The 30 major factors behind a successful customer loyalty programme
March 29, 2011 Leave a comment
A good loyalty programme has the power to transform a business into a customer-centric profit machine. Here, we offer a thirty-point list of the major factors that directly impact the success and profitability of a customer loyalty programme…
In this article, we’ve drawn guidance and data from The Loyalty Guide report, to offer practical insights into using customer loyalty programmes and data to increase not only customer retention but also customer lifetime value and profitability by means of a long-lasting customer relationship. We have purposely kept our focus on practical matters rather than merely expounding theory.
The case for loyalty initiatives
It is vital for the marketing department to contribute to the profitably of the business, and it has to be able to measure and demonstrate its contribution to profits, despite a the common misconception that marketing is a cost centre, not a profit centre. But at the same time, the marketplace is changing: customers are becoming more demanding, and competition is becoming more intense. It’s becoming increasingly difficult to differentiate one business from another. Technology is providing some answers, but each answer brings more choices and more decisions to be made. However, it is sensible to:
Focus on the best customers that you already have;
Optimise the profit that can be made from them;
Increase the period in which they remain customers;
Be able to produce measurable results of success.
Benefits of a loyalty programme
A well designed and run loyalty programme can do all of these things. But it is just one aspect of a comprehensive marketing strategy. Having said that, if a loyalty programme is used to full effect, it should be the central pillar of that strategy. The theory of customer loyalty is quite simple: a business that retains its customers for longer usually makes more money from them at lower cost than one that is constantly paying to acquire new customers. The basic principles are simple, too: know your customers, and only reward them for behaving in the way that you want.
Through a loyalty programme, customer and transactional data can be collected, and the intelligent use of that data will provide a much clearer picture of the customer base – and this will lead to more profits from the beginning. A common question is “What proportion of turnover should a loyalty programme cost, and how long should it take before it begins to pay back?” Well, although there is no definite answer, a good loyalty programme will pay back from the very beginning. (Tesco’s ClubCard – arguably one of the biggest and best-run loyalty programmes in the world today – actually made money from Day One.)
Thirty factors that make loyalty pay…
Focus on acquiring data, not just repeat visits
A so-called “loyalty programme” can’t buy true loyalty – or even repeat visits – in any lasting way. This is a popular misconception. Early operators thought that the reward would be enough to bring customers back time after time. But it didn’t take long to become apparent that they were mistaken. Customers simply carried many loyalty cards and collected points wherever they shopped. They were just as promiscuous as before. The smarter operators used loyalty programmes not to buy repeat visits but to garner information from their customers in order to learn more about them: who their most profitable and least profitable customers were, what they wanted, and what changes or offerings would be most likely to make them truly loyal.
Target customer acquisition more accurately
A loyalty programme should attract new customers to the business. How effectively it does so 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. But it should not be the central focus of the loyalty programme. However, the quality of new customers acquired can be raised by careful use of the existing data from a loyalty programme, which can be used to establish the demographic profiles of existing ‘best customers’, and then to target prospective customers with similar demographic profiles in acquisition campaigns.
Move customers up the spend bands
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 how The Continuity Company (a provider of best customer marketing programmes) skews its rewards in its Best Customer Marketing programmes (also known as ‘continuity programmes’) to encourage lower-spending customers to move up through the spend segments. In one of the examples, 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 7% (because customers from the lower spend segments had increased their average weekly spend and moved into higher spend segments).
Intelligent deselection of the least profitable customers
It can be more profitable to lose bad customers than to gain new ones. ‘Cherry pickers’ (customers 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 these less-desirable customers less reason to stay. In fact, the Syracuse, NY-based Green Hills Supermarket has observed that only around 30% of customers actually generate enough profit to cover the cost of servicing them. In Philip Kotler’s version of a Pareto Principle chart, the top 20% of customers generate 80% of the profits, while the bottom 30% of customers eat up 50% of the profits that the others produce.
Win back profitable customers that have defected
Customer win-back expert Michael Lowenstein (of Harris Interactive) 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 by Jill Griffin and Michael Lowenstein, it is reported 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 channels.
Increase Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV) 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 will rise. Being able to identify customers through a loyalty programme means being able to monitor long-term customer lifetime value, and being able to identify the demographic, sociographic, and even purchase profiles that define the most profitable customers – and that knowledge enables you to target and develop more of them.
