Customer Loyalty, Profitability and Mythology

In The Mismanagement of Customer Loyalty, Reinartz and Kumar take a surgical look at the false assumptions that underlie many Customer Loyalty programs. And whilst the research they quote is somewhat dated now (2002), their findings have an uneasy and contemporary feeling of truth about them.

The popular mythology is of course that the best customers are the loyal ones:  low cost to serve, willing to pay more, and to act as strong word-of-mouth.

The claim by our researchers: “Much of the common wisdom about customer retention is bunk. To get strong returns on relationship programs, companies need a clearer understanding of the link between loyalty and profits”.

Their research findings covered a high-tech corporate service provider, a large US mail-order company, a French retail food business and a German direct brokerage house. The data collected enabled them to compare the behaviour, revenue and profitability of more than 16,000 individual and corporate customers over a four year period.

They discovered “little or no evidence to suggest that customers who purchase steadily from a company over time are necessarily cheaper to serve, less price sensitive, or particularly effective at bringing in new business”.

However, they also claim that the reason that the apparent link between loyalty and profits is weak has a lot to do with the crudeness of the methods most companies use to decide whether or not to maintain their customer relationships.

RFM (Recency, Frequency, Monetary value) analysis is a popular way to sort customers. In practice, this method tends to overweight in favour of recency (eg. doesn’t distinguish different pacing patterns between frequently and infrequently purchased goods) and the monetary value component is almost always based on revenue rather than profitability. In short, it can be a very blunt instrument.

And as valuable as segmentation is, there is no substitute for identifying customers at any individual level. Knowing that 50% of your customers are loyal doesn’t exactly inform:  right offer, right customer, right time, right channel.

The really interesting findings from the research came from probing further into the attitudes of loyalty – sifting out the self-declared true believers. At the grocery retailer, for example, customers who scored high on both actual and attitudinal measures of loyalty generated 120% more profit than those whose loyalty was observed through transactions alone. And in the B2B environment of the high tech corporate services provider, loyal customers of both “thought and deed” were 50% more profitable than those designated loyal by transactions alone.

This certainly mirrors our experience with CRM programs and branded online communities. It is one thing to know about transactions – “who, what, how and when” are all critical to providing context in understanding customers. However, going the last mile to understand “why” is absolutely critical. And can turn a blunt instrument into something of surgical precision.

Everyday Rewards, Qantas and Twitter

 

Earn Qantas Points

Last week, Woolworths and Qantas announced a program that will, from June 22, allow Everyday Rewards cardholders to earn Qantas Frequent Flyer points when they shop in supermarkets. They also announced that the $82.50 joining fee otherwise charged by Qantas would be waived if customers join the Qantas program through the Everyday Rewards site or call centre.

Big W and then other Woolworths’ stores will join the program in the coming months, making it possible to earn Qantas points on a large portion of the average Australian household’s budget.

The Qantas Frequent Flyer company is working to establish their points as the ‘default’ loyalty currency in the Australian market – the same goal as for the Nectar loyalty coalition in the UK. To succeed in this quest, earn and burn options for Qantas points must be ubiquitous, and the Everyday Rewards link-up takes a big step in this direction.

For Everyday Rewards it will provide a common loyalty currency across Woolworths’ brands, providing an incentive for customers to remain loyal to Woolworths across their shopping categories.

We are however, specially interested in the  twitter support initiative that Everyday Rewards has offered to help customers come to grips with maximising their rewards. It joins a number of other Australian brands that have active twitter programs to better communicate to some portion of their customers. A partial list (from my personal ‘following’ community)

• EverydayRewards – Woolworths
• UBank
• ColesCard
• Westpac_help
• nab
• ANZozCEO
• tabdotcom
• iinet
• BigPondTeam – the most famous?
• SmartyPigAu

Follow the EverydayRewards team, and other suppliers in your life; it is a good idea for us to encourage traditional organisations looking to be more accessible and flexible!

Full disclosure – we are helping Everyday Rewards on twitter and help with their blog.

Loyalty schemes buy you knowledge, not loyalty: loyalty can’t be bought.*

We have come from the CRM world, are currently active in social media and online communities – really feel like we have one foot in each of two generations of marketing.

From this (sometimes uncomfortable) stance, let me make a prediction; Loyalty programs will become the bridge between these two apparently different worlds, for savvy companies.

Why? Because loyalty program members identify themselves.

In fact, loyalty programs are the price you pay for individual customer data. You make money from the careful use of this data. When you also know the identity of the customers in your (branded) community, you can;

• look introspectively at their behaviour within your business
• identify your best and potentially best customers
• enrich this with third party data if you choose
• match it all to their behaviour in the community – what do they post about, what ideas do they rate highly, what do they disagree with, how do they rate us (in Net Promoter terms) – segmentation by ‘behaviour in the community’ allows you to profile your brand advocates usefully using insight into their attitudes and beliefs.

The road to success is paved with good information*.

