Capitalizing On Loyalty

In Frederick Reichheld's Loyalty Rules he describes the concept of butterflies and barnacles when evaluating potential customers. A "butterfly" is very attractive, but easily moves from place to place, while a "barnacle" may not appear quite as attractive, but sticks around. "Loyalty Leaders," those companies that have the most loyal (and profitable) customers and employees, seek to attract customers who exhibit barnacle-like behaviors. The reason? As Reichheld describes, attracting new customers is costly and only generates big returns in the later years when the cost of serving a loyal customer falls (they become more self-sufficient) and the volume of purchases rises.

Another significant benefit of a barnacle is in frequent referrals. Since a butterfly does not stick around long enough to experience how much value you provide, they will rarely generate referrals. Conversely, a barnacle has a significant depth of experience and knowledge with a particular vendor, leading to highly credible peer recommendations. This value is three-fold.

1. The referred customers typically turn out to be barnacles
2. Since referred customers cost so little to acquire, they begin to generate profits much earlier in their life cycles
3. Referred customers cost less to support, since they tend to use the people who referred them for advice and guidance

Furthermore, barnacles, unlike butterflies, are not easily lured away by flashy, attractive, offerings. This means that they'll stick with you through thick and thin, even in the face of a seductive media campaign. To understand this, think about a company or brand that you have used for years. Then consider how many alternatives you have encountered, but ignored. Many industries have done a poor job at luring barnacles... think cell phones and airlines.

How does all of this (including the last couple of posts) relate to enterprise software - the topic of this blog? You can easily leverage your information technology investments to drive customer loyalty. I will explore this in my next post.

In the meantime, for further insight and discussion into the impact of customer loyalty, and Reichheld's venerable "One Number You Need To Grow: Net Promoter Score" (% of promoters - % of detractors) check-out these related blogs and resources:

http://netpromoter.typepad.com/paul_marsden/2006/03/title_here.html

http://netpromoter.typepad.com/fred_reichheld/

http://www.cfo.com/printable/article.cfm/7108840?f=options