Maximizing Your Loyalty Return

Many managers and executives will tell you that in order for a business to run effectively, there needs to be measurable objectives set for the business.

In this respect, loyalty programs should not be any different than any other area of your business.

Program Objectives

But first, let's take a step backwards. If you currently have a loyalty program, do you know what your program's objectives are? We believe that there are three objectives that form the basis for any good loyalty program.

• The first is knowing who your customers are.
• The second is understanding what is important to your program members.
• The third is delivering the communication, rewards and benefits that are important to your members.

These three items create a business strategy for your organization: Taking that information gathered and using it to influence customer behavior to make them more loyal, and growing your share of their wallet to provide incremental revenue growth for your business.

Taking Action (Part 1)

But what actions should you take to achieve the objectives that we outlined?

Knowing
To know who your customers are, you have to find a way to collect data about your customers. This can include demographic and general transaction data. This can be challenging without some self-identifier, which is what a loyalty card program brings to you, and what the old-school punch or stamp card loyalty programs cannot bring to you.

Understanding
A key part of understanding your customer base is to ask them questions about their preferences. Collecting preferential data when members sign up for a program should be a key component to any registration process. You could also follow-up this individual data with focus groups or surveys to get additional information about overall preferences.

Delivering
Third, you want to find the most efficient way that you can deliver communication about the rewards and benefits to your customers. You also want to find an efficient way to deliver the rewards and benefits themselves. The idea of real-time rewards and redemption for your program is an important idea, not only for the instant gratification of the program members, but for the lower costs of not having to support a call center and warehouse to fulfill the rewards.

Measuring the Results
Now that you've gathered all this information, what are you going to do with it? In order to understand which customers provide value to your program, and which customers you would like to move to more profitable segments. A common way to evaluate your program effectiveness on segments is through RFM analysis.

For those of you that aren't familiar with RFM analysis, it is comprised of three measurements:

• Recency - When the customer last purchased from your business in the analysis period
• Frequency - The number of customer visits with purchase in the analysis period
• Monetary value - The total amount spent during the analysis period

All customers are ranked from highest to lowest for each of the three metrics, and then split into equally-sized segments. The combination of each of the three segments creates many unique segments. For organizations with large customer databases and solid database management teams, these groupings are often created at the quintile (5x5x5) or decile (10x10x10) level, creating 125 or 1000 different groups. However, several noted authorities in the loyalty field have recently argued that you can do an effective job of this type of segmentation in a 3x3x3 segmentation creating 27 cells, or even 2x2x2 segmentation creating 8 cell matrixes.

Now we get to the real meat of your loyalty program: Reinforcing the behavior of your best customers with rewards and benefits, while working to change the behavior of the customers in the lower groups.

Because you have done research about what your customers want as part of answering the questions at the beginning of this article, you know how to reward them. It just takes the time to tie those rewards together.

For example, you could encourage your top tier customers to continue their spending with you in order for them to keep some of the benefits that you have given them in the past (airline programs are a good example of this). Your middle tier of customers could be nurtured to move into the higher-potential category by using a points multiplier to reward increased spending frequency with your business. And for your bottom tier of price-sensitive customers, you could make a come-back offer to see if you could get one or two more visits out of them.

Additional benefits of doing RFM analysis include:

• Helps to trend sales
• Helps to trend retention rates
• Helps to plan targeted marketing investments towards customer groups - reduce costs while keep effective marketing levels
• Helps you understand the effectiveness of your marketing campaigns by doing post-campaign analysis on each RFM group to see what the effects are.

The Results
So what will this mean for your program? By performing targeted, real-time loyalty marketing towards the high potential customers from your RFM analysis, you ensure that the investment made now will pay off during the life of the customer. Ultimately, this results in a higher customer life time value, and a more profitable customer.

Second, as you are now targeting customers with an offer that is appropriate to their value to your business, you should see a lower defection rate for your high and mid-tier customers. This also allows you to build and grow the customer segments that you know are worth something for your business.

By marketing directly inside your loyalty program to the customers that you know are valuable to your business, you can achieve efficiencies that cannot be achieved through general mass marketing. And by moving more of your program members to the desirable upper-tier categories, you have created a more profitable and fruitful relationship for both you and your customer.

• Gift Cards - A great way to attract new customers and encourage them to buy more while reinforcing your corporate brand.
• Real-Time Points Loyalty - Helps you identify your most valuable customers and reward them at the point-of-sale.
• Promotional Tool Kit - Grab customers' attention with customized receipt coupons, personalized receipt messaging and sweepstakes.