By Peter Clark (Editor, The Wise Marketer & The Loyalty Guide)
Published by The Wise Marketer in August 2010.
When justifying a loyalty initiative, too many executives focus ONLY on the financials, but there are 15 major business benefits – each a competitive advantage – that only a loyalty initiative can provide…
Many of the so-called loyalty programmes in operation today are not really loyalty programmes at all. Frequent customer is a more accurate term. To be loyal to a business is one thing, to use it frequently is another – it could be a result of circumstances that there is no other choice. Clearly, if another choice becomes available, then the distinction becomes critical. This means that most prudent businesses aim to create loyal customers, not just frequent customers.
Of course, not all customers are potentially loyal customers, for a variety of reasons. So the ideal loyalty programme would be one in which already loyal and potentially loyal customers benefited, but other customers didn’t.
This means that the customers have first to be sorted into groups, and different approaches have to be made to each group. Or, more likely, a programme has to be designed so that it will appeal to the desired group more than to the other group.
6. Increase CLV
12. Stock lines
14. Reduce costs
15. New sites
A good point at which to start is at the very beginning – when acquiring the customers. In many typical businesses, as many as 45% of direct, new, one-off purchasers do not go on to purchase a second time. In order to grow and maintain a successful business, three simple rules should be followed:
Acquire customers that are likely to repurchase – even though this may be at the expense of initial raw response;
Recognise which customers are unlikely to repurchase and limit your marketing spend for this segment accordingly;
Focus the marketing budget on those who exhibit the same profile as existing repurchasers but have yet to buy a second time.
The fifteen biggest business benefits that every loyalty programme operator should expect to reap – and use to justify continuing and expanded investment in the programme – are as follows:
Retain existing customers
The effect of the customer retention rate on actual, bottom-line customer numbers cannot be over-estimated. In five years, a firm with a 70% customer retention rate will have lost two to three times as many customers as a firm with a 90% retention rate.
Not only does a loyalty programme provide a practical, hard reason for continuing to buy (the accumulation of points toward a reward, or higher levels of service) but it also provides information about the customers that allows their needs to be met more efficiently and effectively. This in turn makes them more likely to remain customers. In addition, loyalty programme operators often report that, once a customer starts redeeming rewards, enthusiasm and engagement both increase.
In addition to simply retaining customers, the data from a loyalty programme can be used to better cater for their varying needs. Companies typically use this data to segment their customers for the purposes of marketing, sales and customer services. But customers are more complex than that. Their needs and desires differ from time to time, from occasion to occasion, and depending on the reason for the transaction. In other words, the customer is ‘divisible’. Thus marketing can go deeper than one-to-one; it can identify customers’ changing needs and then provide perceived benefit venue-by-venue and situation-by-situation.
Acquire new customers
A loyalty programme should attract new customers to the business; how effectively will depend on how exciting and how valuable the rewards seem to be to the target audience. Acquiring customers is no doubt essential to any business, but it can be expensive if compared to nurturing existing good customers. It should not be the central focus of a loyalty programme; there are cheaper and more effective ways of acquiring customers. However, it is generally far more profitable to retain and up-sell existing customers than to attract new ones.
Using a four-year profile of new customer behaviour from a leading retailer, loyalty expert Brian Woolf has shown that, one year after becoming a customer, only two out of each thousand new customers (0.2%) were in the top customer segment and only twelve (1.2%) were in the second segment. Over half were inactive. Between 95% and 96% of the new arrivals were either in the lowest segment or had left by the end of the year. However, quality of new customers acquired can be raised by careful use of the existing data of a loyalty programme. This can be used to establish the demographic particulars of existing best customers, and then to target prospective customers with similar demographics in acquisition campaigns.
Move customers up-segment
By grading rewards (for example, offering extra points for exceeding a specified spend threshold in a time period), customers can be moved up from one spend level to the next. A good example of this is The Continuity Company (TCC), a provider of best customer marketing programmes, which skews its rewards to encourage lower spending customers to move up through the spend segments. In one of the company’s recent case studies, the top spending band’s contribution to sales increased by 41%, the next band down increased its contribution to sales by 45% and the lowest spend band decreased its contribution to sales by some 7%.
Deselect unprofitable customers
It can be more profitable to lose bad customers than to gain new ones. Cherry pickers (who buy only your discounted lines and nothing else) cost you money, as does any low-spending customer. They cost more money to service than they generate. Designing a loyalty programme that rewards better customers without rewarding this segment at all gives them less reason to stay.