Build real customer relationships based on relevance
Building relationships is crucially important but not always as straightforward 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. Building a relationship with customers can lead to improved behavioural loyalty and thus to increased bottom-line profits. If you examine the human elements of a long-lasting relationship you’ll find several elements, all of which can be approximated by careful collection and analysis of loyalty programme data. The key element, trust, can be built up by always excelling at customer service and problem correction, and by providing consistently good products and services that suit the customer’s unique needs. Surprise and delight can be achieved by delivering personal offers for the most profitable loyalty programme members, such as birthday discount shopping days.
Set fairer tiered pricing policies
There was a time when manufacturers recommended a price for each item, and retailers simply charged that price. Any differentiation then was purely on convenience, ambience, product range and quality of service of the retailer. But the data from a loyalty programme can help formulate pricing structures. 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. The effect of changing prices can also be studied – for example, which customer segments buy significantly more or less. To help with differentiation, some retailers reduce the prices of key products to attract new customers (hoping they will buy other products as well as the reduced-price ones). Other retailers try to “buy loyalty” to low pricing (EDLP or Every Day Low Prices). Yet others use Profit Up Front (PUF) pricing, where the customer pays to be a shopper but gets low prices all-round. Recently a fourth way, called ‘Access Pricing’, has emerged, allowing customers to use loyalty points to ‘buy’ extra discounts on selected items in store (e.g. US$9.99 for nappies, or US$3.99 plus 600 loyalty points).
Intelligent response 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. In his book, Loyalty Marketing: The Second Act, Brian Woolf describes how one fairly small, older 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.
Improving product range and stock selection
Knowing what best customers buy frequently helps choose which lines to stock and which lines to expand on. The owner of a small suburban supermarket in the UK had some 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.
Better merchandising and store layout planning
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 discovering from basket analysis that men who buy baby nappies also buy beer (the refined version includes “on Friday evenings”) may be true or not, but it does illustrate the potential of the principle in its own (bizarre) way. Insights similar to this are 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
When you have a loyalty programme – and the detailed data that comes with it – your advertising can be targeted instead of untargeted, and 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. Better still, the response from such targeted advertising can be measured accurately because the audience is known to you, and each offer can carry a unique identifier that ties the offer to both the customer and the moment of redemption. The cost-saving advantage of targeting can be astonishing. In one instance reported by the DMA a few years ago, a company mailed an offer to 450,000 of its ‘better’ customers. The mailing generated US$22 in revenue for each US$1 spent. On analysing the response data, it was found that 97% of sales came from 13% of the ZIP codes. Imagine the difference that that made to the profitability of future mailings.
Geographical targeting for new store locations
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.
Loyal customers directly impact company profitability
There are many ways in which it pays to earn the true loyalty of customers. For example: Loyal customers buy more, and are often willing to pay more, which means a steadier cash flow; Loyal customers tend to refer others to your business, saving you the marketing and advertising costs of acquiring them as customers; Loyal customers are more forgiving when you make mistakes – even big ones (especially if you have a system in place that empowers employees to correct errors on the spot, in which case even greater loyalty is usually earned); A loyal customer’s endorsement is more powerful to their family and friends than any ad campaign; Thriving companies with high customer and employee loyalty levels are generally seen to outpace their competitors; Loyal customers become familiar with your way of business, and are usually the first to see and report opportunities for improvement; and of course an increase in customer retention can boost bottom line profits significantly.
Developing a core offer that can’t be refused
The companies that boast the highest levels of fiercely loyal customers have built that loyalty not on card programmes or gimmicks, but on a solid, dependable, core offering that appeals to their customers. These companies have focused intently on what they know appeals to the type of customers they want to attract, and have determinedly concentrated on delivering what is expected every time. For example, the North American retailer Nordstrom is well known for the extreme loyalty of its customers. It built this loyalty by understanding what its customers wanted and then empowering its employees to deliver those needs consistently. The data from a good loyalty programme will help improve this core offering by tailoring and moulding it more closely to the customers’ needs and desires.
