Customer ‘Loyalty’ — It's Never a Sure Thing

As “Data,” “CRM” and the “Customer Database” continue the march toward the center of the marketing organization in tens of thousands of businesses, not surprisingly another “classic” marketing concept is rather “new” again — customer loyalty. Customer Loyalty: Where to Start The right place to start in your consideration of customer loyalty and creating a loyalty program is simple, and yet relatively often, rather overlooked. A simple question we ask when discussing the “loyalty” dimension of customer experiences and the customer data they produce goes something like this: What does success look like when you implement a customer loyalty program? The answer to that varies — but the worst answer is “nothing.” “Nothing” is never determining what the end in mind should be for your customer loyalty program in the first place. When organizations invest in defining the outcome they seek, they are roughly 20 percent of the way to success. As the axiom goes, “If you spend 90 percent of your time defining the problem, you’ll solve it in 10 percent of the time.” What Can We Expect From Loyalty Initiatives? So what should we expect from a customer loyalty program? Here’s a partial list we’ve heard from the brands where we’ve used customer data to inform and improve customer loyalty: You keep those customers longer You generate more social referrals Those customers buy more often (frequency) They are less sensitive to pricing and increases in particular The cost of customer acquisition can actually be lower Exchanges and returns decrease “naturally” You recognize profit growth These are all very real outcomes you can expect from a high-quality customer loyalty program built around your unique customer and your business. How Does Loyalty Really Work? This is the best question to ask. Most organizations I’ve worked with on managing a customer base (customer database) to drive business performance begin with a gold, or black card, a name for an elite club or a space they will convert to lavish “loyal” customers with attention. This all requires that we know who is really loyal. Here’s a shortcut to finding out: Using RFM Scoring we can slice the customer base by recency of spending, frequency of spending and monetary value. We can slice that frequency and monetary value by time. We can then take what we call the most valuable buyers from the universe and define them as those who have the greatest frequency (they buy the brand often) and the greatest monetary value (they spend a lot with the brand). It’s hardly rocket science, to this point. Going further, slice the monetary value by time period, in quarters or years, and segment out buyers whose spending is increasing with time. Why? Because when you keep customers for a long time, they tend to spend more. On average, good customers tend to make more money, buy more expensive cars and have greater discretionary income, over time. If these top customers are satisfied and continue to buy from you during a long period of time, they tend to increase their spending with your brand. Here are just a few things that we know about loyal customers across clients and categories that may be helpful as a starting point. Married customers were more loyal than singles Renters tended to be less loyal than owners Income affects loyalty — those without it have a harder time being loyal Customers in certain geographies, especially rural customers, tended to be more loyal Customers in the Northeast and urban customers tended to be less loyal (note, I’m from New York) As we often will maintain, success is not just how many customers you have, how many you acquired, or how much they spend today or recently (though high spend and recency helps). It’s the quality of the customer on a meaningful set of measures that’s the “X-Factor,” or multiplier, in determining how loyal a customer can be. In "The Loyalty Effect" (Reichheld, 1996), a concept called the “Loyalty Coefficient” is discussed. The bottom line being: Increases in retention (loyalty) are driven not entirely by how you engage with your customers (points, rewards certificates or loyalty cards) — although treating customers well is important — but from finding the right customers in the first place. In our work, we’ve consistently found there is no more powerful force in improving the value and profitability of a business than acquiring highvalue buyers in the first place. (See “The Most Important CRM Metric You Might Be Missing.”) Defining that “right customer” is rarely a matter of attaching a modeled variable (income range, for example) to broadcast online advertising. There are invariably multiple variables that tend to produce a more loyal customer — regardless of how unique the service quality might be. Many organizations with organizational strength in operations produce a good product and service quality for all customers, and diminishing returns come with the “black card” approach some have pursued. But getting the customer right is a game-changer, regardless of how over-the-top our service level might be. Consider the Example of Lexus vs. Infiniti: Lexus targets former Mercedes and Cadillac owners. These are older, wealthier and demographically tend to be more loyal customers. Infiniti on the other hand, seeks younger people who were BMW and Jaguar owners. These brands are building their targets around more edgy or fashionable trends, and power. The Lexus owner naturally skews older, and values quality, reliability and resale value. Not surprisingly, the Lexus loyalty buyer rate was more than 60 percent for two years in a row, while Infiniti rates were far from that mark at 42 percent. Lexus didn’t markedly change the quality of the product. The brand is consistently reliable (manufactured by Toyota), has solid resale value and hasn’t changed its always-consistent service levels materially. In fact, the top three luxury brands have higher loyalty rates than all other luxury category brands. J.D. Power cites customers of the top three luxury brands cross-shop the other two far more than brands in the second group, with the possible exception of Audi. In the example of Lexus, they increased customer loyalty by targeting higher-value customers or “loyalists” in the first place. How to Target More Loyal Buyers in The First Place Use the simple approach we’ve outlined with RFM, and layering in demographic data, or derived data — for example, inter-order purchase time. Granted all of this assumes you have a viable customer and marketing operations database that makes this easy enough to execute. You can then use statistical methods — regression, for starters — to identify what the most predictive variables are. Without delving into more detail than the average reader of this column is interested in, regression is a statistical method used for predicting the unknown value of a variable from the known value of two or more variables — also called “the predictors.” The variable whose value is to be predicted is known as the dependent variable and the ones whose known values are used for prediction are known as independent (explanatory) variables. The good news is, you can do all of this with software, and/or an analyst can do this for you. In other words, given what we know about our customers (spending, geography, age, urbanicity, etc.) we can identify what the values of other variables are that we don’t know, i.e. what is predictive of a better and more loyal customer. We then allow this type of intelligence to inform who we target for acquisition (the prospects who spend like your most valuable buyers), the offer, and how we target them. This, too, can be accomplished through customer intelligence and database marketing software. This is not a trivial endeavor and is the subject of many other articles we’ll share. Most importantly, marketers would do well to inform their customer loyalty by benchmarking and improving the quality of the customer being acquired, and methodically improving it. The Bottom Line ― Stack the Deck in Your Own Favor Knowing your customer is the first part of the equation that solves for your loyalty success. Differentiating the customer experience based on common sense loyalty scores like we have touched on herein do help. All loyalty work, of course, comes at a cost — and so marketers who miss or under-perform on loyalty measures often begin with a common error. That error is not looking upstream and starting with acquiring customers with the “genome” to become a loyal customer in the first place. The evidence is overwhelming — targeting higher-value customers or “loyalists” in the first place outpaces any shiny black card you can print a logo on, or the cleverest “club” you create for loyal customers. So be good to your customers, yes. But be good to yourself as a marketer — and start with the right customer in the first place. You’ll change the game in your loyalty program.

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Customer ‘Loyalty’ — It's Never a Sure Thing

Customer Loyalty: Where to Start

Mike Ferranti

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