Defining Customer Loyalty: Why RFM is not the right measure to establish customer loyalty

Customer Loyalty is one of the terms one hears most abused in the boardrooms of retailers. Marketers would tell you that this particular campaign would drive customer loyalty, store managers would tell you that such and such customer is among their most loyal since he comes once every day, and IT managers will believe strewing a few points every now and then on a relaunched loyalty card program would drive loyalty.

Well, loyalty is rather trickier and harder to get.

First of all, what is loyalty? The kind of loyalty we’re discussing is specific brand loyalty. Oxford Dictionary defines this as “the tendency of some consumers to continue buying the same brand of goods rather than competing brands.” In short, customers keep coming to you when they have a choice to go elsewhere. Choice is the critical key word here. The other word to note is “tendency”. Tendencies are more intrinsic. They might be influenced in the short-term by short-term gains but, shorn of them again; they would rather go back to the track they had briefly drifted from.

Now, RFM technique measures three attributes of the customer, namely,

• Recency, or how recently the customer has bought from the retailer
• Frequency, or how frequently is he buying
• Monetary, or what was the total monetary value of these engagements so far

On first go, it seems that a customer with the highest ranking on these three attributes should be called a loyal customer. Intuitive, right?

Let us re-examine this on the two keywords we had noted in the definition above – tendency and choice.

Tendency. Well, RFM does measure the tendency. In fact, it measures it pretty well, looking at not only the most recent action of the customer but a lifetime of it.

Choice. Hmm, this is where it gets tricky. Are the customers who are coming most frequently and recently really making a choice or rather coming because they do not have a choice? In a previous article, I have highlighted the shortfall in the RFM technique that while it points out the most engaged customers it does not tell you why these customers are so. Asking these customers might fetch an answer like – well, it’s the nearest store – which has nothing to do with some intrinsic quality in the retailer which is driving the customer to engage with him and no one else. The proof of this “loyalty” would be tested when these customers have credible choices.

And this is the reason why Kirana stores are lobbying so hard against the advent of modern retail. They know that their most engaged customers are not loyal but choice-deficient, and will move once provide a choice.

And that is why I feel the celebration of some established retailers, crowning them as India’s favorite retailers, is a little premature. Except for a very few pockets, most Indian customers are still starved for genuine choices. The day that choice opens across the street, the favorites would change. My advice to these retailers would be to not self-congratulate themselves so early and prepare for the day when they would have to face some genuine competition. The strength of the customer loyalty would be known that day – as they say, “Picture toh abhi baaki hai, sodt.”

Driving customer loyalty means a continuous commitment to understand the target customers best and strive to be the best solution-providers there. And be rewarded for that by genuine loyalty.