Loyalty Marketing Is Not A Cost
A well designed loyalty programme will earn significant long term financial benefits for an organisation and shouldn’t be viewed as a cost – it is essentially an asset offering high returns on investment.
ROI is clearly the way to measure the immediate result of any direct marketing effort. But with database marketing, the marketer is able to consider more factors and project their profits over a series of years, rather than just looking at the return from a single campaign. Considerations should include such factors as the retention rate, the referral rate and the (long term) spending rate, rather than just the response to an immediate promotion.
Creating control groups is an ideal scenario for testing the waters as it highlights customer response to promotions and long term programmes by comparing the value of Programme participants vs non-participants.
Segmentation
Most companies are aware of the Pareto principle, or the 80/20 rule, which states that 80 percent of your revenue is generated by 20 percent of your customers. But did you know that the top 20 percent of your customers typically generate more than 100 percent of your profits? This means that your best customers actually subsidise your weakest customers—the ones who use up a lot of your marketing budget but don't spend a lot in return. And your worst customers actually have a negative ROI.
While these customer truths are less severe within a loyalty programme, which naturally draws in your better customers, it is still the case that programme ROI can be improved dramatically by shifting your member recruitment focus from "getting the most customers" to "getting the best customers." When your goal is to maximise the number of customers you bring in, you inevitably are going to bring in a large number of customers who turn out to be unprofitable—and that will be harmful to the ROI of your programme.
What can we learn about customers that will help us to segment them into profitable and less profitable groups so that we can devote high investment to the best customers, low or no marketing dollars to the worst customers and average dollars to the average customers? Customer segmentation methods represent the next step up.
- estimate customer profitability by subtracting total marketing costs from total gross margin for each customer (for the past one or two years, depending on your customers' average purchase cycle)
- pull out the most profitable customers (top 20 percent)
- perform a demographic profiling exercise to understand what your most profitable customers look like and where they are coming from
- modify your programme recruitment targeting to focus on bringing in members who look like your most profitable members
Once you have your customers ranked by profitability, calculate the change in ROI you will achieve by increasing the number of most profitable customers by 10 percent and decreasing the number of least profitable customers by 10 percent. It will surprise you.
Rewarding your best customers not only makes sense – it makes millions!
