LOGISTICS AND CUSTOMER LOYALTY

Customer loyalty – as well as that of employees, suppliers, service providers and shareholders – is a theme that has been appearing with notable frequency in business articles and books. How much is a loyal customer worth? How much is lost when a customer no longer wants to buy our products or services? How much does it cost to develop a new supplier that is replacing one that no longer wants to do business with us? What is the impact of losing employees? Objective answers to questions like these, that is, the quantification in economic terms of what it means to retain or lose customers, employees, etc. have become a new field of interest in academic and business environments.

The issue of keeping customers – or indirectly stop losing customers – begins with the criticism of most companies that place a huge emphasis on continually attracting new customers, sometimes with more interesting offers than what they offer to customers already conquered. Loyalty is fundamental when there is market opening, regulation breaking, new entrants, because at all times there is a huge range of attractions to captivate customers from competitors.

And what is the role of Logistics in this matter? The provision of logistics services deals directly with employees, suppliers and customers and indirectly with shareholders. To provide the logistics service, the company needs its employees and suppliers to be committed to the mission of satisfying and exceeding customer expectations. And the results of a good and efficient logistical service impact the organization's profit, an element of interest to shareholders.

This article begins by discussing the concept of loyalty, analyzing the relationship between satisfied and loyal customers. It then discusses at what point in the evolution of logistics activities the issue of loyalty in an organization arises. The article then shows the impact of loyalty actions in economic terms and, finally, comments on loyalty programs.
Satisfaction, Loyalty and Loyalty

More than a play on words, the alternative title given to the article seeks to draw attention to the difference between “satisfied customers” and “more satisfied customers”. Getting more satisfied customers means meeting the expectations of more customers. Getting specific groups of customers to be more satisfied means focusing attention on these groups with the aim of exceeding their expectations and, in this way, ensuring that their purchases are regular, characterizing a long-term relationship.

FIDELITY is an old-fashioned word often used to express enthusiastic loyalty to a cause or political party. But in the business context it has been used to describe a customer's willingness to continue to patronize a company over an extended period of time, purchasing and using a supplier's goods and/or services on a repeated and preferably exclusive basis and voluntarily recommending the brand. from that supplier.

Most readers will have heard that nowadays it is not enough to have satisfied customers. Satisfaction is a necessary but not sufficient condition for the customer to repeat the purchase of a good or service. Satisfying means meeting expectations and these can often be limited by situational factors such as urgency, the perception that all suppliers do the same thing, not knowing other alternatives, etc. Thus, satisfaction is an emotional state, the result of a momentary experience. Nowadays, researchers on the subject link satisfaction with the service of what the customer considers to be adequate service or the minimum tolerable in terms of performance. Adequate service may be far from the desired service, that is, that performance that really delights the customer and makes him repeat the purchase. Only when perceiving a superior value in what he buys, the customer becomes a loyal customer.

To create superior value, and therefore customer loyalty, takes a lot of effort. First of all, it is necessary to know what he considers a superior value. Secondly, it is necessary to transform this information into service specifications and invest in equipment, people, facilities, technology, in short, in the resources necessary to truly create superior value. This can be very expensive and it would be demagogic to say that you need to create superior value for all customers. Thus, instead of wanting more satisfied customers – which does not imply loyalty – one should think about GROUPS of more satisfied customers, which implicitly means selecting customers that one wants to serve better. And this involves determining which customers these are, how much they are worth to the company in terms of attractiveness. Different customers generate different levels of profits. Thus, the customer service project must be fed by studying the customer base and the expected financial performance considering the time the customer will remain a customer. For the company, the value of a customer is the discounted value of the cash flow provided by the customer (sales made to the customer minus the cost of sales and the cost of servicing and retaining the customer) during the time the customer remains a customer. The longer he stays as a customer, the greater his value to the company.

Frederick Reichheld is perhaps the leading scholar of the effects of customer loyalty. In an article he co-wrote with Robert Markey Jr. and Christopher Hopton, the three partners at Bain & Co., they argue that the “strengths” of loyalty are measurable in terms of cash flow because of the links between loyalty, customer value and profits. Loyalty is intrinsically linked to value creation. As a first-order effect, loyalty indicates whether superior value was provided (customers come back because they want more).

