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10 Critical Factors to Building Profitable Customer Loyalty
and why you have to do it, even (or especially) if the economy sucks
by Sallie Burnett, Customer Insight Group

So the economy is bad. You still have choices. You could slash your marketing budget across the board, cutting both profitable and unprofitable programs by an equal amount. Yes, it cuts costs - but it also makes a smaller company. Or you could stop marketing entirely - a survival technique that's the business equivalent of lying down on I-70 waiting for the next semi.

Or - smart you! - you could decide to take action and stack the odds in your favor. You could decide to focus your newly limited resources on the area of greatest opportunity: your existing customers, specifically those who have high growth potential. The result is lower marketing costs and increased sales - not too shabby an outcome in any economy.

If you choose to go this route, common sense, experience and statistics are on your side. According to the Customer Service Institute, it costs five times as much to attract a new customer as it does to keep an existing one satisfied. A study by Marketing Metrics found the average company has a 60-70% probability of selling again to existing customers, a 20-40% probability of successfully selling to lapsed customers - but only a 5-20% chance of selling to a prospect.

Losing a customer? That's where it gets really expensive. According to studies by the Technical Assistance Research Programs Institute, 91% of unhappy customers will never buy again from a company that has displeased them and will also voice their dissatisfaction to at least seven other people.

The good news: Growth rates soar for those who are adept at loyalty. Frederick Reicheld, author of The Loyalty Effect and Loyalty Rules, found that loyalty leaders grow on average more that twice as fast as the industry average across a wide variety of industries.

So - since I suspect I'm preaching to the choir here - most of us agree that loyalty marketing pays off, but it's the how that trips up most companies.

Our experience shows that there are ten critical success factors to cultivating profitable customer relationships.

1. Leverage Your Data
As Bill Gates said in Business @ The Speed of Thought, “The best way to put distance between you and the crowd is to do an outstanding job with information. How you gather, manage and use information will determine whether you win or lose.”

Successful loyalty programs leverage customer insight to:
  • Attract profitable customers.
  • Determine allocation of resources timprove ROI.
  • Evaluate how specific customers react tspecific promotions.
  • Deflect competitive challenges.
  • Identify trends and opportunities.
  • Increase customer conversion rates.
Yeah, data can dall this.

2 - Create a Shared Vision
In a true customer-centric organization, the vision has tbe clear and - equally important - embraced at all levels by all employees. Some key concepts:
  • Over-invest in coordination across all functions. Make sure everyone understands program objectives, strategies, areas of departmental impact and associated expenditures.
  • Encourage employees tparticipate in the program as customers sthey experience firsthand the program's value.
  • Create high-level positions with the sole purpose of leveraging customer data across the organization and serving as the customer advocate.
  • Encourage employees tthink like a customer.
  • Incorporate customer focus inttraining and hiring.

3. Set Realistic Goals
Sometimes loyalty programs are developed with good intentions, but unclear objectives. Woefully, this oversight can sabotage your program from the start. A program cannot be offered to the masses and exclusive, loaded with benefits and cheap.

So, develop program objectives based on your primary business objectives. Do you want to expand marketing channels with direct capabilities to improve efficiency and measure results? Do you want to collect data to be leveraged as a core business asset? Do you want to build strong relationships with high value and high growth customer segments? You decide - but you have to decide.

4. Ask Customers What They Want
If you want to know what will make customers more loyal - ask them. Focus on the features, program structure and rewards they would add or remove if they were to (re)design your loyalty program. Compare the benefits they want with the benefits they're getting. Based on your customers' feedback, determine the business impact of the requested benefits. Is it financially viable to give them what they ask for and does it ultimately achieve your business objectives?

5. Know Your Customers
Look at the customer from a holistic perspective, then segment customers that are similar. Create a loyalty profile by ranking customers according to their value to your company, and then differentiate them by their life cycle and needs. The profile should be a 360-degree view, combining purchase behavior, attitudes, satisfaction, demographics and lifestyles. Once you've created the loyalty segments, prioritize them to focus on their potential economic impact. Avoid rewarding “free riders” - loyalty members who join your program but give you nothing in return, and instead focus your efforts on profitable, loyal customers.

6. Make Rewards Attainable and Realistic
Any incentive you offer must be realistically attainable within a reasonable time period. By design, a loyalty program is a balancing act between offering some low-cost, easily attainable short-term rewards that can be redeemed early in the program and more highly valued aspirational (and more costly) rewards that can be redeemed later in the program. While the short-term rewards encourage enrollment and ongoing participation, the beau ideal rewards serve as an incentive for your customers to consolidate purchases and award you greater share of wallet.

7. Create a Distinctive Customer Experience
While some customers are moved by price, others want personal attention and convenience. Your customers are diverse; consequently, your program needs to acknowledge their uniqueness by speaking differently to each segment. The better you understand your customers, the better you can push the most appropriate levers for the specific customer.

8. Integrate
A loyalty program is not a silver bullet to solve a company's core weakness. You can't manufacture loyalty if you offer shoddy products, poor customer service, noncompetitive prices, or non-integrated distribution channels, or if you don't communicate with customers. Instead, a loyalty program should be thought of as a part of your integrated customer relationship-marketing program - one that helps you to proactively manage the customer life cycle.

9. Be Relevant
Depending on your business, customer touch points may include mail, telephone, fax, text message, e-mail, instant messaging, chat rooms, catalogs, point-of-sale, signage, Web sites, online bulletin boards, and whatever was invented last week. New forays in Internet-based systems include blogs, video conferencing, podcasts and meeting-sharing systems. Each touch point has its own cost implications, and perceived benefits to your customer. In developing your customer communication plan, leverage each touch point to reinforce the value proposition and focus on what really matters to your customer - creating concise, relevant and compelling messages that build relationships based on your customers' needs. The key to success is to embed your loyalty program into the total customer experience.

10. Measure Success
Customer satisfaction and loyalty metrics should be prominent in performance dashboards and visible to the company's leadership, including the Board of Directors. You should measure results in both the short- and the long-term. While short-term success is measured by evaluating the results of promotions, events and customer communication, long-term success is measured by RFV - recency, frequency and value. Recency is the measurement of when the customer last purchased. Generally it is a good indicator of potential defection. Frequency is a measure of how often a customer purchases; it gauges how robust the relationship is between your customer and the company. Value indicates the profitability of the customer; a decline in value can represent a decrease in transaction size and your share of wallet. Measuring value is more than looking at one transaction; instead it is a measurement of your customer's perceived value in the relationship. As Frederick Reicheld explains in The Loyalty Effect, “Creating value for customers builds loyalty and loyalty in turn builds growth, profits and more value.” RFV provides you actionable measure for enhancing and refining your loyalty program.

No matter what the economy is doing, the quest for loyalty offers bottom-line rewards for those who prevail. As unique as your customers are, so will be your challenges and successes as you build and refine your program along the way. The pursuit for customer insight shouldn't be taken lightly or without long-term dedication. Dig in. Dedicate for the long haul and discover that, recession or not, there's gold in them thar customers.

Sallie Burnett is the president of Customer Insight Group, Inc., a strategic marketing company that helps companies improve the return on their marketing investment by developing and executing high-performing acquisition, loyalty, upgrade and retention programs. Explore how Customer Insight Group can help you increase sales and build profitable customer relationships by visiting www.customerinsightgroup.com.

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