Not just right customer, right offer, right channel, right time but also right content in your marketing communications. We have had gratifying success by taking note of what different types of customers want us to talk about and reflecting that in our targeted, personalised direct marketing with good reductions in member churn for a sporting organisation.

In all customer segmentation there is a risk that your customers are homogenous – they all want and need exactly the same thing from you. If this is your case you may end up with the first online community ever that has no customer politics!

If you cannot segment through your community, you will just have to live with the goodwill that comes from being open to a conversation with your customers. Not a bad consulation prize.

* Quoted in “Loyalty Marketing: The Second Act” by Brian Woolf

The Churchill Dilemma & Balanced Loyalty Programs

 

I was talking with Wayne – a old fashioned advertising man who has reinvented his thinking after having a 1:1 marketing epiphany some years back – about where classic ‘branding’ fits with the whole concept of marketing as a conversation. (He was the one who put me on to “The New Brand World” and persuaded me to re-read “The Cluetrain Manifesto”).

In short, Wayne has convinced me that a company’s brand is the sum total of the experiences they provide to their customers. Loyalty programs included – especially.

If this is the case, Wayne pointed out, then the loyalty program is a fundamental part of the brand as far as the customers are concerned. Makes no sense to manage such an important part of the business differently than you manage the other lines of business and departments surely.

The need for alignment between your loyalty program and your brand reminds me of the famous quote attributed to Winston Churchill – when confronted by a beautiful socialite who suggested their children would be exceptional, Churchill reportedly said something like; “with my luck they would have your brains and my looks!”

It takes planning to make sure the intersection of program and brand produces an attractive prodigy, not an ugly dullard. We have seen rich, relationship focused credit card loyalty programs fail inside Every Day Low Price retailers and low value programs fail inside a “top end” department store.

There is a management tool that, when implemented in line with the manufacturers’ instructions, focuses the organisation on alignment across the various functions; the Strategy Map & Balanced Scorecard of Kaplan & Norton. We have good success in designing and aligning loyalty program initiatives by using these tools.

As a gross over-simplification for those of you familiar with balanced scorecards;

1. Financial Perspective

   Focuses on what and where the program will need to increase revenue and improve productivity - increased customer lifetime value of course, but how much and how specifically?

2. Customer Perspective

   Makes us explicitly design and measure the program (product) features from the target customers’ perspective – rules for enrolling, earning, burning, engaging and partners – then make the relationship offer that goes with the program (and brand) explicit and then define the intangibles – status, image etc. that the program should inherit from your brand.

3. Internal Perspective

   The operational things that need to get done well – these are often outsourced because the simplest of them are generic – adding points, shipping rewards etc. Some are critical success factors however, especially the customer analytics and insight functions.

4. Learning & Development Perspective

   The heart of your employee culture and infrastructure must beat in time with the brand and the customer value defined in layer 2. Loyalty programs should not be ‘bolted onto’ marketing!

We recommend you apply the same management disciplines and tools to the design and execution of your loyalty program as you do to any strategic initiative – or face the “Churchill Dilemma” – a program that destroys brand value.  

4 Steps to a Killer Loyalty Strategy

  

Us Aussies love our points and prizes! We collect points when we use our credit cards, when we buy our groceries, when we travel, when we stay in a hotel, just about every chance we get. Partly because so many organisations give them to us.

Which raises the point of this post; why do organisations run these potentially expensive programs? Research I have seen suggests that the main reason retailers run loyalty programs is “because their competitors do” (Leenheer & Bijmolt).

But even in markets where programs are seen as a cost of doing business, only noticeable by their absence, we contend that you can do a better job of producing a return from your program if you take the time to build a strategy first.

The framework we use is deceptively simple – find the answer to 4 questions:

1. Which customers? Working out what types of customers your program will be aimed at is the first step. Unless all of your customers are identical, there will be differences which you can utilise to make the program more effective. Do not assume the target should always be your most valuable existing customers; their volumes typically mean they will be well rewarded anyway. For example, the Journal of Marketing found light buyers responded better to a retail program and recommended ‘…a need to consider consumer idiosyncrasies when studying loyalty programs and illustrate consumers’ co-creation of value in the marketing process.’ (Liu 2007). Get your customer analytics team involved right up front.
2. What behaviours? What actually do you want the target customers to do? Reward that. Nothing else. Sounds really obvious right? Then why do credit card loyalty programs reward behaviour that is the least beneficial to the issuer (spend big, pay no interest) and airline frequent flyer programs best reward customers who fly the most miles for the least money. Be clear what you really want the customers to do.
3. How much money? If the target customers behave the way you want, how much incremental profit will you make? Time to do some numbers, starting with the ’size of the prize’ if the program is effective at causing the behaviour you are after. Clearly you should aim to spend less on the program than it incrementally can produce if you get everything right.
4. How do I include partners? Few organisations can provide the ubiquity of points earning opportunities that will make a program irresistible for members. What other brands would logically support the program to mutual benefit of member, partner and you?

With clear consensus on these 4 points, it is much safer to then move into detailed program design.

