Over the years, there’s been plenty of research that shows that loyalty programs, often developed as a series of incentive-based programs designed to drive a desired customer behavior, can effectively improve retention. The prevailing thinking is that most companies lose 45% to 50% of their customers every five years, and winning new customers can be up to 20 times more expensive than retaining existing customers. Moreover, just a 5% reduction in the customer defection rate can increase profits by 25% to 85%, depending on the industry. Therefore it is important to be able to measure both loyalty and retention and understand the relationship between the two.

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Customer Loyalty Your Company’s Valuable Intangible Asset

The following information outlines four components you need to address in creating a loyalty program: foundational considerations, fact gathering, building a program model, assessing implementation options.

1. Foundational Considerations
Before you invest in an extensive incentive-based program, make sure that you have built a solid foundation. Include these important foundational components:

  • Value. Without real value associated with your products and services, you cannot create loyalty. Make sure there is real value in the products and services you offer.
  • Brand Consistency.  Your brand is not a  logo. Your brand is a promise.  It is essential that you and your customers clearly understand the promise. Your company’s ability to deliver on the promise directly impacts your customers’ degree of loyalty.
  • Service Culture. In a B2B world, your customers are interest in more than a mere transaction with your company. Your culture must demonstrate that you care about your customers.  This means you need a personal approach. Customers want to be perceived as more than a number or a sale. Customers need to be able to engage in a dialogue with you and believe you are there to help them solve a critical problem.  Therefore, it must be easy for them to do business with you, even if your solutions are complex. That means,  your customer-service must be up to snuff. Customer service functions have a positive impact on customer satisfaction and loyalty. If this is a challenge for you, learn how to improve loyalty with service and support metrics
  • Trust. A study by the ECSP Europe Business School, entitledThe Role of Trust in Consumer Relationships’, found that customer communication drives more than 20% of overall consumer trust in a company, affecting not only the length of customer relationships, but also business profitability and customer advocacy.
  • Focus on the Right Customers.   With profitability being front and center for most companies today that means as marketers we must focus our efforts on the most profitable market and customer segments. As you do your analysis you may find the 80/20 rule applies; 80% of the profits come from 20% of the customers. Determining a customer’s value is important when deciding whether to offer a loyalty program. Perhaps you recall the 1996 Harvard Business Review article on Managing Marketing by the Customer Equity Test. The customer equity test is based on the interrelationships of frequency of purchase, volume (dollar and/or unit) of purchases and the next margin of each sale divided by the next cost of acquisition (cost of capital and marketing expenditures). By using the customer equity test you can evaluate and segment your markets and customers.

If you need something a bit simpler, focus your loyalty programs on the customers with the:

– most growth potential

– strongest credit ratings and payment histories

– easiest and least expensive to service

– ones you are most likely able to up-sell and cross-sell to

The key to deriving ROI from your loyalty program is to know who your most profitable customers are and serve their needs.

Once you have the foundation in place, it may make sense to implement an incentive-based Loyalty Program. What are the next steps?

2. Fact Gathering.  With your foundation in place, the next step before you build your loyalty program is to gather all the relevant customer and marketing data. You need this information in order to:

  • Establish your customer segments. Collect the data you need to understand your customers’ lifecycle as it applies to your company. You might consider starting with simple segmentation such as: 
    • Transactionally based customers
    • Inactive Customers
    • Active Customers
    • Advocates
  • What kinds of market and customer data do you need at your fingertips.  Here’s a starting list:
    • Customer behavior data: This will include behavioral data related to personas, buying journey, channel and touch point preferences.
    • Customer metrics: These include conversion rates, marketing expenditures, gross margins, customer acquisition costs, customer retention costs, average number of transactions, and average transaction size for each segment.
  • Customer profitability and value. Analyze the profitability of each customer segment. Find out the customer profitability per segment and multiply by the number of customers in that segment to understand total customer profitability. Determine customer lifetime value. This will be the net profit of one of your loyal customers.
  • Perform a business case analysis. Estimate the effect of a Loyalty Program on each customer segment conversion, and the resulting change in net lifetime customer value.
  • Determine break-even enrollment. Based on previous assumptions, determine the minimum customer adoption rate required to offset the cost of program deployment.
  • Make the Go/No Go decision. Look at your numbers and decide whether or not to proceed with developing a Loyalty Program.

3. Program Model.  You’ve decided to proceed with creating a Loyalty Program. Armed with your data and business case,  define your Loyalty Program objectives. Some possible objectives include:

  • breaking even earlier in the customer relationship
  • increasing the size and number of transactions per each segment by a specific amount
  • improving the conversion rates from segment to segment by a specific amount
  • increasing the net lifetime customer value by a specific amount

With your objectives clear,  you can define your loyalty program structure.   A key aspect of the program is to define the currency- that is the reward and how redemption occurs.  What will “loyalty” give your customers – higher levels of support, training dollars, discounts? How do they earn the loyalty and when does redemption occur, (is it customer support calls, training dollars?), what are the minimum redemption levels, and the margin of the program.

Once you have a model in mind, conduct customer research to establish and refine the reward structure. Your CABS and TABS are an excellent vehicle to being this process. Survey your customers about preliminary program interest, reward level receptiveness, price sensitivity, and brand loyalty. Compare the results across each customer segment.

4. Assessing Implementation Options. You’ve complete all of your analysis, designed and validated your model.  Now it’s time to assess your implementation options and pre-launch requirements.

Some of the implementation options you can evaluate and select from include:

  • Build in-house programs. This allows for complete brand control but involves sizeable upfront costs.
  • Join a Loyalty Networks.
  • Create Private Label/ Site Specific Programs.

After you select how you implement the program,  determine the final program structure. Make any necessary adjustments to your preliminary program model. Then sufficiently staff your program, communicate the program to ALL employees and customers, and train ALL employees on the program.   

For your loyalty program to be successful, you need to hire the appropriate personnel for program management, customer service, technical integration, and creative development. Once you complete all technical integration requirements, you can develop the program promotional strategy and move into program launch mode.  As you can see, there’s a lot to be done and many moving parts.  It’s important to get it right, right from the start.  


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