How can we drive customer loyalty in sectors where price has become the number one driver of the purchasing decision? I am specifically thinking about businesses that have an annual relationship with customers, to see if there are alternative incentives we can use rather than price discounting against competitors.
To start with, what are the elements which organisations have at their fingertips to build their business? I categorise these into three tools. A lot of the time we focus on a couple, but these focus areas are the foundation of any marketing department. They are:
Growth – The acquisition of new customers
Development – The increase of the average spend of a customer
Loyalty – The longevity of the relationship you have with your customers
Why The Focus On Acquisition?
All businesses need to feed the customer pipeline. However we end up being so focused on growth that we tend to spend a vast amount more of our budgets on growth and proportionally less on development and loyalty (by loyalty I specifically mean customers who come back year after year). Why is this?
Given it costs organisations $243 or £150 (Source) for each lost customer, surely focusing on retention in equal proportion to acquisition is a priority? According to an Econsultancy report, seven out of ten marketers agreed it is cheaper for them to retain customers than to acquire them.
But in a 2014 study, a third of marketers said they would increase their spend in acquisition compared to less than one in five who said they would focus on retention.
Are there some businesses which have a higher need to retain customers than others? Maybe a subscription business, or one which has an annual agreement like an insurance company. So why is it often cheaper to go and join a competitor than to stay with your existing insurance company?
Let’s look at an insurance example, an obvious one but something everyone can relate to. I have been with my insurance company for 11 months and the time is coming up to renew my car insurance. I receive my insurance quote through the post and look at the renewal cost.
I then go online and one of two strange things happen. I either find a cheaper online quote direct through the company of whom I am already a customer, or I go to a price comparison site and find a quote significantly cheaper than my original. I then renew my car insurance with the same company but £50 cheaper through an intermediary. Doesn’t this seem silly?
It has cost the insurance company very little to get in touch with me and offer me my renewal. On the other hand when an insurance company signs up to a price comparison site they have to pay a bounty or referral fee for that lead plus there is the administration cost for creating a new customer. Dan White from Ninety Consulting, a strategic digital insurance consultancy, says “the referral fee can vary hugely by product from as little as £45 to a massive £700 for a high-value referral like life insurance.”
This seems strange. It works for the price comparison sites that do a fantastic job of providing the prices and it works for the consumer who gets a better price. However it costs the insurance company money (and therefore profit) to get me to renew my insurance.
First Mover Advantage
Why on earth did the insurance company not take first mover advantage? They were the first to contact me. They had my undivided attention and they didn’t manage to get a price or perceived value to me to get me stay.
Surely the first thing the insurance company needs to do is to build a relationship that values their customers and instantly rewards them for that relationship. No more “only available for new customers” promotions but in fact an “only available for existing customers” approach.
Some of the UK’s mobile operators are doing this now, with Virgin Mobile offering contracts cheaper by £5 per month for existing Virgin customers. And UK building society Nationwide has a whole campaign for mortgages built around existing customers, where you can only get the best rates if you are an existing customer.
Ritchie Mehta from Marketing Lounge Partnership CRM & Loyalty says “Insurance companies should spend time understanding their customers, forming a relationship and bridging the gap with them. This takes a level of investment and commitment to win back consumer trust, but there is a significant retention opportunity for organisations that go the extra mile.
“This will help insurers move the conversation away from price at renewal and towards a value exchange, where consumers see the value in staying with their insurer. Once achieved, insurers will be better placed to offer non-price based rewards that are tailored to customer needs.”
Join The Value Club
Why not allow customers of an insurance company to become members of their value club, which is only available for existing customers. For example in the first year of renewal offer a driving experience; in the second year offer free breakdown cover; and in the third offer a free weekend break. Each of these suggestions would need tailoring to the audience: offering breakdown cover to a new car owner would be irrelevant. However the cost to the insurance company of these incentives is relatively low (potentially lower than paying for a new customer) but the value to the customer considerably higher.
The benefit is the customers get rewarded with a product or service they want which has a high retail cost but a lower cost to the insurer. So why not blend the tools we have in marketing more effectively to reward customers for their loyalty rather than punish them and offer better deals to prospects. At the same time, why not move renewal from a price-based decision to a value-based decision. There is no reason why we cannot do both. It would certainly give the insurer who took this step a significant advantage.