Loyalty then initiates a series of second-order economic effects that ripple through the business system as follows:

1. Revenues and market share grow as the best customers are drawn into the company's portfolio of businesses, building regular sales and referrals.
   2. Costs decrease as the expense to acquire and serve new customers and replace old ones decreases.
   3. Employee retention increases because job pride and satisfaction increase, in turn creating a cycle that reinforces customer retention through familiarity and better customer service. An increase in productivity results from greater employee stability.

As costs fall and revenues rise, profits (the third-order effect) rise. This provides the resources to invest in superior employee compensation (further bolstering retention) and new activities or features that increase value for customers, further increasing customer and employee retention. Profits are important, not just as an end in themselves, but because they allow the company to improve value and provide incentives for employees, customers, and investors to remain loyal to the company.
Logistics and loyalty

It is then seen that the concept of loyalty is not just about customers. It involves shareholders and employees. And, if the thought is turned to a company belonging to a supply chain, the concept may involve suppliers and service providers that are part of that chain. From now on, we will talk about the loyalty of supply chain partners.

In the Logistics context, little has been written about loyalty and its effects. Evidently all the considerations made so far in this article are relevant to the logistics activity but, it must be recognized, the concern with loyalty, in most companies, is far from day-to-day logistics activities.

In an interesting article entitled “Is Your Supply Chain Achieving Customer Loyalty”, consultant Robert Dicello considers that winning partner loyalty is a challenge for logistics executives, but warns that facing this challenge before implementing the supply chain concept is a error. This is because before adoption, executives are unable to measure the effects of customer, supplier and service provider loyalty. For the author, the maturation process of the supply chain concept goes through three stages, as shown in figure 1. In each stage, the objectives, attributes and benefits are different.

Figure 1 – The three stages in the adoption of the Supply Chain concept

The first stage is at the micro level. The focus is on improving the performance of a specific function within the chain. This is the case of companies that, for example, are looking to improve their distribution, reduce idle capacity, optimize transport, etc. These are important but eminently operational objectives. These are aspects that need to be improved to put the company in the competitive game, but that has nothing to do with the concern of retaining customers, employees, etc. It is, unfortunately, the stage where most companies find themselves.

The next stage is the Macro level, where the company no longer thinks so small and now seeks to integrate functions thinking about the return on assets or the reduction of working capital through actions that affect two or more functions. Thus, for example, by improving order processing – integrating the financial area with inventory control – it is possible to reduce customer response time and thus increase market share. The same can be achieved by integrating suppliers with the production area, reducing safety stocks. Even at this stage, the concern is operational efficiency and not loyalty.

Once these integrations are achieved, the third stage (enterprise to enterprise) takes place, when each supply chain integrates with the chains of partners, service providers and customers to meet mutual needs. Through the sharing of information, the aim is to reduce the risk of introducing new products and services; processes that do not add value, such as quality inspections, for example, are eliminated. There is a pursuit of existing waste in interactions between partner companies. The focus is on developing and sharing ideas and ensuring that products and services are available to customers in the shortest time, with less inventory, assets and risk. The objective is to make the set of supply chains stand out and gain a competitive advantage over the competitors' chains.

A lot of material and intellectual investment is made to achieve all this and the main concern is not to lose partners. The important thing is the accumulated profitability of the transactions, it is thinking about long-term gains. Each investment made to strengthen the chain brings with it the expectation that it will pay off over time. Losing a member of the chain represents a very high cost. Thus, it is at this stage that awareness of loyalty emerges more strongly:

• the satisfaction of chain members is not enough; they must be loyal;
• loyalty implies repeat business, enabling a positive present value for the flow of investments made;
• losing members of the chain interrupts the positive flow, requiring new investments to replace the lost partners.

The Value of Loyalty

And how much is loyalty worth? At the beginning of the article, we commented briefly on the economic effects of loyalty. Let's explain them a little more using figure 2. It shows the graphical representation of a cash flow over time of the effects of customer loyalty. A similar flow can be idealized as a result of the loyalty of employees, suppliers, etc.

