Jeremy Alexis

Cultivating fiercely loyal customers requires ambition and risk-taking, but will ultimately provide your company with valuable

and sustained relationships.

18 • Rotman Magazine Fall 2006

Using Design to Create

FiercelyLoyal Customers

by Jeremy Alexis

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It is a common observation: as soon as theplane lands, at least half the passengersquick-draw their Blackberries to checktheir e-mail and voicemail. The deviceresponsible for this behaviour is some-times mocked as a ‘crackberry’ or ‘anextra appendage.’ Some may see this as asad commentary on modern business life,but it is also evidence of fiercely loyalcustomers.

Most of the quick-draw artists on theplane will also likely be members of the air-line’s frequent-flier program. Whereas theBlackberry derives loyalty from an easy-to-use interface, consistent service, and arobust device design, the airline derivesloyalty from a complex and expensivereward program that includes call centers,free product giveaways, and sophisticatedaccounting practices. A recent studyreported in Brandweek shows that offeringssuch as the Blackberry (along with similarproducts from Samsung and Palm) andGoogle have the most-loyal customers,while companies such as, for example,American Airlines have increasingly less-loyal customers.

The companies at the top of this surveyshare a set of common factors: they offer

products and services that are easy to use,and address a holistic set of customerneeds. In other words, they are welldesigned. This evidence suggests that tradi-tional levers for creating loyalty (rewardprograms and contracts) are easy to copyand increasingly less effective, and thatthose companies should look to new, more-powerful levers to build betterrelationships with their customers.

The Never-Ending Quest for Loyal Customers Creating loyal customers remains a goal(often articulated as the most importantgoal) of most companies. Estimates putthe number of books on customer loyaltyin the thousands. In North America alone,

companies spent $1.2 billion on loyaltyprograms in 2003, and this number isincreasing. There are more than 8,600supermarkets, 50 airlines, 30 phone com-panies, 20 hotel chains, and dozens ofcredit cards that offer loyalty programs.However, according to McKinsey &

Company, organizations oftenunderestimate the full cost of

setting up loyalty programs,and then, even if salesincrease, the program mayactually result in losses.

In addition, companies spend a greatdeal on technology to help them managetheir customers – with less than stellarresults. In 2004, North American compa-nies spent $10.9 billion on customerrelationship management systems. How-ever, only 28 per cent of companies thatimplemented a CRM system last yearbelieved it led to any improvements.

Despite these efforts, and not includingcustomers of outliers like Google and Sam-sung, consumers are increasingly less loyalto brands and products. For example, foodretailers will lose up to 40 per cent of theirnew customers in three months, and onlyabout 10 per cent of customers are 100 percent loyal to certain consumer products.

In a nutshell, customers are less loyal,and loyal customers are less profitable, thanmost companies estimate. Much of this canbe attributed to increased choice and avail-ability of information. However, we shouldnot overlook the fact that many organizationshave incomplete and old beliefs about loyalcustomers (see Figure One).This evidencebegs the question: should companies be con-cerned about creating loyal customers? And,if so, what tools can a thoughtful design man-ager employ to build more sustained andmutually beneficial customer relationships?

Old logic: loyal customers… In reality: loyal customers…

Cost less to serve Have higher expectations from your organizationand your offering

Will pay more for your offering Experience helps them to get the best price fromyour organization

Are receptive to cross selling Are very sensitive about your organization taking advantage of their loyalty for marketingand price increases

Will create positive word of mouth buzz for yourbrand: they will market it for you

Are not reliable marketers, and do not alwayspresent accurate and positive messages

Figure One: Rethinking Beliefs About Loyal Customers

Traditional levers for creating loyalty(like reward programs and contracts) areeasy to copy and increasingly less effective.

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The Range of Strategies for Creating LoyaltyThe answer is deceptively simple. A com-pany’s goal should be to create completelysatisfied customers through a more thor-ough understanding of their needs andthrough distinctive offerings. According toresearch conducted for Harvard BusinessSchool by Thomas O. Jones and W. EarlSasser, “To a much greater extent thanmost managers think, completely satisfiedcustomers are more loyal than just satisfiedcustomers.” Traditional loyalty efforts pro-duce customers who are only marginally

loyal, and they make it easy for customersto switch to competitors. In contrast, com-pletely satisfied customers become fiercelyloyal customers, exhibiting the qualities thatwere once assumed common for all loyalcustomers. But this class of customer loy-alty can be difficult to cultivate; it requiresan integrated approach to design, develop-ment, sales, and marketing, and it cannot beachieved with a stand-alone program.