Gary Hawkins, CEO for US-based Green Hills Supermarket, has found that only around three in ten customers actually generate enough profit to cover the cost of servicing them. What about the other seven? Does it make sense to keep them as customers? To a certain extent it does: if they can be identified through a loyalty programme, efforts can be made to move them up through the segments and hopefully they will become more profitable customers. Moreover, while possibly not generating profit directly, they are contributing to the size of the business and also contributing to fixed operating costs (rent, rates, utilities etc.).
However, the ‘worst of the worst’ could probably be profitably lost. So far, it seems that only financial institutions have gone as far as actually closing unprofitable customers’ accounts. The generally adopted approach by other businesses is simply not to reward them in any way and hope that they will leave.
Win-back defected & churned customers
Customer win-back expert Michael Lowenstein says that the success rate in approaching ‘lost’ customers can be three to four times as high as it is when prospecting for new customers. For example, the rate for converting prospects might typically be 5%, while that for reactivating inactive customers might be as high as 15-20%.
In the book ‘Customer Winback’, the authors point out that there are several reasons why customer win-back has a greater chance of success than acquisition. You have advantages with lost customers that you don’t have with prospects, including information about their past purchase history, where and how to reach them, and their preferred communication channel.
Increase Customer Lifetime Value
Customer Lifetime Value (CLV or CLTV) is increasingly being recognised as one of the most important measures of the worth of a customer. It takes into account not only the customer’s value now but the expected value over their projected lifetime as a customer. It is arguably the best way a marketer can demonstrate unequivocally that a programme is working: the CLV of targeted customers must increase.
Best customer marketing
Simply put, best customer marketing (BCM) involves spending more time, effort, and money on your best customers in order to maximise the return on marketing investment.
The strategy has been honed to a fine art by leading marketers such as Brian Woolf and Gary Hawkins, and has become the driving force behind the leading loyalty programmes in the world today.
Building relationships is crucially important but not always as straight-forward as it might seem. It has been said that relationship marketing is powerful in theory but troubled in practice – an unpalatable concept but probably one with which many marketers could identify. If ever there has been an example of “many a slip ‘tween cup and lip”, counting on the building of relationships with all and sundry in order to generate profits must be somewhere near the top of the list.
Building a relationship with customers leads to improved behavioural loyalty and thus to increased bottom-line profits. That’s obvious, isn’t it? Well, no. In fact it doesn’t always work like that. It has been argued that attempting to partner with all customers, regardless of their characteristics, might not always be the best way forward.
There are factors that alter the importance of the relationship/behaviour/profits equation quite significantly. Age is just one of these factors. Studies carried out in the UK in the 1990s concluded that customers under 45 were most loyal and those over 65 were least loyal. Yet other studies found no clear relationship between age and loyalty. It used to be thought that older customers were more loyal to brands than younger customers but even that is changing, with some studies finding no clear relationship.
Create brand advocates
Advocacy is one of the highest forms of loyalty that a customer can show. Advocates are so satisfied and pleased with your offering that they tell their friends and associates.
To most people, a personal recommendation is far more convincing than any amount of promotional material they receive – even if they already trust the brand.
Adjust pricing levels
A loyalty programme can also help to formulate pricing structure. If enough best customers are happy to buy a product at a particular price there seems little point in reducing that price simply to attract cherry-pickers.
But aside from helping to decide what pricing changes should be made, the after-effects of changing prices can also be studied by segmenting and testing offers on the loyalty database – for example, which customer segments buy significantly more or less when prices change, either gradually or suddenly.
Responding to competitive challenges
A good loyalty programme’s ability to tie purchases to individual customers allows quick and accurate identification of customers who defect when new competition opens nearby. They can then be enticed back with customer-specific special offers or even direct contact.
For example, one small store had to face up to a competitor opening a much bigger store on the same parking lot. In anticipation, the small store was extensively remodelled, causing considerable disruption. Over the period of remodelling (a matter of several weeks) turnover dropped by 40%. However, a loyalty programme enabled management to identify regular shoppers and mail them a letter thanking them for their patience and enclosing some special offers. All but 183 customers returned to the store. The store management team then sent handwritten invitations and a US$10 gift certificate to those 183 customers. All but three returned.
