Everyone knows the theory of customer loyalty: A business that retains its customers for longer usually makes more money from them at a lower cost than one that is constantly paying to acquire new customers. Actually doing it – the practice of customer loyalty – is not so straightforward though.
Businesses need to be completely aware of the effort, mind shift and potential pitfalls they face when embarking on retaining their customers and driving loyalty from them.
This article is not meant to scare you off if you are thinking about developing a new loyalty programme or refreshing your existing one, it is here for you to be aware of the misconceptions that are being heard in boardrooms all over the world with regards to customer loyalty and how you can ensure that your business doesn’t fall into them.
Customer Loyalty will be our ‘quick fix’
Many businesses see a loyalty programme as something that can simply be bolted on to their existing marketing strategy in the hope that it will stop customers leaving them, get customers to love their brand and buy more of their products and services.
The reality however, is that loyalty is not about points, rewards, coupons, offers, etc., it is about customer engagement and interactions at every touch point throughout your business and therefore the practice of customer loyalty is absolutely not a ‘quick fix’ but rather the destination that your business gets to once it has built up trust with its customers. A phrase that is often used by loyalty specialist is that “customer engagement is the journey and loyalty is the destination!”
Customer loyalty is not a trick that can be quickly learned and performed. Creating loyal customers depends fundamentally on following good and sound customer centric business and marketing practices across the entire business – all the time.
Companies that are successful in this area know that loyalty is built on trust and everyday interactions and not one-off transactions.
Follow these three principles to ensure that your business does not fall into this misconception. Remember that:
- It is a long term strategy – it takes time to build trust and engender loyalty.
- The entire business needs to be bought into putting the customer first.
- Loyalty is about consistent interactions and engagement, not transactions.
Our loyalty solution should appeal to all of our customers.
It is way too costly for businesses to service all of their customers with a single loyalty solution – your loyalty solution should not be all things to all people!
Knowing which customers you want to focus on (the most profitable or most ‘growable’) and how you are going to reward them when they change their behaviour in a way that you would like them to, is the golden nugget to best customer loyalty solutions.
By taking the targeted ‘best customer’ approach, it means that you can direct the majority of your loyalty budget towards customers who can bring the greatest profit to your business.
It can be more profitable to lose bad customers than to gain new ones as they cost more money to service than they generate. This is proven time and time again and is echoed in Philip Kotler’s version of the Pareto Principle, stating that the top 20% of customers generate 80% of the profits, while the bottom 30% of customers eat up 50% of the profits that the others produce.
Designing a loyalty solution that rewards best customers without rewarding the less valuable segment, can be done by grading your rewards (for example, offering extra points for exceeding a specified spend threshold in a time period), customers can be moved up from one spend level to the next. This means that you are rewarding customers who change behaviour in a way that you want, rather than offering all customers the same rewards no matter what their behaviour.
A good example of this is an Irish company who used the best customer tiered approach as part of their loyalty solution and received staggering results in the first year. Their top tier customer’s contribution to sales increased by 33%, the next tier down increased its contribution to sales by 21% and the lowest tier decreased its contribution to sales by 9%. The overall result – higher revenue and levels of loyalty from their best customers and a decrease in loyalty spend on their less profitable customers. So when building or refreshing your loyalty programme, ensure that it is targeted at your best customers first and that you offer them relevant rewards when they change their behaviour.
Here are three tips to bear in mind when refining your loyalty programme:
- Focus on the best customers that you already have.
- Reward them for the change in behaviour, with benefits that are not available to other customers.
- Optimise the profits that can be made from them.
We know what drives loyalty – no need to ask our customers.
Involving the customer in the development and refinement of your loyalty programme and keeping them involved is key to the success of any programme. Not involving customers on an ongoing basis means that your programme could lose customer relevance and appeal, which will result in a high number of signed up members with low participation.
Customers actually want to be listened to, they want their feedback and loyalty to matter, and they want to help shape future developments and be given the ‘inside track’ on what will happen next but often all they get is an expensive selection of rewards and offers that they may or may not be interested in.
Here are three tips to help your business be more pro-active in listening to your customers:
- Set up regular ‘best customer panels’ to test your loyalty initiatives.
- Go to your customer service department and listen to what your customers want and then do everything that you can to give it to them.
- Attend all research groups to get a real understanding of what they feel about your brand.
It is vital that brands pay particular attention to these misconceptions before embarking launching a loyalty programme, as when done correctly a loyalty programme becomes a powerful asset that your business can use to better understand who your customers are, what segments are most profitable to your business, where you can change customer behaviour and what your customers really want from your brand – all while delivering commercial results for your business.
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