Figure Two details the six availablelevers for creating customer loyalty. Thethree levers on the left are the more com-mon strategies. Customers (both consumerand B2B) are becoming more adept atavoiding lock-in; it is not a desirable condi-tion from a customer’s point of view.Theselevers operate under the false assumptionthat programs can change and control cus-tomer behaviour. Although the programsmay see initial success, customers will soonlearn how to extract the maximum valuefrom them while contributing limited valueand loyalty.

The three levers on the right createmore-sustained, fiercer loyalty, and theyreinforce and enhance customer behav-iours. Not surprisingly, the three levers onthe right benefit the most from integrateddesign efforts, which suggests that designmanagers have a more important role

in building customer loyalty than is gener-ally accepted.

To create fiercely-loyal customers,companies will often employ several leverssimultaneously.To illustrate this point, we’lllook at two examples:Wal-Mart and Apple.

Wal-Mart: Favorable Economics and Emotional Connection Among retailers, Wal-Mart’s customer baseis second in loyalty only to that of Target.The company has created a sophisticated sys-tem of partner relationships and logistics that

provide its customers with consistently lowprices. Customers are loyal to Wal-Martbecause of the favourable economics createdby these systems. In addition to price, Wal-Mart has created a close emotionalconnection with its customers. Despiterecent stories of labour and sourcing issues,most of them are fiercely loyal to the brand.Wal-Mart uses design strategically, creating a

brand and a store environment that is alignedwith the beliefs and values of its core audi-ence. That audience is attracted to simple,uncomplicated signage and merchandising,and a store look that embodies economy. Itremains to be seen how recent efforts to addmore upscale elements to the store willaffect the core audience.

Apple: Emotional Connection and Distinctive Solutions Apple is commonly mentioned when dis-cussing customer loyalty, and it is especiallyinstructive in this case; it would be difficult toidentify a brand with more-loyal customers.This high degree of loyalty results from theapplication of multiple, but well-integrated,levers.Apple has honed and strengthened thisemotional connection over the years. Thecompany also offers its customers uniquesolutions, such as the iTunes/iPod system.Customers are loyal to the iPod because itmade digital music easy to use. Other digitalmusic systems required users to understand adizzying array of file extensions, to log on andestablish accounts with several serviceproviders, and ultimately to live with a devicethat was not an attractive or desirable object.

A Guide for Creating Fiercely Loyal CustomersAs noted above, design and design thinking(both within the internal team and with

Lever Loyalty programs

Contracts Limitedchoice

Distinctivesolution

Emotionalconnection

Favorableeconomics

Source ofloyalty

Repeat pur-chase buildsrewards

Obligated,early termi-nation resultsin fee

Other choiceis nothing

Best solutionfor customerneeds

Customersare alignedwith / buyinto brand

Best eco-nomicproposition

Example AA advan-tage

Cell phonecontracts

Utilities Total Merrillfrom MerrillLynch

Apple Wal-Mart

Challenge • Expensive• Easy to

copy• Customer

loyal toprogram,not brand

• Can createadversarialrelation-ship withcustomers

• Can leadto complexaccounting

Subject toprivatizationand monopolyregulation

• Complexto manage

• Requiresconstantupdating

Requiresdeep customerknowledge

• Hard tomanage

• Can leadto lowprofits

Theselevers:

• Modify customer behaviour • Can easily be copied• Create marginal, temporary loyalty

• Build on / leverage existing behaviour• Are difficult to copy• Create sustained loyalty

Figure Two: The Six Levers for Building Customer Loyalty

Traditional loyalty efforts produce cus-tomers who are only marginally loyal,and they make it easy for customers toswitch to competitors.

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consultants) can play a critical role in cus-tomer loyalty efforts. A design team’s corevalue lies in developing economical anduser-centered solutions and/or creatingemotive and meaningful brand experi-ences, which ultimately are responsible forcreating the most loyal customers. FigureThree details how design efforts can beemployed as part of the three most power-ful levers.