The Fifth “P”: People

The addition of new places to market online – blogs, forums, social networking sites – has re-focused us on the fact that people talk to each other about the products/services we are marketing.

These conversations are not just another communication channel, the interaction shapes the message and you are not in control. This qualifies as the 5th “P” in our mash-up of Kotler’s Marketing Mix.

Almost without exception, these conversations are more credible, for all parties involved, than messages sent through non-conversational channels – but this does not make it easily accessible to us marketers!

When we start thinking about how to access these conversations, it quickly becomes clear that most of them take place face to face, not keyboard to keyboard. To be successful with the 5th P we have found it wise to accommodate both on and off line conversations in our Word of Mouth programs (WOM, another TLA!).

We prefer to call marketing that joins (or deliberately inspires) conversations “Advocacy” programs, because it is a sad fact that not all consumers are interested in discussing your brand. Those that are willing and positive, we call advocates.

All brands have some well-engaged customers who are interested in the category, are currently discussing the category with their social network and are open to some sort of interaction with you (see #1 of the “Top 10 Things Seasoned Marketers Must Do to Alleviate Marketing Performance Anxiety” here).

This means we have to start by finding the customers who are already advocating your offerings so you can understand why and where.

Knowing why let’s you design tools that can help make them more effective advocates – this is generally information but for one client it was a working model that dramatically showed how their product blasts plaque off teeth!

Knowing where lets you make sure the tools you provide are appropriate for the venue where advocacy generally occurs. (”Venue” is a Word of Mouth Marketing Association (WOMMA) term; their framework is worth a look.

For example, in a program that we are currently designing, the venue is Facebook, and the most effective tools for advocates are applications that they can put on their wall.

We have mashed another set of approaches into  conversing with the 5th P if a more formal program is appropriate. The design framework for classic loyalty programs is useful if advocacy is more effective when it earns rewards and/or recognition for your customers (i.e. why are your customers willing to advocate). The framework is a set of decisions that answer the following questions:

1. How will advocates be enrolled in the program? Generally this requires you to provide a platform where they can talk to you and their peers so they self-identify.
2. How will they earn credit and/or status in the program by advocating for you?
3. How will they redeem or receive this credit and recognition?
4. What will we do to keep their interest in the brand and program fresh and current?
5. Can we leverage the involvement of business partners or related providers to make the relationship richer? 

Mashing-up CRM

CRM was initially a response to the discovery that there is money to be made from customer loyalty. Fred Reichheld famously made this discovery in the early 1990’s; The Loyalty Effect.

This would be one of those ‘of course’ discoveries if there weren’t still so many companies obsessed with getting customers they do not have and doing little to keep customers they already have.

Doing this large scale requires lots of databases, systems, infrastructure and expense, so the system vendors were enthusiastic supporters. This expense focused attention on the value of customers as the system had to be paid for and this made CRM, for a ‘relationship’ strategy, curiously left-brain and inside-out; what is the customer worth to me?

In practice, this means organisations adopt more complex segmentation frameworks, and attempt to consider customer needs in their efforts to treat different customers differently.

But is this really different in principle? Let’s consider 3 CRM organisations most often referenced as the global best;

• Tesco & the processes that revolve around their Clubcard program in the UK:  Clubcard
• USAA the US insurer: USAA
• Harrahs the gaming and entertainment company and the processes that revolve around their Total Rewards frequency program: Harrahs.

Tesco have classified customers based on what groceries they buy so they can make sure only relevant offers are presented. They started with; Finer Foods, Healthy, Mainstream, Convenience, Traditional and Price Sensitive shoppers.

 

USAA have a detailed life cycle model of their armed services customers that allows them to predict what products will be most relevant, next; extra car insurance when your child approaches teenager-hood for example. They back this foresight with the best service in the industry, but you have to think they have a head-start if most customer conversations start with “I was just thinking about that very thing… thanks for calling”.

Harrahs looks at your gambling behaviour and builds a picture of your average gaming budget and the length of time you want it to entertain you. They use this information to, for example, slow you down with meal offers if you are losing too fast and could end up home early and disgruntled.

Using transaction data to infer customer preferences and then using this insight to and match offers to customer segment certainly works, but is it different in principle to segmenting by age, income, sex… the targeting of Kotler’s framework? (refer previous post…)

Strikes me it is more clever and effective, but not fundamentally different…

In our recent work with a football club (the mighty Demon’s!) we found that the best approach is to use a blend of the ‘old’ demographic targeting and the new-fangled 1to1 relevance stuff. This lets us speak differently to “passionate partisans” than we speak to “reclusive partisans” and where they live.

We employ the simple and useful methodology created by Peppers and Rogers to integrate CRM strategy into our client CRM work; IDIC, not the Vulcan “Infinite Diversity in Infinite Combinations” IDIC but,

·         Identify customers individually

·         Differentiate them (aka segment, target) on the basis of their value to you and then on what they need from you

·         Interact with them and remember what you both said

·         Customise how you treat them taking the preceding into account so you can be relevant. PRG.

From our perspective, CRM certainly fits in our marketing mash-up, Resonately.