In the initial moment, there is an investment in attracting the client or developing the supplier or hiring and training employees, etc. In the case of attracting customers, we could include, depending on the sector, marketing costs, visits, advertising, direct mail, promotions, discounts, etc. In the case of a supplier, we could think of everything that is spent in the process of gathering information, visits, meetings, trips, advice from consultants, training, etc. That is, whatever the partner, there is always an initial investment that is expected to be paid over the years of the relationship with that partner.

Figure 2 – Why does customer loyalty pay off?

Source: Reichheld (1996)

The figure then shows the subsequent periods. As already mentioned, it refers to the economic effect of building customer loyalty. The economic flow profile is explained as follows:

1. a) Basic Profit: would be the net contribution of the client's business over time, assuming that the volume of its transactions was constant. The basic profit corresponds to the difference between the net contribution of the customer's purchases and what is spent in the effort to keep him as a customer, that is, the efforts to create superior value.
2. b) Contribution derived from increased purchases: over time, customers often become larger, expand their business and consequently need to buy more, need to use the company's products and/or services more. As a policy, they consolidate their purchases, their transactions with a single supplier and from there base profit growth. In addition, every company producing or providing services can think of cross-selling: other services related or not to the first one. When you manage to sell more than one service to the same customer, there is a certain economy. And obviously loyal customers are prime candidates for buying the extended offer items.
3. c) Profit from reduced operating costs: As customers become more experienced, they demand less from the supplier. There is no longer much need for explanations about how the purchase process works, the customer calls and asks for the usual. This is when there is no longer a contract for continuous replacement or continuous service, which undoubtedly makes the purchase process cheaper.

LL Bean, for example, uses customers' purchase patterns to estimate the purchase probability, per customer, of each item in its product line. With this information, it sends customers only those catalogs with products whose purchase probability exceeds a certain value. There is therefore a reduction in costs with the usual customers.

1. d) Profit from referrals to other clients: in this account we are creating, it is necessary to record what is earned in transactions with clients referred by loyal clients, who know our work and refer us. In the case of logistics services in which a potential client perceives risk, does not know the type of response he will get, indications are very important.
2. e) Profit from premium price: new customers often benefit from promotional launch discounts whereas regular customers tend to pay regular prices. By perceiving value in what they receive, they are not sensitized by promotions such as “baits” launched by competitors. The typical comment is: “I already trust this one; it won't be for a 5 or 10% discount that I'm going to take a risk and bother later. It ends up being the cheap that comes out expensive”.

If the flow represented in Figure 2 referred to employee loyalty, the effects of retention would be productivity gains resulting from learning, from experience in dealing with customers, the very discernment about different types of customers and how to serve them, the maintaining relationships with customers, etc.

How to Build Loyalty

As previously mentioned, in order to build customer loyalty, it is necessary to create superior value for groups of customers that are more attractive to the company. Therefore, the first step is to have customers classified by the profitability they provide. Secondly, it is necessary to identify in each of the groups which attributes are most valued by its members and ensure that those attributes will be performed consistently, even seeking to exceed customer expectations.

It is also worth mentioning the loyalty programs suggested in the specialized literature. These are actions that seek to give a differentiated treatment to the partners that one wishes to retain. In a very practical classification, Berry and Parasuraman (1991) identify three types of loyalty programs.

The first type includes mechanisms that seek to reward the customer's loyalty with some prize, some financial retribution such as bonuses, discounts, etc. and that we can simplify by saying that in short, directly or indirectly affect the price of the service. This type of program has proven to be the easiest to imitate and therefore cannot sustain a competitive advantage for long. The best-known example is that of airline frequent flyer programs. The first companies that introduced the novelty in their countries had differentiation as their objective. Over time, they realized that their competitors also launched the “novelty”. The result was that what would be a differential, became an obligation. With the adhesion of thousands of clients to the programs, the companies had to have a very expensive administrative and technological structure. At the same time, they had to introduce quotas per flight, blocked periods and a whole series of difficulties for the “loyal customer”. As a consequence, what was intended to reward regular customers became a source of complaints, complaints to consumer protection bodies, etc.