So far, we have shown that traditionalloyalty efforts will not create completelysatisfied, and thus fiercely loyal, customers.We have also argued that design is wellpositioned to create this new class of loy-alty. The challenge remains for designmanagers to articulate this argumentwithin their companies and then to build anintegrated approach to employ more effec-tive loyalty levers. When implementedproperly, these efforts will create cus-tomers who:

• are more accepting and accommodatingof product launches that require furtheriteration and refinement;

• will be instrumental in moving yourofferings from early adopter to earlymajority markets; and

• can become partners in your innovationand development efforts.

Although implementation at your companywill vary based on culture and industry, thefollowing guide outlines a four-step processfor defining the appropriate levers, design

interventions, and organizational strategyfor creating fiercely loyal customers.

1. Shift mindset from ‘lock in’ to ‘lock out’The first step is both the most importantand the most challenging. It requires you,the design manager, to immediately shiftthe focus, first of your team, and eventuallyof your future collaborators, to the correctpath for achieving customer loyalty. Mostloyalty programs are based on a company-centered point of view, and they attempt tolock customers in to services and offerings.

When a company takes a customer-centered point of view, which is ultimatelyrequired if you intend to create completelysatisfied customers, the corporate focusneeds to change. The goal of the loyaltyefforts should be to provide products, serv-ices, and communications that are socompelling and distinctive that customersdo not even consider switching, essentially‘locking out’ competitors and substitutes.

Although initially challenging, thischange in focus will be liberating. Most ofthe people in your organization will notdisagree with this suggested change (thereare few companies that do not give at leastlip service to “putting the customer first”).However, despite their agreement in prin-ciple, many of your colleagues will not beconverted until they begin to see changeand results. It is critical for the design teamto remain vigilant, positive, and dedicatedto the effort during the uncomfortableperiod between initial agreement and fullbuy-in based on results.

2. Diagnose the situationOnce your colleagues agree in principle,the design team should begin an analysis ofthe current situation. The team shouldgather data to help answer the followingquestions:

• How loyal are our current customers?• What levers do we employ to build

their loyalty?• How effective are these levers?• How loyal are our competitor’s customers?• What levers do they employ?• Do our competitors do anything related

to loyalty that we wish we did or wish wecould do?

• What can we learn from companies inother industries?

Much of the loyalty data may alreadyexist. However, it is important to under-stand the methods used to collect the dataand the objectives of each study. Loyaltystudies, like any good piece of research,need to limit bias. Often, these studies canbe biased to show loyalty being strongerthan it actually is. Ideally, you want to beable to identify customers who are not sat-isfied, somewhat satisfied, and highlysatisfied, and the drivers behind each seg-ment’s current state.

3. Choose the right leversYour situation diagnosis will help your teamto understand what gaps need to be filled inorder to create more loyal customers.Yourstudy will also likely reveal opportunitiescreated by your competitor’s myopia orcompany-centered focus on loyalty. Now,your team can select and then detail theappropriate levers.

• Set realistic and appropriate goals.Your teamshould be sensitive to the presenting con-dition and position of your customers. Ifyou have identified that the majority ofyour customers fall in the lower range ofsomewhat satisfied or even not satisfied, itmay be difficult to move all the way tofully satisfied with one set of interventions.In fact, these customers may prefer yourorganization to focus on getting the basicsright before they will become more loyal.It is critical to set goals that are appropri-ate for your customers and that can be

Lever Potential design interventions

DistinctiveSolutions

• Conduct design research to understand unarticulated and unmet needs.• Develop product platforms that address a comprehensive needs set.

• Conduct usability testing to ensure offerings are best in class for usability and usefulness.

EmotionalConnections

• Conduct design research to understand customer values, aspirations, and passions. • Develop brands that communicate emotion and feeling, not just functional value.• Develop products and communications that customers covet and desire.

FavorableEconomics

• Conduct usability design studies to understand which elements of the current offeringcan be shifted to customers, reducing costs and complexity.

• Seek innovative fabrication and sourcing models.• Assess product and service design with intent to reduce unnecessary components

and complexity.

