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Customer LoyaltyFrontier Communications CEO Maggie Wilderotter intends to change the game in customer loyalty. Using a company called Loyalty3, she plans to grant Frontier Communications shares to its customers as a way of building loyalty.

I’m a vocal critic of loyalty programs that purchase customer “loyalty.” Program returns typically are low relative to the costs, and your “loyal customers” stay bought only as long as the rewards keep coming. While you incent behavior that looks like loyalty on the surface, you create a Sword of Damocles situation where one false move—say, cutting back on the program—creates an even worse situation.

Alternatively, investing your resources and culture in earning real loyalty creates a relationship able to endure the occasional misstep.

Wilderotter is adding a new twist, although the investomer concept is not new. Savvy start-ups encourage strategic investment by partners, but I have to admit I’ve never seen stock grants for consumers.

More than 1,500 companies already sell stock directly to investors, including Lucent Technologies, Home Depot and Wal-Mart. Loyal3 aims to further democratize the market for stocks by eliminating transaction fees and reducing complexity for very small investors with a no-fee, three click process. Loyalty3 clients such as Frontier Communications plan to create equity-owning customers, citing studies by Bain & Co. and others that investomers are more loyal, more likely to be advocates, more open to cross-selling, and less likely to churn.

Investomers create a positive dynamic in a strong market

Joint ownership–in the literal sense–is the textbook approach for aligning relationships. The behaviors cited by Bain and others represent the ideal for engaged customers. A strong performing stock creates a sense of partnership and/or conflicted motives (purchase behavior vs. investment returns) that act as switching costs in the not-so-rational world of brand preference. What more can you ask for?

A weak stock raises red flags

Stock ownership isn’t always a positive. While often unnoticed by most customers, a poorly performing stock is unlikely to go unnoticed by investomers. A company they believe in is expected to become more valuable. A poorly performing stock raises red flags, perhaps causing the investomer to question the firm’s management and/or the company’s offerings. Not the type of attention you want to foster, so the downside is huge if your stock doesn’t cooperate.

Economics poses an additional risk. While most consumers are not particularly rational when it comes to brand decisions, running the numbers is likely to reveal optimizing the purchase decision has higher returns than owning a few shares of the stock.

A better way to build customer loyalty

Ownership of a strong stock is an ideal incentive for driving greater alignment. Allowing customers to buy a few shares or even granting shares, offers an attention-getting incentive to drive strong alignment and loyalty. As long as the customer feels invested in your company, stock ownership is a positive.

Actual stock ownership may not be necessary. Tom Siebel captured much of this vibe in the early days of CRM with the Siebel Customer Index. The index tracked the stock performance of Siebel customers vs. the overall market. The message was that Siebel was doing a great job, and enterprises should buy their product and investors should buy their stock.

A languishing stock, on the other hand, makes a poor incentive unless the customer thinks it is badly undervalued, but likely to recover. Not sure I’d want to operate under the dual pressures of delivering great product or service value day after day, and meeting stock performance expectations. If the stock price doesn’t recover quickly, you probably end up with a perverse incentive that actually decreases loyalty.

Outside of a few unique situations, the risks outweigh the benefits from a loyalty program standpoint. That doesn’t mean companies don’t benefit from customer stock ownership, just that you want them to approach stock ownership as an investor rather than as a kickback for being a customer. Victor Kiam’s claim that he liked his Remington Razor so much he bought the company forms the basis for a healthy partnership. Free stock as a reward creates a different dynamic.

When viewed as a by-product of building a better business, the pursuit of customer loyalty creates a much healthier dynamic than trying to purchase loyalty.

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