Four proven ways to foster stronger customer loyalty

Liem Viet Ngo

As businesses feel the full economic aftereffects of the COVID-19 pandemic, many will be looking for fresh ways to improve customer loyalty. But what worked in the past may not work anymore. A recent US-based analysis by McKinsey for example found 75 per cent of customers have altered their shopping habits since the COVID-19 pandemic struck. 

Closer to home, the pandemic has led to panic buying and changing customers’ usual shopping habits and expenditure patterns (especially as toilet paper became increasingly scarce). As many storefronts closed their doors during lockdowns, more customers began to embrace e-commerce. Before the surge in demand, online grocery orders made up less than 5 per cent of sales values. By March, both Woolworths and Coles reported reaching full capacity.

Consumer needs are changing, and brands will have to adapt to gain and retain customers.

Interestingly, a global survey of 8062 consumers across six countries including Australia found that 39 per cent of customers worldwide bought products from new brands this year, and 88 per cent of those first-time purchasers indicated they intend to continue buying these brands in the future.

This number was the largest in the US, where more than half of the customers interviewed (51 per cent) saying they resorted to purchasing brands they hadn’t previously known about.

One possible reason behind this shift could be that the more well-known brands kept selling out their stock due to higher demand during the pandemic. Either way, customer loyalty and behaviour towards brands is undoubtedly changing, and businesses need to know how to cultivate and retain customer loyalty in this new environment, according to UNSW Business School’s Associate Professor of Marketing Liem Ngo.

The importance of customer loyalty

These key issues as well as practical ways brands can engage and retain customers are explored by A/Prof. Ngo in a recent co-authored paper Not all experiential consumers are created equals: the interplay of customer equity drivers on brand loyalty, published in the European Journal of Marketing.

The authors examine the essential elements of customer loyalty, and their research leads to a better understanding of exactly how, why and when relationship equity, value equity, and brand equity work together to trigger customer loyalty.

When thinking about the importance of customer loyalty, it seems appropriate to quote the famous Peter Drucker, one of the most widely known and influential thinkers on management, who once said: “There is only one valid definition of business purpose: to create a customer.” 

Indeed, business profitability and growth are driven primarily by the retention of customers (or customer loyalty), as earlier research has shown a 5 per cent increase in customer loyalty can increases profits from 25 per cent to 95 per cent.  

So, what steps do businesses need to take to improve customer loyalty? They need to focus on three things: relationship equity, value equity, and brand equity. These "customer equity drivers" are the essential components that make up the "customer equity framework", which is crucial to understanding customer loyalty from a marketing perspective, says A/Prof. Ngo. 

Importantly, his research also distinguishes between different types of customers: holistic consumers, hedonistic consumers, action-oriented consumers, sensorial consumers and utilitarian consumers, highlighting another vital element: the brand experience. His research shows that holistic consumers prefer all the aspects of brand experience simultaneously (e.g. sensory, affective, intellectual, and behavioural), whereas utilitarian consumers are unlikely to attach considerable concern to any brand dimension. 

So all customers will react differently to marketing and communications, and as a brand – thinking about the best way to design communications and marketing strategies – it is essential to consider how different customers may approach communications and the overall brand experience. 

“Firms could consider offering different facets of value to customers, such as convenience, engagement, quality products and services, advertising campaigns and price promotions with a caution to the different consumer types”
Liem Ngo, Associate Professor of Marketing, UNSW Business School

The interplay of essential elements

But what does this all mean in practice? Relationship equity refers to how the customer evaluates the interaction quality with the brand, and this can be improved by brands that utilise loyalty programs, affinity programs and community-building programs.

While value equity is the customer’s objective evaluation of the overall service and quality versus the cost and convenience. Finally, brand equity specifies the subjective and intangible appraisal of a brand as strong, unique, attractive, and likeable.

So why are these essential elements – relationship, value and brand equity – important? They enable marketers to address a critical day-to-day challenge: to link their marketing actions to customer metrics (such as customer lifetime value and customer loyalty), says A/Prof. Ngo. 

However, while building relationships with customers through initiatives such as loyalty programs is necessary, it alone is not sufficient for creating and maintaining better customer loyalty.

