Don’t Cut All the Carbs

The low-carb diet craze is losing momentum. Unfortunately, this is not the case in the business world. As companies realize the spectrum of benefits associated with a loyal customer base, the inclination to focus on loyalty-building shortcuts make low-carb-like strategies more popular today than ever.

Developing an effective customer loyalty program requires that the following essential “carbs” be included in the process:

• Customer information
• Analysis
• ROI
• Balance

Customer Information

True customer loyalty is a bond that goes beyond retention and leads to customer advocacy. But you can’t even begin to develop this emotional tie with customers if you know little or nothing about them. Therefore, to design a loyalty program that will go the distance, it’s necessary to bulk up on customer information right from the start.

There are many places useful customer data can be found in an organization. These include:

• Proprietary credit card transactions.
• Online purchases.
• Point-of-sale phone number or ZIP code capture.
• Existing loyalty programs.
• Rebates.
• Product and warranty registrations.
• Customer service interactions.
• Demographic appends
• Market area data.

Delving into customer data will provide answers to key questions that ultimately will become the loyalty program’s foundation.

Some of these questions might be:

Who is your target audience? Allegiance can’t be built with everyone. Therefore, it’s necessary to identify customers whose loyalty will generate the greatest short- and long-term value to your company. Using your customer information to understand what current potential high-value and high-growth customers look like will identify your target audience and assist in the development of a loyalty program that has the best chance to appeal to that group.

What behavior should be motivated? The principal goals of loyalty programs are to 1) retain customers, and 2) build long-term allegiance. However, there are other, more granular business needs that, if met, can play a key role in fostering customer loyalty. Identifying these needs typically involves an analysis of key business indicators. Specific metrics to highlight the areas of your business in need of improvement include:

• Frequency of transactions and/or interactions.

• Purchases across multiple product and/or service categories.

• Trends in spending or investment levels.

• Elapsed time between purchases or transactions.

• Acquisition and activation rates.

The results of these analyses then become the baseline metrics for measuring program performance moving forward.

What form should your loyalty program take? Should there be a fee to join? Should you launch a points program? What benefits will appeal to the target audience? These program design questions can be answered once you’ve identified your target customer and the behavior you have to motivate. It’s critical that these determinations be made before designing the program structure. If you overlook them, you run the risk of rolling out a program destined for failure.

Analysis

Building customer loyalty is a continuous process requiring long-term commitment and effort. Over time, competitors come and go and customer perceptions shift. Consequently, perpetual analysis of customers’ behavior, their attitudes, and the changes in the competitive landscape are imperative to ensure that your loyalty program continues to be effective and financially viable.

Multiple levels of analysis should be a regular part of your program regimen.

These include:

Performance against baselines. It’s important to analyze how well your program is performing against the baseline metrics identified during program design. You will need this information to determine if program design modifications are needed and to quantify the program’s return on investment.

Performance against objectives. This is the litmus test for all marketing initiatives. And while building customer loyalty is an evolutionary process and not easily measured in the short term, progress in meeting the other business needs identified during planning should be frequently assessed. Positive performance often is an early indicator that your loyalty strategy is effective at strengthening customer relationships and driving toward loyalty.

Test scenarios. Ideally, all communications and promotions supporting your program will have embedded test scenarios. Analyzing the results of these tests will enable you to learn more about your customers, how they respond, and what motivates their behavior.

Marketplace. To keep pace with changing times, it’s important to periodically analyze what’s going on in the markets where you conduct business. Identifying demographic shifts and monitoring the competition will provide information that’ll help you respond to changes in a timely manner.

ROI

Even if your performance against baselines is fabulous, if the costs associated with generating those results exceed the incremental lift in business you won’t be able to sustain your program for very long.

When calculating ROI you have to consider both the short- and long-term impact on your business. Specific factors in the ROI equation may vary by company, but some examples follow.

Account for all costs. This includes hard costs such as production of collateral, awards, advertising, and direct communications, plus soft costs like those for dedicated staff, the Web site and the sales force.

Calculate incremental value. This determination usually is based on an extended period such as six or 12 months. It includes measuring the cumulative growth or decline of customer behavior vs. baselines as well as any control groups that have been created.

Determine the effect of retention. Even if key customer metrics have remained the same as the baseline measures, any improvement in customer retention rates must be considered and the value of those retained customers included in the ROI calculation.

Balance

Programs that feature high-value rewards such as discounts or points accumulation for rewards can be very appealing to customers but quite costly to maintain. Conversely, non-tangible rewards such as vaguely defined members-only events won’t break the bank…but are not very effective at motivating customers, either. Striking a balance is critical to your program’s success and your ability to sustain it over the long haul.

Likewise, programs must include a balance of immediate gratification and long-term benefits to maximize impact. Programs that focus primarily on short-term rewards are usually ineffective at driving long-term behavior. And programs that feature only long-term benefits tend to bore customers because of the extended time required to realize any benefits at all.

Finding this balance between immediate and long-term rewards and hard and soft benefits is directly related to understanding your target audience, the behavior you need to motivate, and your current baseline measures.

Structuring a program that demonstrates short-term and long-term value by rewarding specific incremental behavior rather than business-as-usual behavior is key. And identifying soft rewards that will resonate with your target audience also will help you achieve this balance.

These “carbs” are essential building blocks of successful loyalty programs. They provide the necessary sources of energy so your program can endure over time. Reducing or eliminating them from the planning process may enable you to quickly get a program up and running and even possibly see some encouraging immediate results — but these results will be short-lived. To build true customer loyalty, you have to be prepared to go the distance. There are no quick fixes. There are no shortcuts.

Vicki L. James ([email protected]) is the director of strategic consulting services for NuEdge Systems in Brookfield, WI.