15 Key Business Benefits of a Loyalty Program

Thanks to The Wise Marketer for the following:

According to The Loyalty Guide 5, the 15 key business benefits are:

1. Retain your existing customers…

The effect of the customer retention rate on actual, bottom-line customer numbers cannot be over-estimated. Global loyalty marketing consultant and author, Brian Woolf, has developed several invaluable reports which can be used to show the effect both overall and for different customer segments. His reports have shown that, in just five years, a company with a 70% customer retention rate will have lost two to three times as many customers as a company with a 90% retention rate. Not only does a loyalty program 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 program operators often report that, once a customer starts redeeming rewards, enthusiasm rises. In addition to simply retaining customers, the data from a loyalty program can be used to better cater to 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.

2. Acquire new customers…

A loyalty program 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 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 program; there are cheaper and more effective ways of acquiring customers. However, Brian Woolf’s work for leading retailers on many continents has led him to believe that it is far more profitable to retain and up-sell existing customers than to attract new ones. Using a four-year profile of new customer behavior from a leading retailer, he 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 program. 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.

3. 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 TCC, a provider of best customer marketing program, which skews its rewards 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 some 7%.

4. 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 program that rewards better customers without rewarding this segment at all gives them less reason to stay. Hawkins Strategic found that in the company’s own supermarket, 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 program, 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 and so on). 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 is simply not to reward them in any way and hope that they will leave. A graphic example of how important intelligent deselection can be is Professor Philip Kotler’s adaptation of the Pareto Principle, in which 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. Now that’s a good reason to actively ‘fire’ your least profitable customers.

5. Recover defected customers…
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%. 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.

6. Increase Customer Lifetime Value (CLV)…

Customer Lifetime Value is increasingly being recognized 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.

7. Best customer marketing (BCM)…

Best customer marketing involves spending more time, effort, and money on the best customers in order to maximize the return on investment. The strategy has been honed to a fine art by marketers such as Brian Woolf and Hawkins Strategic. Not surprisingly, the principles of best customer marketing are the driving force behind the leading loyalty program in the world today.

8. Build relationships…

Building customer 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. 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/behavior/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.

9. Create 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. And to most people, a personal recommendation is far more convincing than any amount of promotional material.

10. Adjust pricing levels…

A loyalty program can help 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. The effect of changing prices can also be studied – for example, which customer segments buy significantly more or less.

11. Respond to competitive challenges…

A good loyalty program’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. By way of example, a fairly small retail 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 program 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.

12. Select stock lines effectively…

Knowing what your best customers buy frequently helps choose which lines to stock and which lines to expand on. When your stock range is adjusted to suit the more profitable types of customer that you already have, the entire store will naturally begin to appeal to more of the same types of customer, and a slow but sure process of “customer cloning” begins, eventually leading to the removal of less profitable customer groups by simply dropping the lines that only those groups tend to buy, and building up the lines that better customers prefer.

13. Plan merchandising optimally…

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 diapers also buy beer (the refined version includes “on Friday evenings”) may be true or not.  However, 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 diapers in the beer aisle on Friday evenings or not!

14. Reduce promotional and advertising costs…

Because advertising can be 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. And targeted advertising works measurably. The more sophisticated type of loyalty program – 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. Tesco’s Clubcard magazine, packed with targeted money-off coupons, is mailed to approximately 13 million customers four times a year. Not only does this form of advertising save Tesco money; it earns Tesco money. 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 it 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. The cost-saving advantage of targeting can be astonishing. In one instance, a firm mailed an offer to 450,000 of its ‘better’ customers. The mailing generated US$22 in revenue for each US$1 spent. On analyzing the response data, it was found that 97% of sales came from 13% of the zip codes. Can you imagine the difference that that made to the profitability of future mailings?

15. Select 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.

What benefits have your loyalty program produced?