Influencing customer satisfaction levels
Clearly, satisfaction is important; indeed essential. But, taken in isolation, the level of satisfaction is not a good measure of loyalty. Many auto manufacturers claim satisfaction levels higher than 90%, yet few have repurchase levels of even half that. The situation is stacked against the business: if customer satisfaction levels are low, there will be very little loyalty. However, customer satisfaction levels can be quite high without a corresponding level of loyalty. Customers have come to expect satisfaction as part and parcel of the general deal, and the fact that they are satisfied doesn’t prevent them from defecting in droves to a competitor who offers something extra. The point is that, while high levels of customer satisfaction are needed in order to develop loyal customers, the measure of customer satisfaction is not a good measure of the level of loyalty. The two are not measuring the same thing.
Influencing the elasticity of a purchasing decision
Elasticity expresses the importance and weight of a purchasing decision – effectively the level of involvement or indifference. This applies to both the customer and the business. The more important your product or service is to the customer, the more trouble they have probably taken in their decision to do business with you, and the more likely they are to stick with what they have decided. Most customers would be highly involved in the category when choosing a new car, a new jacket, or a bottle of wine. However, when choosing a new pair of shoelaces, involvement is not usually high. Businesses dealing in commoditised products and services cannot expect high involvement and need to earn loyalty in other ways. The customer’s level of ambivalence is also important. Few decisions are clear cut. There are usually advantages and disadvantages to be balanced, and vacillation is unstable. Again, we see that the more commoditised a product or service, the more difficult it is to cultivate loyalty. It is only when points of differentiation are introduced that the customer has a valid reason for consistently preferring one particular supplier.
Judging the marketplace’s influence on customer loyalty
The marketplace is a key factor in the development of loyalty. The elements most closely involved are: ease of switching, and inertia. If the number of competing suppliers is high and little effort is required to switch, switching is likely. Conversely, the more time and effort invested in the relationship, the more unlikely switching becomes. The level and quality of competition has a significant effect on how easy it is for a customer to switch from any one particular supplier. When competitors are offering very similar products at similar prices, with similar levels of service, some means of useful differentiation has to be found in order to give customers a reason to be loyal. But inertia is the opposite: most banks enjoy a high level of inertia loyalty simply because it’s often so difficult and time-consuming to change to a new bank and transfer direct debits and standing orders.
Using demographic data to predict loyalty
According to Jan Hofmeyr and Butch Rice, developers of ‘The Conversion Model’ (which enables users to segment customers not only by their commitment to staying with a brand but also to segment non-users by their openness to switching to the brand), more affluent and better educated customers are less likely to be committed to a specific brand. They say that the commitment of less affluent consumers to the brands they use is often unusually strong – possibly because they cannot afford to take the risk of trying a brand that might not suit them as well. They also suggest that younger consumers are less committed to brands than older consumers. Interestingly, these differences carry over into cultural groups as well: they find that French-speaking Canadians are more likely to be committed to a brand than English-speaking Canadians, and Afrikaans-speaking South Africans are more likely to be committed than English-speaking South Africans. In their excellent book, Commitment-Led Marketing, they show how commitment norms for the most frequently used brand of beer vary from country to country. At the two extremes we see both Australia and the UK (58%) and South Africa at 83% – a considerable difference.
Increasing share of wallet
Share of wallet expresses how much of a consumer’s total spend in a given category they award to your company. For example, if a household buys US$800 worth of groceries each month, and they buy US$200 of that in your supermarket, your share of wallet for groceries is 25%. As markets become saturated and customers have so much more to choose from, share of wallet becomes increasingly important. It is cheaper and more profitable to increase your share of what the customer spends in your sector, than to acquire new customers. After all, that’s what loyalty is really about. Totally loyal customers would give you a 100% share of their spend in your sector. A loyalty programme that’s working properly provides enough data about consumers and their households to be able to reasonably estimate share of wallet. There are complete formulae and data analysis tool-sets just for the job.
Promoting the brand to build customer loyalty
Every business must develop and deliver a consistently branded experience for its customers. The essence of the brand should be apparent in every interaction a customer has with the company, enabling customers to form an emotional attachment with the brand. This includes: training and enabling front-line employees who interact with customers; developing high-impact marketing campaigns; defining the brand’s “promise”; and segmenting customers on the basis of value. The loyalty programme provides a truly multi-channel vehicle through which to communicate this brand experience, and through which the consumer can become more attached to the company and its brand.
