IS LOYALTY ENOUGH? Getting customers to spend more

by Halisi

I’ve been working with my son lately on his scholarship essays.  One of the topics that he has to explore deals with economic situations in various countries.  He has learned that most countries subsidize some domestic industry and that in some countries their incentive plan leads to corruption.  In retail we’ve been incentivizing our team by their commitment to increase loyalty scores; to increase the percentage of customers that say they would recommend the company/product and/or that they would come back for more.  We expect that as the loyalty scores increase, sales will increase accordingly.  However, a study outlined in the Harvard Business Review, reveals that loyalty ≠ more sales

 

“loyalty ≠ more sales”

In fact, according to the study, Walmart saw sales decline as satisfaction and loyalty scores rose.  What then is the small business owner to do?  If Walmart cannot get it right how can Papa’s Pizzeria get it right? Instead of incentivizing your team to increase loyalty, per se, incentivize your team to increase the share of wallet that your customers spend!

1.  MARKET RESEARCH

It is not enough to know what percentage of your customers would be willing to recommend you to their friends.  You also need to know where else are they spending their money.  Let’s use the fictitious Papa’s Pizzeria.  Mr. Papa can look at the situation in several ways.  What percentage of expendable income do his customers spend on pizza, what percentage do they spend on dining out, and/or what percentage do they spend on quick service food.  It is probably unreasonable to expect that his customers would spend 100% of their dining out money on pizza; and it may be unreasonable that they would spend 100% of quick service allocation on pizza.  He won’t know until he does some research.  The first step Mr. Papa should take is to try and get 100% of all pizza money allocation to be spent at Papa’s Pizzeria.  A simple questionnaire will get you the basic information:

Once you get a large enough sample, look at the answers for the people who would recommend Papa’s, yet also order from other restaurants.  What answers does that group give for #4.  Is there a way to mitigate that weakness?  Once you have taken away the reason to eat at another restaurant, then you should command a larger share of wallet by improving your “ranking” against all the local pizzerias.

2.  MEASURE SUCCESS

In our fictitious scenario, let’s assume that most of the folks who would recommend Papa’s also eat at Little Italy’s and Mama’s.  Let’s also assume that the average customer orders pizza 2 times per month with an average bill of about $20.  So the average customer spends about $480 on pizza per year.  If that same customer is splitting that $480 between 3 restaurants, with Papa’s getting 40% of the business and the other two splitting 60% of the business then Papa’s is potentially loosing out on $288 per year from each such customer.

Let’s assume that Mr. Papa added some variety to his menu and started advertising his homemade pizza sauce with fresh spices and he kept his prices the same.  After a few months he did another survey.  On this new survey his customers ordered pizza from him 50% of the time.  That might not seem like a lot, but let’s do the math on this 10% increase.

BEFORE                        AFTER            
40% 50%
$192/YEAR $240/YEAR
500 CUSTOMERS 500 CUSTOMERS
$96,000/YEAR $120,000/YEAR

Just by satisfying 500 of Papa’s customers to eat his pizza over the competition 10% more, Papa brought in an extra $24,000 that next year.  Remember it’s easier and cheaper to get your current customers to spend more than it is to get new customers.

TAKEAWAYS

1.  Loyalty does not necessarily = increased sales

2.  See who your competition is and why your customers choose them over you any % of the time

3.  Improve your product/service in a way that your customers’ value

4.  Improve your ranking in your customers’ minds thus commanding a bigger share of their wallet

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