Owing to the current economic situation and the heightened competitive environment that has become part of the business landscape; more business owners are seeking to understand the importance of customer loyalty. It has often been repeated, and in some studies it has been proven that it is far less expensive to sell to an existing or current customer than it is to acquire a new customer. However, few businesses really understand the dynamics involved in measuring the loyalty of customers.

Most Common Example

Nearly every person that flies more than once a year is a member of at least one airline's frequent flyer program. The general approach to these programs is that in exchange for becoming a member and consolidating all or at least the majority of flights taken to a single airline; the airline will provide certain perks. These may range from free tickets to preferential boarding opportunities, access to more personalized reservation assistance, and/or the ability to carry additional luggage onto a flight without charge.

What these programs do effectively is garner greater shares of that flyer's air travel as most travelers loathe giving up the amenities associated with being a member of the airline's program. However, to claim that the passenger is loyal to the airline may not be entirely accurate as the passenger may feel trapped into the relationship. A slave would hardly be considered loyal to a master just because freedom is not seen as something

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easily attained.

Similarly, many grocery store shoppers belong to a frequent shopper program that provides the shopper with a card to swipe at the checkout stand to secure discounts only available to cardholders. However, most shoppers that do frequent more than one store have a separate card for each store they visit, so the success of the supposed loyalty building cards is suspect. Even if the majority of shopping is done in one store or chain; it does not necessarily translate to the shopper having positive feelings about that retailer and demonstrating loyalty. After all, students spend nearly ten months of every year in school, and then celebrate as soon as the school term is over - few would observe this behavior and claim that because the students are loyal to their school simply because they spend the majority of their time in school instead of out of school.

First Step

In order to properly create a loyalty program that will be effective, there has to be a determination of what the target market looks like for the business. Potential examples of how to think about forming a target market might include:

-Does the business cater to young adults with small children or empty nesters with disposable income?
-Is the likely shopper more inclined to attend rock and roll concerts or a science museum?
-Will distance traveled to the business be within five miles or worldwide?

Without a clear understanding of the shopper profile, it is very hard to build loyalty. In fact, if there is no inclusion versus exclusion factor that differentiates the target market from others, there is often very little compelling the customer to want to be loyal. Said another way from the customer or prospect's viewpoint; if the business appeals to everyone, then it is not appealing to me directly and there is little reason to become or remain loyal.

Measures Of Loyalty

There are a few measures that are commonly used to identify and determine customer loyalty. As already demonstrated, the customer may be behaving in a way that leads one to assume loyalty, but that is not always an accurate assessment. When given a choice that reduces the negative consequences of shifting to a competitor, the customer will often switch - thereby proving that they were not acting out of loyalty, but out of a feeling of being unfairly constrained. These measures are therefore only directional, as they do not account for how the customer is feeling or thinking about the company, but rather how they behave.

Share of Wallet or Share of Requirements - the business wants to ideally serve all of the potential needs for purchases made by the customer of products sold by the business. If each of us were to make a purchase a month of copy or printer paper for our office, then Staples would seek to be the provider of all twelve purchase occasions. If, however, only four of those purchases are made with Staples; then that means that eight purchases went to other providers - Office Depot, OfficeMax, Wal-Mart, or other suppliers. A business wants to maximize the percentage that a customer spends on buying the competitive set products needed to fulfill their requirements with their offerings.

Frequency and Purchase Cycle - The next common measurement used in determining loyalty is the number of purchases that occur within a given time period and how long before a customer performs a repeat purchase. Furniture purchases happen perhaps once every ten or so years for most families. It would be hard to determine how loyal a shopper is to a furniture retailer if a purchase has a decade between the last time it was made. In more frequently purchased product categories, loyalty can be measured by how often the purchase is made and how much time elapses between purchases. If the average time between purchases is a month, and the store secures four purchases a year - it is clear that the customer is getting some of his or her needs met elsewhere with a competitor.

Transaction Size - another commonly used metric is size of any individual purchase. If the customer buys a ream of copy paper at a local office supply store to fill in during a copy emergency, but purchases a box of copy paper from Staples within the same month, it is not an equal measure to suggest that since each store received a single purchase in that month and shares equally in that customer's loyalty. Businesses will look at how much is spent on any given purchase occasion and factor that into an assessment of loyalty.

Backwards Thinking

In reality, the thinking around loyalty has been backwards to date, and is only now starting to be more critically analyzed. Up to this point, loyalty has been viewed as something the customer was to give to a business and was measured in terms of spending habits with a business. In fact, it might be a better measure to assess how loyal the business is to the customers it desires.

Ways that a business can demonstrate loyalty to customers would include:

Educational opportunities to help customers complete their tasks more effectively
Providing access to other customers for facilitated or hosted chances to share and exchange - whether through blogs, internet chat rooms, face-to-face meetings, or other ways.
Inclusion in future product or service plans; time with senior management to discuss ways of improving the company's offerings.

Customers will only behave in a way that is loyal if they feel it is reciprocated back to them. If they do not feel that way, there is a chance they may still purchase and do business with a company; but they will be loyal and will seek other options as soon as they identify one that is suitable. A truly loyal business and customer relationship requires that both parties feel they are receiving equal value from the other and is not measured solely on sales figures.

David Zahn is a serial entrepreneur and consultant to Fortune 100 businesses (www.zahnconsulting.com) as well as entrepreneurial startups (www.startupbuilder.com). His books, "How To Succeed As An Independent Consultant, 4th Ed.," and "The Quintessential Guide To Using Consultants" are frequently cited by other authors and have been used as textbooks in college and MBA classes.

The opinions expressed are the author's and not necessarily those of connpost.com. Please direct comments to cdauber@ctpost.com.