“Brand loyalty is being eroded by price sensitivity. As such, the simultaneous existence of relationship equity and other customer equity drivers (value equity and brand equity) is of paramount importance,” explains A/Prof. Ngo. “Each driver plays their unique role,” he says. 

Indeed, his study shows brand equity (whether the brand is seen as strong, unique, attractive and likeable) fosters and sustains the positive effects generated when customers also experience a high level of relationship equity (interaction quality between a brand and its customers). 

So brand equity mediates relationship equity and brand loyalty. Value equity – the objective evaluation of customers about what-is-given-up for what-is-received (e.g. quality, price, and convenience) – also strengthens this reciprocity effect. So the interplay of these elements together leads to better customer loyalty.

But another important highlight of his research is that today’s customers no longer buy products for their functional benefits, instead they are also interested in the emotional and experiential aspects of the brands. These can be sensory, affective, intellectual and behavioural, says A.Prof. Ngo. 

Depending on the intensity of the brand experience and the types of emotions it evokes (for example, Apple's focus on 'human experiences' and inclusivity), this can attract lots of different consumers not previously considered as potential customers, he says.

But too often, brands focus more on building relationship equity, through loyalty programs (some have even launched innovative loyalty programs such as KFC and Hoyts, for example), but don’t spend as much time on refining brand or value equity, says A/Prof. Ngo. Instead, he says the interplay of all the following elements is crucial.

Practical steps to foster stronger customer loyalty

1. Brand equity. Companies may wish to devote their attention to strengthening brand equity because of its directly positive mediating effect between relationship equity and brand loyalty, resulting in overall improved customer loyalty. 

They can do so in several ways, “for example, they can enhance brand awareness by using marketing communication starting with quality products to build brand image and gain positive consumer evaluation, creating positive brand attitude to leverage the consumer purchase decision, and evolving a consistent brand image to form a special relationship between the brand and its consumers,” explains A/Prof. Ngo.

2. Relationship equity. Any attempt from the brand to consolidate its relationship with customers will "favourably stimulate positive influences on brand loyalty via brand equity, to collect their rewards easily", continues A/Prof. Ngo. 

So savvy brands should look for innovative ways to bring more significant benefits to their clients to improve customer loyalty. “For example, through the launch of the loyalty program on mobile apps, supermarkets will be able to deliver more customised, relevant promotions to their shoppers,” says A/Prof. Ngo.

Indeed, apps make it more convenient for customers to collect their rewards easily. A global study of 29,000 people across 58 nations in 2013 by Nielson, found that 84 per cent surveyed customers opt for retailers that offer a loyalty program.

Additionally, using well-trained in-store staff is another approach managers and marketers can utilise to reinforce the relationships between brands and their customers, says A/Prof. Ngo.

3. Value equity. A third of customers have been shown to "quit shopping if they are unaware of enough benefits", says A/Prof. Ngo. Therefore, companies should work hard to highlight the visibility of the value they provide to customers. 

“Such efforts should be implemented to leverage the three levers that influence value equity, including quality, price and convenience,” says A/Prof. Ngo. One way for managers is to continuously boost their innovation and differentiate their products to meet consumer needs, reach prospective customer segments, and prevent existing buyers from switching, he says.

Managers and marketers can also track the operation of new launches and use that information to make sure that they develop the right products at the right price. “Firms could consider offering different facets of value to customers, such as convenience, engagement, quality products and services, advertising campaigns and price promotions with a caution to the different consumer types," says A/Prof. Ngo.

Through these efforts, businesses should be able to promote value equity and, accordingly, effectively facilitate the positive link between relationship equity and brand equity.

4. Brand experience. Finally, A/Prof. Ngo’s findings indicate that the moderated mediation effects of value equity, brand equity, and relationship equity on brand loyalty vary significantly depending on the types of experiential appeal that customers are after. 

Managers and marketers may, therefore, wish to consider setting up a more useful resource allocation and tailored marketing strategies that generate long-term effects on different experiential consumer appeals. 

“For example, understanding that value equity may be more dominant in fostering brand equity – for those associated with holistic consumers rather than other types of consumers – suggests different marketing strategies and themes for these consumer segments [may be needed],” he says.

Liem Ngo is an Associate Professor of Marketing at UNSW Business School. For more information, you can read the research paper, or contact A/Prof. Ngo directly.