Customer Equity Accelerator Podcast

Ep. 71 | Wharton’s Pete Fader on Customer Loyalty (and what affects it)

 

"True loyalty emerges when you reduce the switching costs and people stay with you anyway." Pete Fader

 
 
This week Wharton Professor Peter Fader dives into customer loyalty in the Accelerator. Loyalty is an area riddled with multiple concepts colliding with each other but Professor Fader helps us sort it out. He cites a classic paper by Oliver which frames four flavors of loyalty: Affective loyalty (emotional love), action loyalty (things you do), cognitive loyalty (feature love) and conative loyalty (intent to buy). Our conversation then moves into the broader effect of satisfaction and switching costs on loyalty.

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Show Transcript

Allison Hartsoe: 00:01 This is the Customer Equity Accelerator. If you are a marketing executive who wants to deliver bottom-line impact by identifying and connecting with revenue generating customers, then this is the show for you. I'm your host, Allison Hartsoe, CEO of Ambition Data. Each week I bring you the leaders behind the customer-centric revolution who share their expert advice. Are you ready to accelerate? Then let's go! Welcome everybody. Today's show is about customer loyalty and what affects it. And to help me discuss this topic is professor Pete Fader. Pete is the Francis and pay one chop professor of marketing at the Wharton School at the University of Pennsylvania. He's also the founder of two predictive analytics startups, Zodiac, which was acquired by Nike last year and Feta Equity Partners. He's also an established author. So Pete, thank you for being our guest on the show today. Welcome.

Pete Fader: 01:05 Allison, happy to talk to you.

Allison Hartsoe: 01:07 So, when we talk about loyalty, people often think about it as simply the fact that a customer returns and keeps returning, but actually there seem to be several types of loyalty. Can you talk to us a little bit about the different flavors of customer loyalty?

Pete Fader: 01:22 Yeah, the L word man, there are a few concepts out there that are more important but less understood than loyalty, and the problem is it really is a mishmash who loyalty is a mishmash of different kinds of concepts coming together. So that's the broadest level. People will often mistake loyalty per satisfaction. They love us. They're loyal to us. Now granted that love or let's call that affective loyalty is definitely part of it. There's no question about it, but just because you like something doesn't mean that you're necessarily doing it all the time. There could be reasons why you can't, that you either don't have access to it, you can't afford it. It doesn't fit with your current lifestyle, or you're locked into something else that your switching costs or are such an important component that often don't get spoken about, but we really need to have a conversation about them.

Allison Hartsoe: 02:22 Got It. So there is the love of the brand, and then there is perhaps a transactional style of loyalty where there might be someone who comes because you discount and you've got a coupon. And then are there other flavors or is it really just kind of a spectrum between those two?

Pete Fader: 02:40 So I adopt a framework from one of my former colleagues to a gentleman by the name of Richard Oliver who really spent a lot of time not only thinking about these issues but doing just a lot of very careful survey-based research about loyalty and satisfaction long before it became the really super popular ubiquitous topic or topics that they are today. And I often turn, and I even after all these years remembered so well to a paper that Rich Oliver wrote back in the late nineties really trying to break down loyalty into its components earliest the different flavors of loyalty. So, Allison, you've touched on two of them. The one would be this idea of affective loyalty, that kind of emotional aspect, and one would be action loyalty. Like do you do the thing over and over and over again? Again, those two kind of align with each other, but they may not.

Pete Fader: 03:33 And there are two other forms of loyalty that Rich Oliver put out there. One was called cognitive loyalty, which is that you're loyal to or really interested in the inherent features associated with a particular product or service. So it might not be that overall feeling you get about the brand. That's going to be more of the affective components. But you know what, this thing has everything that I'd want in a car or a restaurant or a house or whatever else that I just like all of its features. So there's going to be cognitive loyalty that's kind of much more rational. There's going to be that affective loyalty that's going to be much more emotional. And then the fourth one is conative loyalty, which is this kind of a weird word, conative, but I don't even know what that word literally means, but it actually relates more to intentions that I intend to buy this thing.