Figure Three: Design Interventions That Can Build Customer Loyalty

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22 • Rotman Magazine Fall 2006

achieved by your team.This is truly a casewhere it is smarter to under-promise andover-deliver.

• Identify existing and new organizational capa-bilities. Your selection of levers should bealigned with your organization’s capabili-ties. So, if your company does not have thesourcing and logistics capabilities todeliver low-cost offerings, selecting favor-able economics as a lever may not be theappropriate choice. There may be someinstances in which the team identifies newcapabilities that need to be developed ornurtured.This will require additional col-laboration and resources; developing anew capability is a strategic decision.

• Use multiple levers simultaneously. As notedearlier, several levers should be employedfor maximum impact. Ideally, these leverswill be mutually reinforcing. For exam-ple, if you choose to deliver the lowestprice to achieve favorable economics, youshould also be able to create an emotionalconnection with your customers based onoffering them a low price – this should bea key benefit for your customers.

4. Develop an integrated approach With a set of interventions defined, yourteam can now begin to plan the implemen-tation with other disciplines and functions.To the extent it is possible, you can includea broader coalition during development,but at this point it is critical to move effortsto a larger, more cross-functional team.

At the core of this integratedapproach is the idea that customer loyaltyis not created by a stand-alone programbut is the result of orchestrated efforts ofmarketing, sales, product development,and strategy.

It is critical at this point to create acoherent business argument for loyalty.Despite the common sense and clear bene-fits of creating completely satisfiedcustomers, there will no doubt be individ-uals in your organization that still requireconvincing. A tool for making this argu-ment and for engaging skeptics is theprofit/satisfaction matrix illustrated in Fig-ure Four. This tool integrates yourdesign-focused research, which segmented

customers according to loyalty, withresearch that likely lives in the financedepartment and details which segments ofcustomers are most profitable.

Combining these data into a singlemodel will require some cleaning and modi-fication, but it will create a common tool tohelp guide and shape a robust strategy. Thismodel also will force a much-needed collab-oration among design, marketing, sales, andfinance.What is important is that this modelwill move the customer loyalty conversationto a strategic level of the same rank as prof-itability. Although not always acknowledged,profitability and customer loyalty have amutually reinforcing relationship:

• If you just focus on creating profitablecustomers, without trying to make themcompletely satisfied, your competitors caneasily poach these highly valued customers.

• If you just focus on creating “completelysatisfied” customers, without understand-ing profitability, you may rack up lossesserving them.

Depending on the nature of your busi-ness, it may be possible to put individualcustomers (likely in a B2B environment) orcustomer segments in each cell in themodel. Figure Four lists strategies as appro-priate for customers or customer segmentsin each cell.

Summary Thoughts All companies should strive to createfiercely loyal, profitable customers.This canbe achieved only through rethinking existinglogic about customer loyalty and loyal cus-tomers, integrating loyalty efforts withoffering development, marketing, and sales,and close collaboration between the strategyand design functions within the organiza-tion. Cultivating fiercely loyal customersrequires ambition and risk-taking, but willultimately provide your company with avaluable and sustained relationship.

Jeremy Alexis is an assistant professor at the Illinois Instituteof Technology’s Institute of Design in Chicago, where heteaches design planning and the economics of design. He hasspent the majority of his career leading interdisciplinaryteams tasked with defining next-generation products, serv-ices, and business models, working with such clients asUnilever, Motorola, Citibank, Pfizer, American Express,and Target Corporation.

Figure Four: The Profit-Satisfaction Matrix

Not satisfied Somewhat satisfied Highly satisfied

Profitable customers

Start by getting the basics right to build initial loyalty.

Conduct research andapply appropriate leversto build satisfaction and loyalty.

Monitor and adjust effi-cacy of levers to ensureongoing satisfaction and profitability.

Break evencustomers

Provide incentives for customers to becomemore profitable and satisfied or to exit.

Apply appropriate leversand pilot alternative business models.

Shift cost/service burdento customers.

Unprofitablecustomers

Develop incentives to steerthese customers to differ-ent offerings and services.

Prototype and pilot alter-native business models.

Shift cost/service burdento customers.

Customer loyalty is not created by astand-alone program. It is the result oforchestrated efforts of marketing, sales,product development, and strategy.

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