Designing Data Driven Loyalty Programs
As CRM and analytics systems become more sophisticated, more data will be available to mine for extracting valuable insights that can inform the design of customer loyalty programs. With retention an often undervalued aspect of continued growth, understanding the importance of using data as a tool for crafting retention strategies can create tremendous value within an organization.
1. Gather and mine customer data to determine core revenue drivers.
Most customer data from businesses will end up following the Pareto Principle: 20% of customers will constitute 80% of revenue. By gathering and amassing large amounts of customer data, analyses can be conducted to identify what the real revenue drivers for your business are and consequently, where you should be focusing your efforts. For example, transactional customer data may reveal that while you sell donuts, crepes, and croissants, donuts are really what is bringing in the lion’s share of your revenue and creating the biggest impact on your bottom line. The more data and the better the analysis, the clearer where the company’s focus should be. In “Building a Customer-Relevant Organization” by Deloitte, “The primary lever for improving the relevance and effectiveness of pricing and promotion resides in knowledge about what matters most to key customer segments.”
2. Run marketing experiments to discover cliffs in customer preferences.
Change the way customers make decisions about your products and services by conducting analyses to identify trends in customer behavior and preferences that can lead to specific marketing programs and pricing structures. Understanding the different Lifetime Values of your customer segments is key to developing targeted programs based on the potential worth of a customer to your business. For example, many companies are able to develop Platinum / Silver / Gold membership structures based on identifying potential lifetime values of their customers from databases.
One formula for calculating LTV is taking the the net revenues to the firm each period from the customer (m) divided by a value for the expected retention rate and discount rate of the cost of capital. In other words, the total potential net positive revenue likely to be generated by the customer over a period. Subtract from this the COCA, or cost of acquiring a customer, to get the total lifetime value. Alternate forms of LTV calculations are also available.
Jeremy Alexis provides several extremely helpful case studies in “Using Design To Create Fiercely Loyal Customers” by showing how a combination of favorable economics, distinctive solutions, and emotional connections are foundational in developing sustainable, deeply engaging loyalty programs that create high barriers to entry. (Important point: Contracts can be highly effective pricing strategies, but not necessarily loyalty strategies.)
3. Focus on creating targeted customer aspiration with tiered structures.
Profitably address the unique preferences of different customer segments by identifying ways to appeal to their interests. Reward customers for spending in ways that directly add to what they value. Strategically, developing programs that result in greater perceived value to each individual customer than it actually costs the business is key simultaneously increasing margins and driving higher customer satisfaction. The most classic example includes Frequent Flyer Miles, which cost only about $0.03-0.04 on average, but create immensely powerful psychological value: “One mile closer to my dream vacation in Fiji!”. Cultivating relevant and seemingly achievable aspirations for customers (i.e. Getting into the V.I.P. line at the airport) can be compelling in driving customer behavior.
By customizing the customer service, products, and experiences that different customers get based on their lifetime value to your business is tremendously powerful in being able to naturally help your customers self-select into each group based on their motivations and aspirations. Structured loyalty programs empower businesses to focus on rewarding the top 20% of customers without alienating the other 80% because the levels established are so transparent. It will be far more difficult for a customer to get angry over standing in the long line at the airport when they know that the V.I.P. customers who don’t have to wait have spent over $10,000 with the airline this year. Instead of breeding mistrust and resentment, well-structured loyalty programs improve the relationship a business has with all of its customers by making the rewards and incentives clear. Not only does this improve margins, increase revenue, and provide strong strategic direction, a data-driven loyalty program impacts brand perception, customer sentiment and retention.