Pete Fader: 04:24 So very often, you'll see a lot of people asking questions about purchase intentions or willingness to pay. So it's trying to capture that motivation, which by itself should build on top of the cognitive and the affective loyalty. But sometimes there's either a gap there, or sometimes there's an amplification that you don't get just through asking people about their love for the product or its attributes. So it's cognitive loyalty, affective loyalty, conative loyalty, and action loyalty. Really important to understand the four of them, how they're different from each other, how they interplay with each other, and how far a given firm, which is the one where you're most lacking at and where you really need improvement.

Allison Hartsoe: 05:07 So let's take an example. Are there certain types of businesses that are maybe predispositioned for one type of loyalty or another? I oftentimes think of my bank as an example where I'm loyal in the fact that I can't move, but that's a different type of loyalty than a company that I come back to again and again because I loved the performance and the features.

Pete Fader: 05:29 Yes, indeed. So, you know, a lot of it has to do with the kind of product or service that we're talking about. And I hate to be thrown all these academic frameworks at you, but I think there are actually kind of interesting and useful. So you and a lot of your listeners would be familiar with the difference between kind of search goods and experience goods. So that search good. It's something where it's all very rational. It's more of a kind of a consumer reports kind of thing where I can just look at this matrix of which brand offers which of these features and I know which one I want and then I'm going to search around until I find it. So when you're talking about search goods, you know, dishwashers, washing machines, maybe even cars for some people. Then the cognitive loyalty really kicks in. That is like if you have the features that I want, then that's good enough for me, and I love you.

Pete Fader: 06:16 Do you meet my needs? A plain and simple. And then the other end of the spectrum you'll have experienced good where you don't even know if this is any good. It's like if we're talking fashion, like how does this look on me? Well, it's not a matter of just coding up the attributes that you have to see. Does it impress other people or even credence goods, like doctors would be an example of a credence good because you don't really know if they're doing a good job or not? The fact that you haven't died yet means I haven't screwed it up, but you have to put some credence that they're recommending the right things and that these vitamins or these other medications are working for you. So in those more complex areas where it's not just about does, it have the right features for me? That's where some of this affective of and conative, where the emotional and the intentional motivational aspects really start to kick in. You know, I think this doctor is doing a good job, so I'm going to stay with that physical therapy regimen, or I'm going to continue to take that medication because I've been incentivized by him or her to do so. So you can clearly see differences in the importance of these different kinds of loyalties depending on the kind of product or service you're talking about.

Allison Hartsoe: 07:28 Okay. So if I've heard you correctly then effective and conative, which are the more emotionally driven sides of loyalty fit better for fashion brands and things that rely heavily on recommendations like doctors or services, but things that are more feature driven will lend themselves to action, loyalty. And would you also say cognitive loyalty? Is that the way?

Pete Fader: 07:54 Absolutely to be sure driven than then you've clearly cognitive loyalty kicks in because now I can look at the features, I can say this one meets my needs, I'm going to lock myself into it. And very often that's going to apply to fairly low involvement products or products where there isn't a big social component to them. So for instance, when it comes to chewing gum, I don't really need to ask people how has this gone work with me? And I don't really have to have much of a strong relationship with the brand necessarily. Doesn't face good, does it last a long time? It's not. What a lot of companies are trying to do is to try to move away from release, broadened beyond pure cognitive loyalty. Let's try to create an emotional bond there. Let's try to create some social connections. So you look at, for instance, I love some of the ads that, I guess it's a hit.

Pete Fader: 08:40 We're going to talk about chewing gum. That extra gum, they're just gonna go with a wonderful hard tugging ad campaign that had nothing to do with it. Features or tastes or anything like that. Or is it showing no old man and young boy playing checkers with each other and sharing the gum while they do so, and they're really trying to get more at those affective or brackets those motivation or conative aspects. So all companies wisely should aspire to kind of hit the mark on all these different aspects of loyalty. Sometimes it's harder to do some than others, sometimes might not even be worth it, but it's good to be aware of these different dimensions of it.

