Customer loyalty programs are attempts to bond customers to a company and its products and services by offering incentives— such as airline frequent flyer programs or special credit cards with valuable benefits—to loyal customers. In support of loyalty programs, companies often invoke the "80/20" principle, which states that about 80 percent of revenue typically comes from only about 20 percent of customers. However, this profitable 20 percent are not necessarily loyal buyers, especially in the sense of exclusive loyalty. Studies have demonstrated that only about 10 percent of buyers for many types of frequently purchased consumer goods are 100 percent loyal to a particular brand over a one-year period. Moreover, 100-percent-loyal buyers tend to be light buyers of the product or service. "Divided loyalty" better describes actual consumer behavior, since customers typically vary the brands they buy. The reasons for this behavior are fairly straightforward: people buy different brands for different occasions or for variety, or a brand may be the only one in stock or may offer better value because of a special deal. Most buyers who change brands are not lost forever; usually, they are heavy consumers who simply prefer to buy a number of brands. Such multiband loyalty means that one company's most profitable customers will probably be its competitors' most profitable customers as well.

Still, advocates of loyalty programs contend that such programs are beneficial because the costs of serving highly loyal customers are lower, and because such loyal customers are less price sensitive than other customers. It is true that when there are start-up costs, such as credit checks, involved in serving a new customer, the costs exceed those of serving a repeat customer. However, it is not at all clear why the costs of serving a highly loyal customer should in principle be different from those of serving any other type of repeat customer. The key variables driving cost are size and type of order, special versus standard order, and so on, not high-loyalty versus divided-loyalty customers. As for price sensitivity, highly loyal customers may in fact come to expect a price discount as a reward for their loyalty.

The passage suggests that companies that invoke the "80/20" principle in support of customer loyalty programs believe which of the following

A well-designed customer loyalty program can increase the number of a company's loyal customers by as much as 80 percent.

About 20 percent of any given company's most profitable customers are likely to be its competitors' most profitable customers as well.

It is unreasonable to expect more than 20 percent of customers to be 100 percent loyal to any particular brand of product.

Even "loyal" customers cannot reasonably be expected to stick to one particular brand of product more than 80 percent of the time.

A relatively small number of loyal customers is responsible for about 80 percent of a company's profits.


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