It can be seen, therefore, that the mechanism of offering advantages, prizes, bonuses, credits or other artifices to create "loyalty" between partners, in reality, they try to increase the switching costs or the frequency of purchase, without necessarily having the concern with customer satisfaction.

On a second level, the company goes beyond financial retribution by building relationships in the social field. An attempt is made to personalize the relationship through key accounts, an attempt is made to know the needs and desires of the customers, to identify key people in the partner organization, to know the people involved in the partnership by name, one or another gift, finally reinforcing the relationship through initiatives such as invitations to events that the company promotes. This second category of loyalty mechanisms, due to the fact that it introduces some customization initiative, has a higher loyalty potential than the first category.

At a third level, called structural, it is the turn to use the company's structure to provide some kind of value service to the customer and not available in other companies. These are usually services that use the company's technological base and help partners to be more efficient or productive. Instruments in this category have a high loyalty potential.

Some companies turn to Internet sites, for example, to facilitate service recovery. Cisco Systems, for example, has created a database that allows a keyword search of questions and answers given to other customers. As new problems arise, ways to solve them are added to the database. For more complex problems, Cisco has developed a “troubleshooting engine,” an expert system that walks the user through the process of identifying and resolving the problem. The company uses a series of questions created by service specialists to lead customers to the solution. Problems that cannot be resolved by online technology are escalated to the telephone support system. In addition, Cisco offers a “bug toolkit,” a collection of interactive tools for identifying, tracking, and resolving software bugs. (Tax and Brown, 1998)

By recording service failures in a database, Cisco Systems also improves recovery, as identification of systemic problems leads to faster and more accurate diagnoses of customer complaints and improvements to expert systems databases and Troubleshooting the company's website. Cisco's approach gives the customer greater control and flexibility in problem resolution, increasing the fairness of the service.

Incidentally, the Internet is one of the most useful tools in building partner loyalty through the company's structure. Information of all kinds (such as updating programs, new versions, the status of orders pending delivery, tips on how to obtain better performance when using products, how to proceed to access guarantees), are examples of initiatives that provide the customer with a sense of value higher.

Among the possibilities of Information Technology in customer loyalty is the treatment of information related to customer consumption, which has allowed the development of new marketing tools such as CRM or 1 to 1 Marketing, whose idea is to develop and manage individual relationships with individual customers.

Managing a customer database allows for better customer understanding and relationship building based on an ongoing series of collaborative interactions. With the cheapness of computational resources, it became practical and accessible on a large scale. Thus, instead of working with market samples of potential customers to determine the needs of the “average” customer, the three basic technologies of a CRM (database, interactivity and personalization) allow the concern with each customer individually. Amazon is perhaps the best-known example of using information about customer consumption habits to build customer loyalty.
Final Words

It is loyal customers, not merely satisfied customers, that sustain a company's leadership. To achieve loyalty, it is not enough to have continuously improved products and services at competitive prices. Programs that offer rewards and discounts to frequent customers also do not support loyalty. This is because most of these approaches do not target the individual customer and his concept of value. They treat customers as a whole, without concern for differentiation. In order to build loyalty, it is necessary to identify groups of attractive customers or those with the potential to become attractive, identify their needs, concerns, in short, what they consider value and develop products and services that lead to obtaining value. It is logical that all this costs, but these initiatives should not be seen as a cost, but as an investment whose return will be felt in the medium and long term.
BIBLIOGRAPHY

Berry, LL; Parasuraman, A. Marketing Services. The Free Press, New York, 1996.

Dicello, R. Is Your Supply Chain Achieving Customer Loyalty. inboundlogistics.com, April 2000.

Reichheld, FF The Loyalty Effect. HBS Press, Boston, 1996

Reichheld, FF; Markey Jr., RG; Hopton, C. The loyalty effect – the relationship between loyalty and profits. European Business Journal, 2000, pp. 134-139.

Tax, SS; Brown, SW Recovering and learning from service failure. Sloan Management Review. v. 40, n.1, pp. 75-88, Fall 1998.