Becoming truly customer-centric
Most businesses are, by nature, either product-centric or service-centric. Remember the days when business owners knew their customers by name, and knew their personal preferences – and just about everything else there was to know about them? Those who have realised the value of a customer-centric approach have thrived: examples are the Tesco Clubcard programme in the UK, widely regarded as one of the best loyalty programmes in the world, and the Nectar retail coalition programme, which very quickly signed up 13 million members, representing half of the UK’s households. But adopting a customer-centric approach generally involves changing several procedures, including: marketing, sales and service applications must be merged seamlessly; differentiation based on products or services must be changed to differentiation based on customers; reactive service must be swapped for proactive service; and data that’s segmented by products must be segmented by customers instead. Again, the loyalty programme’s data is already customer-centric by its very nature, and the implementation of a loyalty programme is a vital opportunity to merge cross-department data silos.
Ensuring the success of a loyalty programme
There are dozens of elements that are critical to the long-term success of any customer loyalty or relationship marketing initiative. First, these programmes are definitely not a ‘quick fix’ for an ailing corporate bottom line. It takes time to build loyalty because loyalty is based on trust- and relevance-based relationships with best customers. Accurately targeted marketing is a benefit of loyalty data, and is essential if the programme is to be seen as ‘relevant’ by its members. Other secrets of success include: gaining consumer buy-in, knowing your customers, rewarding only the right behaviour, rewarding and recognising customers in the right circumstances, spotting defection patterns, insights into customer lifecycles, making sure rewards are attainable, recovering the programme’s costs in a reasonable time, well timed and relevant communications, keep the programme simple to understand and use, measuring campaigns and results continually, acquiring new customers, having unique and uncopyable benefits on offer (as a barrier to entry for competitors in the same space), empowering your staff to make the right decisions under all circumstances, and of course making the customer’s life easy.
Detailed planning and careful execution
The list of issues to consider and pre-plan when designing a loyalty programme is enormous: there are hundreds – sometimes thousands (depending on programme complexity) – of individual action points that have to be worked through before a programme can confidently be called “a success”. Indeed, any failure to address some of the more important points could result not only in a failed programme but also unrecoverable expenses, lost consumer good will, legal problems, and lasting brand damage. The loyalty consultancy and management company ICLP uses a comprehensive list, of which the following are just a few of the more important issues to be defined: Loyalty programme markets and objectives; strategy (programme type, proposition, comms, partnerships, infrastructure, etc.); objectives, key process flows, KPIs, rewards, benefits, financials, and timelines; desired behavioural changes; benefits and rewards, type, tracking, communicating, bonussing, reward currency, breakage, and liability; partnership details; tiers (both thresholds and management); financial and administrative controls; legal aspects; staff requirements and training; ROI; programme rules; system functionality; fulfilment process and costs; data requirements and usage; and the list goes on. There is much to be planned for a well-executed programme.
Rapid market penetration with a coalition programme
Partnership in a coalition loyalty programme is often thought of (quite rightly) as a quick method of entry into the field of customer loyalty – however, there are disadvantages that must be weight up first, such as the ownership and usage of loyalty programme and customer-specific data, and potential competition of other programme partners in future markets you plan to expand into. Successful coalition programmes have a major partner in several of the key consumer sectors in order to quickly capture a significant proportion of consumers’ spend. Ideally, this would be a major grocer, fuel retailer, bank or credit card, department store, and mobile telecoms provider. Proportions as high 50% – 60% of the target market can be enrolled very quickly. This means that not only is the data collected more representative of the target market but that the share of each consumer’s wallet is also maximised. Most importantly, new partners joining the programme after it becomes established will automatically gain the same degree of market penetration as the existing partners, and co-marketing activities with the programme’s operator will usually raise consumer awareness rapidly.
Successful CRM (customer relationship management)
The loyalty of customers stems from building relationships with them, and those relationships have to managed. This is where CRM comes in. Whether the relationships are so finely tuned as to be one-to-one relationships, or whether they are in bigger segments or groups, the principles of management are similar. Over the past decade CRM has come to be regarded by many marketers as being synonymous with huge, costly IT systems. But many of the big companies have now passed through that stage, and are focusing more on explaining to both employees and customers the benefits of the system, and streamlining the laborious processes of data collection. CRM’s reputation is improving – it is making a come-back. Some of the key faults that can cause CRM projects to fail or prevent delivery of the expected ROI are a reliance on technology as a global ‘cure-all’ and down-playing the importance of management level buy-in. But having the correct focus and commitment can significantly improve a CRM initiative’s performance. According to IBM’s research, CRM should be run at the corporate level or with a cross-functional perspective – and when this is the case, there is a 25-60% greater chance of success.
