Kaj Storbacka, Tore Strandvik, and Christian Grönroos in 1994, this quality of service model is based on in-depth exploration and refinement on the basis of a loyalty business model, but the same conclusions are finally obtained. It was mentioned that customer satisfaction is based on the experience of the most recent purchase of a product or service. This evaluation depends entirely on the comparison between the actual service received and the expectations generated by the previous service quality. If the recent experience results are better than expected, customer satisfaction will increase. That is to say, if the customer's expectations are relatively low, even for a relatively mediocre service, the customer satisfaction result will be high, even for a mediocre service with a lower price. Similarly, if the customer perceives that the quality of the previous service is better or that the product is expensive or the service is not worth the price, he will naturally be dissatisfied with the treatment of the service.

This model looks at the power / effect of the buying and selling relationship. It proposes that this power is determined by the customer's latest experience, the past perceptions and concepts of the service , the customer's service commitment / price, and the trust of the parties. According to the article, customers will also have a tolerance zone, which is consistent with the range of "barely accepted" and "unexpected" service quality. Therefore, if it is only a disappointing experience, it may not effectively weaken the business relationship between the buyer and the seller, because he still maintains a high evaluation of the long-term service experience in the past, which is equivalent to putting up with the past this time. Other reasons for tolerating this disappointing experience are the high transaction costs of converting to buy or sell, or few other desirable choices, or having agreed to long-term cooperation, or certain other constraints to keep them in business relationships. The existence of constraints behaves like an obstacle to exit. Here are a few examples, including: legal contracts, shared technology, economic dependence, and so on.

The model then confirmed a series of links between customer loyalty and buying and selling relationships. Customer loyalty is made up of three factors: buying and selling relationships, other choices, and crisis events. The sale relationship will be terminated in the following cases:

1. The customer left the service radiation area of the enterprise;

2. Customers no longer need the company's products or services;

3. More competitors enter the radiation zone;

4. The buying and selling relationship has weakened;

5. Businesses do not handle crisis events well;

6. It is impossible to explain why the prices of the services provided have been adjusted.

The final connection of this model is the impact / effect of customer loyalty on profitability. The basic assumption of all loyalty models is that the cost of acquiring a new customer is much higher than the cost of maintaining an old customer. This assumption was made by Reichheld and Sasser in 1990. Depending on the industry, for every 5% increase in customer retention, profits can increase by 25% to 85%. However, in 1992, Carrol and Reichheld argued about these calculations, suggesting that they were the result of wrong one-sided analysis.

According to Buchanan and Gilles (1990), increasing profitability is related to customer retention efforts because:

-The new customer acquisition cost is only calculated at the beginning of the buying and selling relationship: in fact, the longer the relationship, the lower the amortization cost of this customer.

-Account maintenance costs as a percentage of total costs have fallen.

-Long-term regular customers are often reluctant to change businesses and are not so price sensitive. This can stabilize and increase unit sales.

-Long-term regular customers may initiate free word-of-mouth publicity and recommendations.

-Long-term regular customers are more likely to purchase auxiliary products and high-margin complementary products.

-Long-term customers and companies are often satisfied and unlikely to switch to competitors, making it difficult for market access or competitors to seize market share.

-Frequent customers often do not need to spend too much to serve, because they are familiar with the service process, need less "education", and have consistent orders.

-Increasing customer retention and loyalty will make employees' jobs easier and more satisfying. In turn, the more effortless work of happy employees translates into higher customer satisfaction, forming a virtuous circle.

If you can grasp this last connection, then this buying and selling relationship is bound to be profitable. Striving to keep unprofitable loyal customers is not a viable business model. For marketers, this is why it is so important. Marketers can use it to evaluate the profitability of each customer (or the type of customer) and terminate those unprofitable buying and selling relationships. In order to do this, we have to calculate and compare the cost and revenue of each customer. There is an effective calculation method called income cost ratio. The biggest obstacle to this calculation method is how to collect the cost of personal relationships and what are the cost drivers for vague relationships.

Extended model

SPC model

Commitment-loyalty model

data collection

1.Storbacka, K. Strandvik, T. and Gronroos, C. (1994) "Managing customer relationships for profit", International Journal of Service Industry Management, vol 5, no 5, 1994, pp 21-28.