To paraphrase Jack Nicholson in A Few Good Men: "You want loyalty? Well, you can't handle loyalty."

In this movie, Nicholson was talking about truth. And lately, it seems that getting to the truth about customer loyalty has been more difficult than it ought to be. Some pundits and trade magazines say customer loyalty is the ultimate measure of success. Brandweek even ran a special issue in October about the topic. But others take issue with how loyalty is defined, how it should be measured, and even whether it makes sense at all as a basic business goal.

Does Loyalty Really Connect To Customer Value? Make Loyalty Rewarding

First, let's be straight about the fact that whether customer loyalty is a good thing or not depends on whether or not you have the right customers. If your most loyal (frequent) customers only spend money with you when there are discounted goods or services, is that good? Or what if some customers only stay with your company because they are contractually obligated to, but many are so dissatisfied with your service that they are constantly trashing you to their friends -- is that good?

The truth is, customer loyalty is only an effective metric if it relates to customer value. "The measure of brand loyalty is not only misleading, it can actually be dangerous," says Jeffrey Rayport, Harvard Business School professor and author of Best Face Forward: Why Companies Must Improve Their Service Interfaces with Customers. "The best thing for a C-level executive to do is look at brand loyalty metrics in conjunction with other metrics."

"The best thing for a C-level executive to do is look at brand loyalty metrics in conjunction with other metrics." Jeffrey Rayport Professor Harvard Business School

What Rayport means is that loyalty can be a blessing and a curse. It just so happens that the top 10 companies in the Brandweek loyalty survey we mentioned had some excellent profit stories to tell. But don't assume that brand loyalty equals financial success, and don't assume current brand loyalty equals high customer lifetime value. They must be combined, as Rayport says, with other metrics. Some of those metrics, as we have espoused in Return on Customer, include lifetime value, customer equity and customer profitability, and the rate of change of those measures.

Dr. Robert Passikoff, president of Brand Keys, which co-authored the Brandweek loyalty study, says that executives make two key mistakes when evaluating customer loyalty. The first is, 'what did customers do last time?' "I call this the rear-view mirror approach," he says. The second is, 'how likely is a customer to do something,' like make a purchase or recommend the company to friends. "This is based on customer intent, which ultimately is not a good correlation with behavior and loyalty," he says. Passikoff recommends more predictive metrics to get a better sense of who's really loyal.

The experts we contacted for this story generally agreed on three tasks required of C-level executives when considering the benefits of customer loyalty:

1. Measure customer-specific profitability: Different customers will have different levels of profitability, so the benefit of securing the loyalty of any single customer depends on the type of customer. Quite simply, is a customer buying from you in a way that makes your company money? Low value customers can be loyal customers. Even money-losing customers can be loyal. They might buy from you exclusively and even spend a large share of wallet with you. But for loyalty to pay off economically, you have to be able to grow low-value customers into more profitable ones. Verizon, for example, consistently increases the average revenue per customer every quarter in an extremely competitive market. It doesn't lose its valuable customers. And those valuable customers are loyal customers.

2. Understand the details: Rayport points out that loyalty is made of several components. What is the length of the customer relationship? What is the frequency of purchases? How many interactions does the customer have with the company? And what is the customer's lifetime value?

3. Look across all channels: Customers don't shop in one place anymore and companies shouldn't measure loyalty as if they did. What is the value of Customer A at your online location? At your brick and mortar store? At a catalog? At the contact center? These metrics can cast a new light on what your company calls loyalty. The loyal online shopper may actually be creating havoc in your contact center. Or they may be researching your product to buy somewhere else.

We believe the benefits of customer loyalty depend on financial performance. Leading the discussion in your boardroom should be customer value and ways you can increase it. That way your company will be able to "handle" loyalty.