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Rewarding Value With Value
When I hear people talk about loyalty these days, they always mention how it's all about the customer experience. What I don't hear these same people talk about is customer value. After all, what's an experience without value to the customer? Loyalty programs are great ways to learn more about your customers, and then act on that information to increase their value. These programs must have a long-term goal that involves deep customer connections.
That means rewarding value with value. A loyalty program is most effective when its incentives, rewards, and other communications meet the needs of customers who are high-value today and those customers with the potential to be high-value tomorrow. Then you will truly create an experience with impact.
On Tuesday Mila D’Antonio wrote a blog entry about direct marketers needing to add value to their offerings. Instead of simply selling products, they should offer customers services, education, etc. The same applies to loyalty programs. If companies don’t consider customer value and don’t find ways to make their loyalty programs unique, they simply fall into the category of “a dime a dozen.” Airline frequent flier programs are great, but does your membership in an airline’s frequent flier actually create loyalty, or do you instead have memberships to several airlines programs so you earn miles on whichever airline you happen to fly?
One of our readers said, “Customer loyalty is measured in what the customer does (e.g. repeat purchases, referrals), not by hanging around on a company's ‘Active’ customer list.” Customers who join loyalty programs aren’t necessarily loyal or valuable. As Chris and Liz said, if you don’t consider this when you design your loyalty program, the program may actually cost you more than it will benefit you.
A fundamental goal of a loyalty program is to keep and grow profitable customers. Accomplishing this goal requires insight into customer value (including at least a rough understanding of cost to serve at the customer level, not just at an aggregate level). And while there are exceptions to every rule, it can be argued that many loyalty programs do not yet have a firm grasp on customer value. Earlier this year, 1to1 Media, Carlson Marketing and Mulberry House Consulting conducted a 1to1 Customer Loyalty Survey of several hundred loyalty marketers. Only 12.7% of respondents strongly believe that their companies engage in activities to distinguish between customers they wish to develop and those they do not. In other words, loyalty marketers have more work to do in order to focus their program (and resources)on keeping the customers who are most valuable today and growing the customers who have the potential to become high value in the future.
Without a deeper understanding of customer value, loyalty programs run the risk of equating a loyal customer with a profitable one. For example, just because Customer A has a long-standing tenure with a loyalty program, has a high purchase frequency or reaches a certain revenue target does not necessarily mean that Customer A is profitable. It could be that Customer A's cost-to-serve actually exceeds the revenue he is bringing in (e.g., a high number of call center inquiries year over year). If this is true, then the loyalty marketer might be wasting valued resources on keeping an unprofitable customer in the program. Thus it's conceivable for a program to have lots of loyal customers, but not necessarily profitable ones. However, armed with better insight into customer value, the marketer can focus resources on keeping and growing customers that are both loyal and profitable.