Four Steps to Unlocking Customer Value

Welcome to the first in a series of columns by Michael Greenberg, VP-Marketing of Loyalty Lab ( www.loyaltylab.com), a San Francisco-based developer of customer loyalty programs for the retail industry.

Retailers are shifting their focus back to growth. That means looking within themselves for sources of sustainable, cost-effective comp-store improvement. A recent NRF/BearingPoint survey listed comp-store sales growth as the top priority of 71% of retail executives in 2006.

You can accomplish this goal by unlocking the tremendous value that exists in your current customer bases. Starting now will put you in the position to benefit come holiday season 2006, as it takes about six months to gather enough data to segment effectively. Here’s how:

1) Find out who the top 30% of your customers are.
For direct merchants, this is a piece of cake. But store-only merchants need a cross-channel tracking mechanism. Some POS systems let you capture customer information, but this assumes that your throughput is fairly low all the time.

The classic tracking mechanism is a loyalty program, trading a financial benefit for a unique identifier to connect transactions to customers. Luckily the cost of loyalty infrastructure has dropped substantially, so there are newly available choices for most multilocation retailers. Look for the flexibility to use different identifiers by channel and a prebuilt customer data warehouse capability. The tradeoff here is funding vs. capture rate. More funding for benefits, training, and marketing means a higher capture rate, which improves the overall quality of the data your program provides.

2) Find out the difference between the first, second, and third deciles of customers.
This top 30% of your customer file probably accounts for 60%-80% of your sales–and all of profits. Profile and analyze these customers relentlessly. Keep investigating until you find the differences between the top 10% and the second decile.

In a previous life at a large sporting-goods retailer, we found there was minimal difference in preference for the company between our top and second-tier customers. Typical predictive factors were identical, including income, assets, presence of children, distance from store, and gender. After some digging, we found the perception of store convenience (not actual distance) and the perception of price fairness were the only differences between the groups.

3) Segment and communicate based on the differences.
Unfortunately, this means parallel marketing strategies. Mass media should differentiate without alienating, since few companies can afford separate campaigns by target segment. But use targeted media to tell different stories to each segment. Be consistent, and automate as much as possible. Customers will self-select into different segments based on their behavior, so you simply need to track it. A decent campaign management system, whether combined with e-mail or as part of a larger customer management solution, is key to ensuring that segments receive the appropriate messages.

4) Test and streamline.
Don’t skimp on measurement and analysis. Some ideas will work, some won’t, so measure sales and response results and iterate. Don’t be afraid to reduce quantity per message in order to improve ROI and free up dollars for more messages.

Eventually the results will define the bounds of creativity. For example, testing may show that direct mail must have four items on the cover plus a preview day for best customers, no matter what the subject. Or your e-mail must have a reference to a well-known vendor in the subject line to ensure that it gets opened. Here’s where a good analyst is critical, either on staff or as a consultant. The analyst can design the appropriate control group strategy, analyze results, and prepare recommendations for operational changes.

Results won’t show up overnight, but the process takes far less work and money than you might think. Plan your contact strategy and media mix up front, identify the gaps in your current capabilities, then find a provider that can fill the holes. Unless your IT department is like no other–uncommonly flexible and open to change–an integrated solution that reduces the number of integration points will be an easier internal sell. Stay focused on getting the tools you will really use, follow these four steps, and comp-store growth will follow.