The relationship between the 21st century customer and their favoured merchants is a complex one. It was never straightforward, and events over the past fifty years or so have complicated it still further - although at the same time providing new ways of nurturing it. Over this time the face of marketing has changed beyond recognition. The 1950s and 1960s saw mass marketing at its peak. After the austerity of the war years, stores filled up with goods that consumers bought enthusiastically. But mass marketing had its disadvantages. It was almost totally untargeted, making it both costly and wasteful. It was indiscriminate, attracting as many 'cherry picking' customers as good customers. It depended on one-way communication: no feedback was received and no relationship was formed. This article is copyright 2018 The Best Customer Guide.

Then they were all squeezed from another side. In some countries, retail space was growing at a faster rate than the population, which meant that it became more difficult and more expensive to attract new customers. In some of the major sectors discounters moved in, drawing yet more customers from the high street retailers. Suddenly, it made sense to retain regular customers rather than simply relying on new ones turning up. But how could organisations with thousands or even millions of customers apply the principles of mom and pop marketing to their massive empires? Well, once the case for the value of nurturing loyal customers was made, it began gathering momentum.

Way back in 1990, The Harvard Business Review printed an article entitled 'Zero Defection: Quality Comes to Services', which eloquently argued the case for increasing profits by decreasing the rate at which customers defect. By retaining just 5% more of its customers, the article showed how a company could almost double its profits. Furthermore, in a period of only five years, a firm with a 70% customer retention rate will have lost 2 - 3 times as many customers as a firm with a 90% retention rate. It pays to engender loyalty.

Is a loyalty programme the right answer?
So what can a loyalty programme actually achieve? Loyalty programmes are known for some of their more obvious effects - such as increasing spend (and therefore customer lifetime value), and better retention - but they can also achieve a number of other things that impact the company's business strategy, operational efficiency, human resources policy, and more. For example: customer acquisition, up-selling and cross-selling, intelligent deselection (getting rid of unprofitable customers), winning back defected customers, selection of new outlet locations, reducing advertising costs, stock planning and merchandising, getting competitive responses right first time, setting pricing policies, building lasting relationships, and enabling true 'best customer marketing'.

What is customer loyalty?
Customer loyalty is something of an abstract concept - there is no single complete definition of it. It comes in different types and different degrees. Customers are loyal or otherwise for many different reasons: some are loyal from choice, some are loyal because both parties have invested time and effort in building a relationship, while some are loyal because their needs are met or exceeded, and others because the relationship is profitable to both sides.

A number of factors play a part in influencing the loyalty and the commitment of customers, such as the quality and value of your core offering, levels of customer satisfaction, 'elasticity' inherent in the sector or product category, other competitors in the market, and even social, demographic and geographical influences.

What about partnering with other companies?
There are un-partnered loyalty programmes, and there are partnered programmes ('coalitions'). Within the partnered category of programme, there are two main types of multi-partner programmes that have proved their value time and time again: true coalition programmes, and single operator programmes that include other partners.

Tesco's Clubcard is an example of a single operator programme that involves other partners. The programme is owned and run by Tesco. However, Clubcard holders can collect points when buying from various partners in the programme, such as Alders, Beefeater, Marriott, and National Tyres. Vidal Sassoon is an example of a redemption partner.

However, for example, Air Miles and Nectar are true coalition programmes. The programme management is independent of any of the partners. The partners have contracts with the operators of the programme to issue and/or redeem the currency of the programme, and only have access to data harvested by the programme through its operator. The aim of these coalition programmes should include:

  • Rapid market penetration
  • Delivery of attractive rewards
  • Being the first in the market
  • Building communication channels

How about using a Payment Card for loyalty?
These kinds of programme - called Co-Branded or Affinity loyalty programmes - are usually based on a credit card, and burgeoned in the 1990s. But, while they are still popular with consumers and card issuers alike, the market in some regions has become somewhat mature.

A co-branded card is a the result of a partnership between an issuing bank and a co-branding partner which could be any commercial organisation (such as an airline, automobile association, retailer, insurance company or motor manufacturer).

An affinity card is similar except that the partner is not a commercial organisation, but is generally a non-profit making organisation like a club, association, charity or professional body. The affinity group itself benefits from extra funds, as a fee is usually paid for each member who enrols for a card, and then a percentage of each transaction's value is also garnered. Most importantly, affinity cardholders feel good because they are positively helping a cause close to their hearts, so they are likely to use the card in preference to other cards they might have.

Best Customer Marketing
Best customer marketing (BCM) is all about directing the major part of your marketing budget and effort toward your best customers - those who bring you the most profit. To many, the principle sounds obvious - perhaps too obvious to even discuss.