Using gift cards and store value cards for loyalty
The market for gift cards – many of which are pre-paid, stored value cards – is expanding rapidly. Clearly, the card is the mechanic: what is done with it determines how useful it is as a vehicle for building loyalty to the retailer. Copious research has been carried out to show the potential of the gift card market. Gift cards have been widely used in the US for longer than in other parts of the world, but the popularity is now beginning to spread. Gift card merchants can use different types of promotions to increase the level of excitement. For example, creating a swipe and win sweepstake when the gift card is redeemed is an excellent way to drive additional sales. Another opportunity that can benefit both the merchant and the customer is the use of receipt coupons, or custom coupons, as part of a gift card programme. For stored value cards that are a cash replacement and need customers to re-load their cards, a bonus can be given when they add value to the card. And if something can be offered that is difficult to put a price on – priority service, a backstage pass, a ticket on the 50-yard line at the Superbowl – there is an opportunity to create ‘extreme perceived value’. All of these are gift card-based ways of generating renewed consumer engagement.
Use the six Ps of customer loyalty marketing
Loyalty programmes have become necessary due to vast customer bases and market sizes, according to The Allegiant Group, which suggests adding two new ‘Ps’ to the well-known ‘Four Ps of Marketing’ (those being Product, Price, Place and Promotion). The two newcomers that stand to benefit the customer loyalty marketer are People and Performance: People (and how they affect customer loyalty) are an increasingly important part of the marketing mix, and the Performance of the entire enterprise, and its quality and consistency therein, is increasingly critical to delivering products and services in a way that engenders loyalty and repeat purchasing behaviour. Other critical success factors in the development and management of successful loyalty initiatives include: strategy and economics, the features and benefits offered by the programme, the methodology of the reward component, and the metrics and measurements used to track the effect of the programme.
Building a database that can really create loyalty
There’s a myth that says most companies have enough data about their customers to conduct successful marketing campaigns. But, in fact, some of the largest firms in the world have not assembled the personal identities and key contact information of their largest customers into a single database. Instead, the information resides in the minds, drawers, or handheld PDAs of their sales representatives. Rarely is it warehoused as it should be. The amount of junk mail the average consumer gets today proves the point: despite talk of CRM, it hasn’t improved relationships between consumers and their suppliers. The problem is that properly implementing a customer database is far more difficult than ever imagined. A customer loyalty programme’s unifying effect on data, if the data structure is properly planned based on clearly set-out business objectives, forms the basis of relationship-based campaigns that start with “Fred, we see you’ve moved – here’s a map of your local stores to get you started” instead of mailers that start with “Dear Occupier”.
Avoiding technological problems with loyalty platforms
If you’re setting out to find a ready-made or partly-customised loyalty platform, there are hundreds of points to consider before making a final choice. In 2005 a survey of the capabilities of over 30 loyalty programme platforms was conducted by UK-based MJA Associates, finding that many of the solutions examined were merely “points engines” that could increment and decrement the points in a member’s account but were limited in the functionality required to manage bonussing, lifestyle data collection, surveys, partner management and other fundamental operations. Most of the loyalty solution software platforms examined were lacking in many areas – particularly in terms of bonussing, partner management, survey functionality, and contact centre information screens. Of the hundreds of factors, these are just a few of the most important: Application and member number tracking; Archiving of programme data; Audit logs; Awards redemption processing; Bonussing functions and flexibility; Card management; Different currencies and languages; Events management; Interactive Voice Response features; Fees management; Kits and cards processes; Location hierarchy; Member services provisions for call handling; Member management, transaction and attributes recording; Partner management; Points expiration; Point types; Reporting; Security; Development kits and APIs; Statementing; Surveys; Tiering; and Financial transactions and points management. It’s important that the system you choose has the features you need, not only for today but for the future development of the loyalty programme.