As a company progresses through the various stages of growth, marketing strategy often evolves from customer acquisition to retaining the customer base. At that critical transition, many companies fall prey to following strategy with bad economics. The challenge becomes how to decide how much your customer loyalty is worth to you.
Bad economics arises from a few common pitfalls that can be avoided:
Misjudging the value of loyalty can bleed your company to extinction – The purpose of developing loyalty program is to increase your company valuation. That is, every dollar spent on loyalty should result in more than a dollar in revenue creation for the company. If not, your company is heading towards extinction. The cost benefit analysis should be performed holistically, including all fixed costs of resources used. Measuring the impact on revenue is one of the most complex valuation exercises, since it is difficult to isolate the impact of the loyalty program. This exercise should be performed on a granular level, analyzing changes in customer survival rates, average ticket size of purchases, and purchase frequencies.
Loyalty programs targeting your entire customer base breeds disaster –It is important to understand your customer base and how they contribute to your company earnings. Chart out in a histogram to determine the distribution of “dollars earned per customer” - the distribution will tell you if your company has a natural segment worthy of loyalty marketing. If you determine your customers follow an 80/20 (i.e. 20% of your customers make you 80% of your earnings), 90/10, or 70/30 distribution then you have a natural segment worthy to target. By focusing on that 10-30% of your customer base, you significantly reduce marketing costs and focus on the most profitable segment to retain. If not natural segment is found, perhaps loyalty marketing is not suitable for your industry.
Following competitor’s strategy will increase your costs – Companies going through the exploding phase of growth often forget that their success was due to the unique product/idea they created. During this critical phase, companies fall prey to copying competitor’s strategies. This is bad, because it commoditizes the strategy. Once a commodity, you need to keep on fighting on the ‘price’ of the loyalty program to keep your customer’s happy. We don’t need to look any further than the credit card industry with its cash-back rewards. To maintain competitive rewards, card companies continue to increase the cash-back bonus, which in turn erodes their bottom line and profitability. One wonders if they are following ‘survival of the fittest’ strategy or their rewards offering is based on careful study of loyalty economics. Think outside the box, evaluate your core competencies and create a loyalty program that adds to your unique value proposition, further differentiating your company from the masses. And, most importantly know the minds and hearts of your consumers to excite them with what they perceive as ‘value’ when creating your loyalty program.
One size fits all loyalty will create bad economics. Know which segment of your customers to target and carefully monitor how your loyalty program contributes to your business value. The innovative spirit that made your company succeed should be brought to your loyalty strategy to help you create unique value proposition to your consumer.