Allison Hartsoe: 09:17 And I think that's where we've seen some really interesting brand stories where Dollar Shave Club, right? It's a razor, was more of a commodity item that you bought from Beck or whatever we razor company was Gillette, and then they brought in the emotional side of it and made it more of a club and a cause. And the same thing with old spice. And a couple of weeks ago on the show, we had Diane Lee from Coffee Bean and tea leaf who, you know the same thing. Again, it was something that was traditionally more of a just a commodity, an item, It's just coffee. But then it becomes something that's so much more heartfelt, and they seem to be using a lot of techniques around great advertising and apps and subscriptions and convenience in order to drive that difference between what might've been just action loyalty into more effective loyalty. Is that what you're seeing too?

Pete Fader: 10:08 I am. And now that takes us to the next step. Something I mentioned briefly before, but we don't talk enough about net switching costs. So actually one of the most wonderful definitions of loyalty, and again, I'm going back to my old friend and colleague, Rich Oliver who unfortunately passed away a couple of years ago, he said that loyalty is when someone shows a repeated commitment to do something. In the absence of switching costs. This is a beautiful definition. It's very often what appears to be loyalty. What appeared would, you'll see this action loyalty is just because you're feeling locked in. So with a lot of people in this example resonates with so many people. You might not really be loyal to the person who cuts your hair or your dentist or even your bank. It's just that it would be such a hassle to move to kind of close accounts and open accounts, or you're just feeling this.

Pete Fader: 11:02 It would just be so difficult to look your hairstylist in the eye and say, I'm moving on. So there's a variety of different switching costs. Some of them that are very tangible, like you can't walk away because I have so many loyalty points there, or it'll just be too much of a bother to figure out which bank or airline to switch to, or it's too much of a risk or some of these more emotional things that I might dislike the people in the bank, but I do feel some warmth towards the brand or something like that. So there's a variety of different switching costs, and too often when we think we see loyalty, we're just seeing switching costs in place, and a lot of companies that are either implicitly or explicitly trying to increase those switching costs. Well, that doesn't increase loyalty. That just creates more of a hostage situation, and true loyalty emerges when you reduce the switching costs, and people stay with you anyway.

Pete Fader: 11:56 A great example of this would be cell phone number portability. For years and years and years the cell phone providers made it really difficult to switch by saying, if you want to go, you're going to have to change your number. And again, they thought that people were being loyal, but no, they were just being held hostage because they cared more about the number than the provider, and it was very controversial. Some people might remember when cell phone portability became universal. I know it was a real acid test for the providers. Now that people can go, will they, and it's very interesting to see that. At first, it was this big shock to the system. A lot of people would run away. Finally, I'm free, but it was really nice way to let the shakeout occur. You know what? Maybe we should lose those people anyway. We don't necessarily need hostages. We'd prefer to have truly loyal customers, and it's good to see loyalty really manifest by folks staying around when they don't have to, and that's going to tell you much more about the kinds of customers you want.

Allison Hartsoe: 12:51 Now, that makes a lot of sense. But I'm also wondering if switching costs are something that as a company moves from cognitive and action loyalty into affective and conative loyalty. If they should be setting up switching costs or some light version of switching costs to encourage people to stay, It should that be part of their loyalty program?

Pete Fader: 13:14 It absolutely should be. Firstly, you need to be aware of. You need to be spending as much time thinking about measuring, managing, acting on switching costs as you are on satisfaction. It's remarkable how many companies out there are doing some kind of satisfaction measurement thing, net promoter score, and on down. But very few of them are actively thinking about the switching costs and they really play pretty much an equal role in overall loyalty or overall customer value. So now actually you do want some of it, but you'd prefer it to be more on the emotional side rather than the, you know, if you go, you will pay a penalty, or you will lose those points. You don't want to really be rubbing it in people's faces with it. You'd rather just kind of have people almost locked themselves. And there's this beautiful interplay over here about do you start with the switching costs and hope that people then adjust themselves to your system? Almost a, dare I say a Stockholm Syndrome, or do you just start with pure love, but then find ways to kind of quietly and subtly lock people in by making them so reliant on your ecosystem that they would have to pay switching costs to leave. So there's a lot of interesting strategic questions there about how the building of the switching costs and potentially the lowering of them interplays with more traditional satisfaction.