So why, in reality, are so very few companies actually practising best customer marketing effectively? Well, best customer marketing is not a new concept - it has been practised since marketing began. It was the cornerstone of the 'mom & pop' stores that were so prevalent until the 1950s. It's plain common sense: look after your best customers really well because they are the ones who generate the most profits. But, in order to identify the best customers, you need customer data. That was easy in the mom & pop stores: the staff knew all the customers personally, knew what they bought regularly, could anticipate their needs, and could reward those who generated the most profit. But in order to identify best customers today, you need customer data, and you need to market to them accordingly.

How can we measure a customer's value?
We know that, in theory, building customer loyalty increases profits. But how can we measure how effective it is in reality? How can we predict the effect an investment in loyalty will have on the future of the business? While no method can ever be perfect, measuring loyalty's effect on Customer Lifetime Value (CLV) is one of the best - and most accurate - ways, particularly if the management wants to maximise customer profitability during the whole of each customer's life cycle with the company.

The increased interest that managers have shown over the past decade or so in loyalty databases, transactional CRM systems, 360-degree customer views, data warehouses, and data mining and analysis is a positive development. Having such a system in place provides essential data that can be analysed to provide better business intelligence and decision-making support.

There are many business models that can be used to get an overall picture of the kind of relationships and correlations that form the basis of CLV calculations, such as the powerful 'Predictive CLV' calculation, which shows the financial advantage and power that Predictive CLV offers. Among the dozens of key business areas that can potentially benefit from CLV-based segmentation and anaysis are things like:

  • Production rationalisation
  • Mass marketing
  • Market share
  • Quality management
  • Service management
  • Relationship management
  • CRM

What's the bottom line for the customer?
Clearly the human aspect of loyalty programmes is of paramount importance. Loyalty and even satisfaction are human emotions. Actions that might make one person loyal could well repel someone else. Even worse, something that might engender feelings of loyalty in someone on one day might be the last thing they want on another day.

So can a loyalty card really create loyalty? Well, loyalty cards are just one element of the overall shopping experience, rather than the prime reason for choosing a particular store, while factors such as price, quality, service, and convenience contribute more to fostering loyal shoppers, according to consumer research food and grocery think-tank, IGD. For the majority of loyalty card users in IGD's survey, the card itself was not the key driver in store choice, and shoppers considered it as a 'nice to have' extra. However, those who said they use them regularly also said they see a clear value in doing so. In fact, if the loyalty programme leads to better service and a strengthened relationship, then yes, loyalty is often engendered and nurtured, and the results are higher spending and more frequent visits. Research over the years has show a variety of both loyal and disloyal behaviour - for example, the top three reasons for joining a loyalty scheme have been cited as:

  • Benefit of being rewarded for products and services frequently used (54% of consumers)
  • Greater discounts on products and services (49% of consumers)
  • Special member-only perks (42% of consumers)

What rewards should we offer?
Reward drives behaviour. We teach our pets how to behave by rewarding them when they behave correctly, and by not rewarding them when they don't. Reward the behaviour that you want and don't reward the behaviour that you would like to discourage, and behaviour will follow reward - within reason.

But, paradoxically, while a big reward reinforces desired behaviour better than a small reward, when rewards are discontinued, those who have received big rewards are more likely to return to the old buying pattern than those who received small rewards. So the warning is clear: never, ever let your best customers feel that you are withdrawing privileges from them.

It follows from this that the reward is a crucial part of any loyalty programme. It has to be desirable enough to change the behaviour of customers. In fact, if the reward is really well chosen, it will be attractive to the target group of customers, and not attractive to customers who are not really valuable to the business. It also has to be affordable, and balancing the two sides of the desirability/affordability equation is tricky.

What data should we collect?
Many of the benefits of creating and operating a customer loyalty programme, or implementing a customer relationship management (CRM) system, come from the collection, analysis, and use of data. The more data we can practically use, the better: customer demographics, preferences, lifestyle and life stage, transaction history, returns, and even customer service event history.

The loyalty programme gives us a way of identifying specific customers, and tying their demographic records to their transaction records in the back-end database (whether that be an in-house collection of databases, an enterprise-wide CRM system, or some other data warehouse that's being updated, analysed, and used across the whole business).

Business intelligence starts with data. The uses of the resultant data, given all the technologies that are now available to analyse it and turn it into useful support for business decisions, are potentially endless. There are, of course, many uses that customer data can be put to, including (to name a few):

  • Customer behaviour profiling
  • Customer lifestyle & demographic profiling
  • Customer product preferences and repertoire
  • Customer targeting and differentiation
  • Best customer marketing and win-back
  • Product category relationships & cross-selling
  • Planning and merchandising
  • Online shopping suggestions
  • Pricing policies

Armed with the above, you should have enough questions - and hopefully your own answers - to start deciding how best to use the spectacularly successful Customer Loyalty phenomenon to your business' advantage.