Portrait of Conor Henderson with background image of bills

Customer Loyalty and Engagement

You have a set of existing customers. You don't want to be complacent, you want to be proactive in engaging them, but you don't want that effort to backfire.

A recent study coauthored by Lundquist College assistant professor of marketing Conor Henderson offers insights to managers to identify customer types for which engagement helps, hurts, or has mixed results. The research won the Marketing Science Institute's 2016 Best Paper award.

In their report, “Consequences of Customer Engagement: How Customer Engagement Alters the Effects of Habit-, Dependence-, and Relationship-Based Intrinsic Loyalty," Henderson, along with coauthors Lena Steinhoff of Germany's University of Paderborn and Rob Palmatier of the University of Washington, examine how customer engagement initiatives interact with different sources of customer loyalty.

Henderson said a major telecom services provider approached the researchers seeking information about how to proactively engage existing customers to both keep them happy and also mitigate potential future discord. In this case, the service provider randomly selected customers to receive two free months of service, but the results were not uniformly positive.

To understand its full impact, the firm needed to account for each customer's existing sources of loyalty. The authors first defined three different customer types in terms of their perceived intrinsic loyalty to the service provider.

“We define intrinsic loyalty as a customer's natural inclination to remain with their existing provider due to innate, deeply held psychological structures," Henderson said. “We identify three sources of intrinsic loyalty from three types of information processing. First, habitual loyalty is a customer's automatic proclivity to repeat past purchase behavior in response to consistency. Second, dependent loyalty refers to a customer's reliance on a provider from a sense of immobility given a rational evaluation of the benefits, the alternatives, and the costs of switching to another provider. Third, relational loyalty entails a customer's propensity to remain with a provider due to social-emotional bonds, such as trust. Intrinsically loyal customers exhibit behavioral loyalty due to people's natural inclination towards stability, yet these same inclinations can lead to complacency and creates the problem customer engagement initiatives aim to address."

In the 2,000-customer experiment, the service provider gave half the customers two months of free service. Some longtime customers welcomed the benefit, seeing it as an affirmation of existing beliefs, and became even more likely to stick with the provider. However, newer customers who are still uncertain about the provider greeted the bonus with bigger and broader reactions ranging from excitement and gratitude to suspicion of insincere attempt to get them to re-up their contracts.

Henderson used a dating analogy to illustrate: “When you are with your partner for a long time, an unexpected bonus, such as flowers, is welcome because it plays into the existing narrative one has established," he said. After all, people in love do nice things for each other. However, in a new relationship, the same gesture may seem over-the-top, to the point of feeling odd. “One may think, ‘Why did this person do this? We hardly know each other" and become suspicious of the giver's motives. In other words, the gesture can backfire."

In this case, based on their experiment, the study authors found that customer engagement initiatives targeted to “loyalists" offered benefits with no offsetting penalty (with a 5.1 percent reduction in the rate of existing customers ending the relationship and no significant effect on customers expanding the relationship). In contrast, customers who are mainly bound by habit may be jolted by engagement initiatives, in this case suddenly paying attention to a bill they had formerly ignored, causing them to either expand their purchasing—in this case increasing by 1.9 percent, or causing them to reevaluate and cancel the service with the provider, which increased by a startling 3.3 percent.

In the case of the first group, the number of customers ending the service was reduced—a win for the telecom. The number of customers adding to their services didn't expand or decrease—neutral news to the firm. However for the last group— the ones who were jolted into reevaluating the service—more canceled than expanded, so no engagement initiative at all would have been the better choice.

“This is valuable research for big companies," Henderson said. “With hundreds of thousands of customers, an increase in defection or expansion from let's say 1 percent to 1.6 percent is significant."