Allison Hartsoe: 14:36 That makes perfect sense. So I'm going to say that any actions when people are thinking about loyalty first, they should consider the stages of loyalty when developing a program. It's not just a punch card or a binary system, you're really trying to develop a whole emotional connection, and that gets back to that paper which will link to in the show notes. That reflects a little bit about how people move through loyalty. And then second, consider the switching costs, especially as your satisfaction might be rising and your loyalty levels might be rising. Think about how you stick the landing and keep people part of your attached to your brand without creating a hostage situation. Would that be fair?

Pete Fader: 15:15 That's right. Or everything you said is right as always. But there are some companies that suffer from high switching costs. It sounds like a good thing, but it could be a problem that you acquire customers, and it's really hard for them to leave and they're not that valuable. And you kind of want to chase them away, but you wouldn't mind for sometimes lowering switching costs of that. The kind of base kind of shake out a little bit so you can see who the truly loyal are and that will give you some guidance about what you should be doing with your acquisition efforts and so on. So again, the switching costs kind of cut both ways and it's hard to give a clear framework as to when they should be high or low and how that should change over time. And it goes right back to the point I made earlier. Quite frankly, that companies, there aren't enough case studies of companies managing the switching costs, and so it was harder to come up with best practices around them as it is compared to satisfaction.

Allison Hartsoe: 16:07 But it's a good test and control. Yeah, I don't know that I wouldn't drop barriers across the board from my entire brand, but I might take a small group of people and test and see how much loyalty affects whether, how much the switching costs affect whether they move or not. And then you could extrapolate to the broader group.

Pete Fader: 16:23 I agree with that. Or another twist on it would be if you think about the variety of different switching costs that we have, let's differentially try lowering some as opposed to others to try to really get a sense of how strong some of them are. What is the financial value of certain kinds of blocking compared to others so we can know what kinds of investments to make or avoid.

Allison Hartsoe: 16:45 And that's a perfect case I think for CLV when you want to decide what types of things you want to tinker with, you have the classifications of different types of customers, and maybe different things apply in different places on the ladder.

Pete Fader: 16:59 Absolutely. And it's so important. In the end, it all comes back to customer lifetime value, but that's why it is important for us to kind of get below the surface of just the dollars and cents that are coming in to try and understand how many of them are coming in by choice, by different forms of loyalty versus how many of those dollars are coming in because of, again, almost forced through switching costs. So an example where I think the academic literature, it really does have a lot to offer to really break down these very important concepts and to understand them better. And it is interesting that you can start to kind of look at ads and look at other kinds of company campaigns and get a better sense of how they can be classified in which kinds of practices make sense for that kind of company or not, as opposed to say, you know, is it creating loyalty? Yeah, it's much more subtle than just that.

Allison Hartsoe: 17:47 And it's not exactly an academic literature, but it goes back to database marketing and a book that you recommended to me, which is the customer loyalty solution. And some of the classic things, I mean it's a dead ringer for some of the techniques that we're applying today, but it was written by Arthur Middleton Hughes back 20 years ago, 30 years ago. It's an old book that was using database marketing techniques, and it's the same thing that we're applying now, but we're putting in more big data attributes behind it.

Pete Fader: 18:14 Bless your heart, Allison Hartsoe, some of those old school direct marketing books like the one by Hughes and his mother really classics out there. They are on no one's radar, and most marketers today actually they don't like direct marketing. It's kind of funny. They want to be direct marketers. They want to have one on one relationships. But when you're talking about direct marketing, think about late night infomercials and all that kind of things like, oh we don't really like that. So put aside the kinds of products and services that you ordinarily associated with direct marketing, but look at the practices and you'll find out that you know what, this is exactly the kind of stuff we've been thinking about and experimenting with, but there's gold in them their hills, and I think it marries very nicely with some of the more, let's call them, you know, a qualitative or emotional aspects of branding and so on that we associated with marketing today.

