Where's the Loyalty?

It's what you might call the face of loyalty. "A brand is more than a virtual symbol in the marketplace," observes John Fleming of the Gallup Organization in a New York Times article. "It has the face of the people who interact in the marketplace … who create, or fail to create, the emotional connections that lead to brand loyalty."

Mr. Fleming tested that concept in a study of 16 Japanese women that was designed to gain insight into why they were loyal (or not) to a particular upscale department store. It was one of those newfangled neuromarketing studies, where the brain is scanned to track whether various stimuli light up the amygdala, the part of the brain associated with emotional matters, such as loyalty. Yes, indeed, the amygdala lit up all over the place among the women who described themselves as passionately loyal to the store.

Frederick F. Reichheld, author of The Loyalty Effect, says this goes straight to the bottom line. "If a company could turn 5% more of its customers into loyalists, with hooks into their amygdalas, profits would increase 25-100% a customer," he says.

OK, so maybe this whole neuromarketing thing is a little bit creepy. Point is, if scientists can link consumer emotions to profitability, maybe there's hope for marketing after all. Hal Varian, a New York Times columnist, says the price of loyalty can indeed be measured. When Amazon raises prices by 1%, he reports, its sales drop by about a half a percent. However, if Barnes & Noble raises prices a percent, its sales decline 4% -- eight times as much.

The difference, says Hal, is loyalty. The reason is that because Amazon has invested relatively more in the building blocks of loyalty (e.g., service and reliability) it attracts shoppers who are interested in something more than just the lowest possible price and who will suffer price hikes gladly.

The only problem is that sometimes the price of loyalty is just too high. Werner Reinartz and Viswanathan Kumar argued in the Harvard Business Review that loyal customers tend to cost more because companies often give them more services as well as greater discounts.

And were the favors returned? Not necessarily. Interviews with "loyal" customers of a European grocery chain found they did not necessarily recommend the stores to others.

Ah, consumers. A fickle bunch, we are.

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