Is the “Customer Insight Gap” Limiting Your Loyalty Program ROI?

As seen in Loyalty Management

Most companies spend a lot of time and money figuring out how they want to configure their loyalty program. Should it be points-based? Do we offer redemptions through partners? When should accrued-value expire? These are all critical drivers of success when designing your program—and most companies do a good job in this area.

But once the program is up and running, most companies miss a major opportunity to increase program ROI. The problem is this: too much focus on program results and not enough on customer results.

All loyalty programs track metrics such as total members, number of active members, total liability, point redemption rate, recruitment program performance, etc.—and these are critically important to understanding the health of the program. However, they provide little insight into how to change the customer dynamics of the program to improve program ROI.

We call this the “Customer Insight Gap.” And it can only be bridged by asking different questions from the ones you are currently asking—and then using the answers to change how you manage your loyalty marketing program. For example:

Instead of Just Asking: Ask This:
How many customers are we enrolling? Are we enrolling the right customers?
How many customers are active? What does customer migration look like?
What is our current liability? Are we over-discounting to some customers?

There are many more customer-centric questions we could ask, but let’s explore how just asking these three questions can help lead to better ROI for your loyalty program.

Are We Enrolling the Right Customers?

With apologies to Thomas Jefferson and the Declaration of Independence, the truth is: not all customers are created equal.

Most companies are aware of the 80/20 rule (80% of your revenue is generated by 20% of your customers). But did you know that the top 20% of your customers typically generate more than 100% of your profits? This means that your best customers actually subsidize your weakest customers—the ones who use up a lot of your marketing budget but don’t spend a lot in return. And your poorest customers actually have a negative ROI.

While these customer truths are less severe within a loyalty program (which naturally draws in your better customers), it is still the case that program ROI can be improved dramatically by shifting your member recruitment focus from “getting the most customers” to “getting the best customers.” Remember: when your goal is to maximize the number of customers you bring in, you are inevitably going to bring in a large number of customers who turn out to be unprofitable—and that will be harmful to the ROI of your program.

“Most companies miss a major opportunity to increase loyalty program ROI. The problem is this: too much focus on program results and not enough on customer results.”

The first step towards making this shift is to fill the insight gap on customer profitability within your loyalty program. A bit of advice: don’t over complicate this. You are just trying to differentiate between customers, not create a new accounting process. Here’s the basic process:

1. Estimate customer profitability by subtracting total marketing costs from total revenue for each customer (for the past 1 or 2 years, depending on purchase cycle)

2. Pull out the most profitable customers (top 20%)

3. Perform a demographic profiling exercise (the off-the-shelf cluster profiles like Prizm or PersonicX are good for this) to understand what your most profitable customers look like and where they are coming from

4. Modify your program recruitment targeting to focus on bringing in members who look like your most profitable members

If you need to convince yourself (or management) that this will be worth it, here’s a tip: once you have your customers ranked by profitability (Step 1), calculate the change in ROI you will achieve by increasing the number of most profitable customers by 10% and decreasing the number of least profitable customers by 10%. It will surprise you.

What Does Customer Migration Look Like?

Loyalty programs are primarily designed to concentrate spending (share of wallet) and lengthen the customer relationship (retention). On average, most of them are successful at achieving these goals to some degree.

Then again, on average most loyalty program results are, well, average. But what else would you expect when objectives are set and results are measured to the average?

This is what we call the Agency 180 Law of Averages: if you define success in terms of average performance targets—“on average, we want to bring in XX,XXX members per month and have them spend $YYY per year for Z years”—you are very likely to achieve average performance.

Breaking out of this “Average” trap requires the same basic strategy (discussed above) in enrolling better customers: understand the differences between customers and then use that insight to develop customer strategies based on where they are in the lifecycle and their potential value. Once you have done this segmentation, you can begin to track how customers are moving from one segment to another over time.

For example, here is a simple customer migration report that shows how customers are shifting from segment to segment over time:

Here’s how to read this chart: of those customers who were in the Very High value group in 2007, 50% stayed in the Very High group in 2008, 23% slipped to High, 13% fell to Medium, etc. Conversely, 15% moved from High to Very High.

The percentages provide focus as to where the largest shifts are in terms of the number of customers, but overlaying revenue onto this chart (average annual revenue by segment) will reveal where the large ROI opportunities lie.

For this client, the most obvious place to start was with customers who lapsed in 2008. In total, this group represented over $130 million in potential revenue that was not realized. This information could possibly lead to the development of a new retention strategy or a lapse/recapture program.

Are We Over-Discounting to Some Customers?

In an effort to keep loyalty program customers coming back, many companies use discount offers and coupons in all (or nearly all) customer communications. On average (there it is again!) it is an effective strategy that drives traffic and purchases.

But there is a price to be paid even beyond the cost of the discount itself, because by constantly discounting you are training your customers to look for and wait for deals—reducing the likelihood that they will buy at full price. What is even more painful is that companies almost always have the feeling that they are over-discounting, but they don’t know how to break the cycle.

There is a way out of the discount trap. First, we need to recognize that not all customers are equal when it comes to sensitivity to discount offers. Some are impulse buyers willing to pay full price; some are “coupon clippers” who won’t buy anything at full price but will buy something they don’t need if it’s on sale (great target audience for clearing merchandise); some are in between. The key is to understand the differences between customers (sound familiar?) and then use that insight to vary to offers based on how sensitive they are to discounts.

A simple way to differentiate is to look at the percentage of total items purchased at a discount for each customer. Another way is to evaluate responsiveness to communications with a discount vs. those without. Once you have done this, you can experiment with replacing discount offers with more relevant product (full price) offers for those customers who appear to be less sensitive to discounts. Over time you will find out the right mix of discount and non-discount oriented communications—and your ROI will be the better for it.

Realizing the untapped potential of your loyalty program starts with asking questions that go beyond the traditional measures—questions that lead to increased customer insight once you have answered them. These insights will enable you to make key changes to your program that in turn drive your ROI higher.

“When your goal is to maximize the number of customers you bring in, you are inevitably going to bring in a large number of customers who turn out to be unprofitable.”

Warning: Invalid argument supplied for foreach() in /home1/a180/public_html/wp-content/themes/mercury121/sidebar.php on line 6

About the Author

Agency 180 on Facebook