Acquiring new customers is hard work, but turning them into loyal customers is even harder. The acquisition efforts can usually come almost solely from the Marketing department, but customer retention takes a village. And all those villagers have to march to the beat of a strategy that effectively balances the concepts of bought loyalty and earned loyalty.

I first heard the concepts of bought and earned loyalty many years ago in a speech given by former ForeSee Results CEO Larry Freed, and those concepts stuck with me. They’re not mutually exclusive. In the most effective retention strategies I’ve seen, bought loyalty is a subset of a larger earned loyalty strategy.

So let’s break each down a bit and discuss how they work together.

Bought loyalty basically comes in the form of promotional discounts. We temporarily reduce prices in the form of sales or coupons in order to induce customers to shop with us right away.

Bought loyalty has lots of positives. It’s generally very effective at increasing top line sales immediately (especially in down economies), and customers love a good deal. It’s also pretty easy to measure the improvement in sales during a short promotional period, and sales growth feels good. Really good.

And those good feelings are mighty addictive.

But as with most addictions, the negative effects tend to sneak up on us and punch us in the face. The 10% quarterly offers become 15% monthly offers and then 20% weekly offers as customers wait for better and better deals before they shop. Top line sales continue to grow only at the cost of steadily reduced margins. Breaking the habit comes with a lot of pain as customers trained to wait for discounts simply stop shopping.

Bought loyalty, by itself, is fickle. But it doesn’t have to be that way.

We can avoid a bought loyalty slippery slope when we incorporate bought loyalty tactics as part of a larger earned loyalty strategy.

We earn our customers’ loyalty when we meet not only their wants but also their needs. After all, retail is a service business. We have to learn a lot about our customers to know what those wants and needs are so that we align our offerings to meet those wants and needs. Which, of course, is easy to say and much more difficult to do. But do it we must.

To earn loyalty, we have to provide great service and convenience for our customers. But we have to know how our customers define “great service” and “convenience” and ensure we’re delivering to those definitions. Earning loyalty means offering relevant assortments and personalized messaging, but it’s only by truly understanding our customers that we can know what “relevant” and “personalized” mean to them. And a little bit of bought loyalty through truly valuable promotions can provide an occasional kick start, but we have to know what “valuable promotion” means to our customers.

We earn loyalty when the experience we provide our customers meets or even exceeds their expectations. As such, our earned loyalty retention strategies have to start before we’ve even acquired the customer. If we over-promise and under-deliver, we significantly reduce our ability to retain customers, much less move them through the Customer Engagement Cycle.

But earned loyalty can’t just be the outcome of a marketing campaign. It’s much bigger than that, and it doesn’t happen without the participation of the entire organization. Clearly, front line staff in stores, call center agents, and those who create the online customer experience have to be on board. But so too do corporate staff, including merchants for assortment and marketers for messaging. And financial models for earned loyalty strategies inevitably look different than those built solely for bought loyalty.

Since customer expectations are in constant flux, we have to constantly measure how well we’re doing in their eyes. Those measures must be Key Performance Indicators held in as high a regard as revenue, margins, average order size and conversion rates. Our customers’ perceptions of our business are reality, and measuring and monitoring those perceptions to determine what’s working and what’s not is the best way to determining a path towards earning loyalty.

Earning loyalty requires clear vision, careful planning, a little bought loyalty, lots and lots of communication (both internally and externally), and some degree of patience to wait for its value to take hold. But when the full power of an earned loyalty Customer Engagement Cycle kicks in, its effects can be mighty. The costs of acquiring and retaining customers drop while sales and margins rise. That’s a nice equation.