After the new competitor opened, the smaller store’s whole customer database was mailed an offer containing US$5-off coupons for US$50 orders in each of the following twelve weeks. Any customer using all twelve received an extra US$10 certificate. The result was that sales actually rose by between 6% and 7% over the months following the new opening. The competitor’s store (which was approximately twice the size) achieved less than half the sales of the remodelled store. This shows the power of knowing who your customers are.
Select stock lines effectively
Knowing what best customers buy frequently helps choose which lines to stock and which lines to expand on. By way of example, the owner of a small UK-based suburban supermarket had twelve months’ notice that a large national supermarket was opening right over the road from him. He realised that without major changes he would not survive. What he did was simple but clever. The suburb in which he was situated was mixed, having mainly low-cost housing but also a very exclusive area. Many of his customers were low earners who bought their basic requirements every day or two from him – in essence, what they could carry home in a couple of bags. He knew that they would migrate to the lower prices and bigger ranges of the big chain.
However, a considerable number of the more wealthy people would call in on their way home from work to pick up bread and milk and a few odds and ends. He started noting what they bought, and what they never bought. Over the months, he stopped ordering products that they never bought, and increased his range of things that they did buy. Over the year, his store slowly changed from a small supermarket to a very big delicatessen. His wealthy customers told their friends and the composition of his customer base changed from mainly low earners to mainly high earners. When the supermarket opened over the road, his low earners did migrate, but he hardly noticed the difference.
Plan merchandising more intelligently
Basket analysis can identify what lines are bought at the same time, particularly by best customers, and planograms can be planned accordingly to encourage cross-purchasing.
The apocryphal story of a retailer (usually said to be Wal-Mart) discovering from basket analysis that men who buy baby nappies also buy beer (the refined version on the internet includes “on Friday evenings”) may be true or not – there is a whole web site devoted to discussing its veracity. But this story, regardless of its origin, does illustrate the potential of the principle in its own bizarre way.
Data similar to this is used widely to plan planograms for store merchandising. Of course, on one level, plain basket analysis without a loyalty programme is enough for this purpose. But add the dimension of knowing who the customer is, how much they spend, and where they live and you can confidently decide whether it is worth putting a display of nappies in the beer aisle on Friday evenings or not!
Reduce promotional and advertising costs
Because advertising based on segmentation of a loyalty database can be highly targeted instead of untargeted, significant savings can be made. There is no need to send out thousands of flyers that will be thrown away unread, or take pages of newspaper space that is irrelevant to many of the readers.
Targeted advertising works measurably. The more sophisticated type of loyalty programme – such as the UK’s Tesco Clubcard – can not only target advertising material almost individually to its many millions of members but it can accurately measure the response rates to those advertisements. If Mrs Smith is sent a coupon for money off Whitesmile toothpaste, the system knows whether or not she redeems that coupon. That information is valuable not only to Tesco, but to the makers of Whitesmile toothpaste. Not only does this form of advertising save Tesco money; it actually earns Tesco money. While national UK magazines are reported to charge between £5,000 and £7,000 per page for advertising, Tesco is said to charge up to £37,000 for an A5 page (roughly half the size of a standard A4 magazine) – and brands pay those kind of rates because it works. Buying space in the magazine is an accountable investment toward measurable sales; one particular toilet tissue brand saw a 27% increase in sales after advertising in this way.
Selecting new trading sites
Selecting a site for a new store is no longer a case of sticking a pin in a map, or choosing a site on a hunch. The loyalty card enables you to profile the demographics of best customers and – because it is often likely that the best prospective customers will have similar demographics – choose new locations much more accurately.
In addition, if the addresses of existing customers are known, they can be plotted geographically and sites can be chosen where there are outlying pockets of customers or gaps in coverage.
Where to find more detail…
See The Loyalty Guide up-closeThe Loyalty Guide, our comprehensive guide to customer loyalty, explains every aspect of loyalty programmes, best practices, concepts, models and innovations, all backed up with case studies, original research, illustrations, charts, graphs, tables, and presentation material. Find out about the principles, practicalities, metrics, analysis, and bottom-line effects of loyalty, and gain the expert guidance of dozens of loyalty and relationship marketing thought-leaders, worldwide.
It shows you exactly how to use customer data to increase profits, reduce churn, and increase frequency, spend, and share of wallet. See how and why others have already succeeded, what works, and – more importantly – what doesn’t work. The report’s full executive summary, table of contents, downloadable samplers, and pricing/ordering are all available online – click here.