COLLOQUY Corner: The Baseline Customer Metrics
There’s one simple reason loyalty programs have flourished in the 24 years since American Airlines launched AAdvantage, the first modern database marketing program: Loyalty marketing is measurable marketing. You can track, report, analyze, and take corrective action on everything you do. You know what’s working, and you know the exact return on investment associated with your program costs. Over time, you’ll realize that the most important difference between loyalty marketing and your other marketing initiatives is the precise understanding of what you get for what you spend.
Loyalty marketing has its own standards of measurement, and each company that launches a customer loyalty initiative has measures of success peculiar to their industry, brand, geographic location, and customer base. You must decide, prior to launch, what metrics are most important to your business. You must then calculate how much each metric needs to change in order for you to make money, and you must periodically report on the progress of each.
In big programs in complex verticals such as travel and financial services, loyalty metrics can get very sophisticated, with companies employing armies of analysts to help measure the financial impact of the program. If you’re not yet ready to hire a roomful of MIT grads to help you crunch your program data, you can start with a few basic metrics that will help you measure program impact on an elementary level and determine a customer’s level of profitability. Such baseline customer metrics include
recency. The first thing you’ll want to know is the date of a member’s last transaction. We call this measure recency, and it’s typically expressed in terms of days or weeks. If 10% of your membership spent money with you last week, you could express your recency goal as “increase by 5% the number of customers who spent money with me within the past week.”
All you need to capture this metric is the date of each transaction. Once per defined period, run a simple report showing the date of each member’s last visit, the percentage belonging to predefined recency segments, and your progress on meeting specific recency objectives. You can then devise specific action plans for each group, especially those that exhibit a change.
frequency. Depending on your sales cycle and the products and services you offer, your customers probably exhibit a fairly predictable set of frequency patterns. The more often customers spend with you in a given time period, the higher their value. Add in the seasonal nature of many companies, and you quickly realize that increasing visit frequency—particularly among high-value and high-potential consumers— is the single biggest reason to engage in loyalty marketing.
Once again, all you need to capture this metric is the date of each member transaction. Once per time period, run a simple report showing the dates of member visits over that period, the percentage belonging to predefined frequency segments, the average frequency per member, and your progress on meeting specific frequency objectives. You can then devise specific action plans for each group, especially those that exhibit a change in frequency patterns.
You can also combine frequency and recency measures into a velocity metric. Members who visit the most often (frequency), and also the most recently (recency) are probably in your highest-value segments. The greater their velocity score, the higher their rate of retention and value.
. monetary value. All loyalty marketers live and die by customer monetary value. You express monetary value in terms of trackable dollars spent by a given customer over a defined period of time; you can look at seasonal, per annum, or lifetime value. The value score encompasses all trackable spending within your business and offers sophisticated operators the ability to break down that spending into various margin contribution categories.
Many marketers, however, fall into a trap that assumes monetary value is the only critical measure of success in loyalty marketing. Consider the following problem. For the sake of this example, pretend that you’re the marketing director of a regional convenience store chain:
Customer A visited your store once, more than six months ago, but brought three friends and paid the entire bill for a party they were having that night. The bill totaled more than $100—a big transaction for a convenience store. You haven’t seen a measurable transaction from him since that day. Customer B comes to your facility every week, has been doing so for 10 straight weeks, including this one, and averages $10 each visit. Assuming each paid the same amount for goods and services of equal margin, which customer is more valuable: Customer A, the one-time big spender, or Customer B, the faithful contributor?
If you look only at monetary value, then these two customers are of equal value to you. After all, they each spent $100 with you. If you take recency and frequency into consideration, however, then Customer B is obviously more valuable. His pattern suggests engagement with your brand. His probability of leaving you for another retailer is much lower than that of Customer A, who may already have left. B’s long-term value to you is much higher.
Of course, these are the most basic measurements of customer behavior, and you can get as sophisticated with measurements as your skill and budget will allow. But knowing even these simple measures of customer value allows you to set the funding rate for your program accurately— ensuring both attainable benefits for members and increased profitability for you. By combining member spending with the velocity measures of recency and frequency, you’ll obtain a more comprehensive picture of who your best customers really are. You can then design marketing objectives that most reflect the needs both your customers and your business. After all, we all must learn to walk before we can run.
Rick Ferguson is the editorial director for COLLOQUY, a provider of loyalty-marketing services.
Copyright COLLOQUY 2007 First rights only
Other articles by Rick Ferguson:
You’re Only As Strong As Your Staff
Dialogue, the Coin of the Realm
The Customer, Not the Payment Type, Is King
The Yin and Yang of Loyalty Marketing