Allison Hartsoe: 19:04 Exactly. And I'm actually going to quote something from your book at the very end. So Pete must cause the customer centricity playbook. And at the very back, you have this really interesting note about two cautionary tales. And so we oftentimes talk about CLV and loyalty and how to get to success, but for companies that already achieved success, there's a really interesting note about in this case you say one reason in both cases is that the competition didn't simply sit by and allow Caesar's and Tesco to run away with their markets. Instead, competitors started to emulate some of the successful strategies and tactics that they had been observing and use their deeper pockets to beat out focal firms in their own game. And I think what's so interesting about that is this is a dynamic space, right? So just because you get the loyalty doesn't mean that your competitors aren't trying to outmaneuver you. So the idea of constantly tinkering with loyalty or switching costs or other things just as a way to react to the competitive space in the market is what makes modern companies perhaps more nimble and more resilient when they can respond to that quickly.

Pete Fader: 20:12 That's a super good point. That's why when you try to pin me down for, you know, which kind of loyalty do you use when? I, I hate to be wishy-washy, but it really does depend. It depends on the competitive landscape, and of course the nature of the business and it really is a chess game and it's interesting to see how sometimes companies find the formula for success and then it turns around and ends up actually hurting them because they're kind of locked in when their competitors are out there actually shaking things up. So I think that's a universal lesson and applies the loyalty, satisfaction switching costs on to everything else.

Allison Hartsoe: 20:46 Exactly. If people want to reach you, what's the best way to get in touch? Should they use your data equity address or a different address?

Pete Fader: 20:52 No! Google my name Peter Fader, and that by itself brings up contact info, but lots of other writings and activities that I've done on these general topics as well as the others that relate to them like custom valuation and so on. It's wonderful. It's heartwarming that there's so much interest in these topics today. Much more than there was when some of the real great thought leaders like Rich Oliver, we're putting some of his ideas down 20 years ago, but you know what? Better late than never.

Allison Hartsoe: 21:19 Pete, thank you as always for sharing your fantastic ideas. As always links to everything we discussed, including the paper that Pete mentioned. We'll be at ambition data.com/podcast and our transcripts. It's just fantastic to have you, and I really appreciate you sharing your thoughts on loyalty.

Pete Fader: 21:36 Allison, you're just such a good job as being a gatekeeper. Not only given a geek like me some airtime, but a chance to really, I'll put out some excellent ideas. Again, most of which are in mind, but it's news that people can use and keep up the good work.

Allison Hartsoe: 21:50 Thank you, Pete. Remember everybody, when you use your data effectively, you can build customer equity. It is not magic. It's just a very specific journey that you can follow to get results. Thank you for joining today's show. This is your host, Alison Hartsoe, and I have two gifts for you. First, I've written a guide for the customer centric Cmo, which contains some of the best ideas from this podcast, and you can receive it right now. Simply text, ambitiondata, one word to, three, one, nine, nine, six, (31996) and after you get that white paper, you'll have the option for the second gift, which is to receive The Signal. Once a month. I put together a list of three to five things I've seen that represent customer equity signal not noise, and believe me, there's a lot of noise out there. Things I include could be smart tools. I've run across, articles I've shared cool statistics, or people and companies I think are making amazing progress as they build customer equity. I hope you enjoy the CMO guide and The Signal. See you next week on the Customer Equity Accelerator.

 

 

Key Concepts:  Customer Lifetime Value, Marketing, Digital Data, Customer Centricity, Long-Term Customer Value, Marketing Leaders, Analytics, Creativity, Product Development, Audience Research

Who Should Listen:  CAOs, CCOs, CSOs, CDOs, Digital Marketers, Business Analysts, C-suite professionals, Entrepreneurs, eCommerce, Data Scientists, Analysts, CMOs, Customer Insights Leaders, CX Analysts, Data Services Leaders, Data Insights Leaders, SVPs or VPs of Marketing or Digital Marketing, SVPs or VPs of Customer Success, Customer Advocates, Product Managers, Product Developers

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