Developing a Basic Loyalty Strategy

Mar 07, 2007 1:51 AM  By

Because customer loyalty tends to lead to retention and advocacy, it’s not surprising to find that loyalty programs are on more retailers’ roadmaps than any other marketing technology project, according to Aberdeen Group’s Clicks to Customers report. With all these new entrants into the world of loyalty marketing, the need for guidance on loyalty strategy is more important than ever. Here’s a simple yet effective framework that can help you structure your initial loyalty efforts.

Segment your customers
First, look for two good predictive indicators of customer value. It’s okay if you don’t have solid research to back up your assumptions; you have to start somewhere.

Each business will have its unique approach to this process. For some, it could be as simple as proximity (e.g., customers within two miles of a location are far more likely to be good customers than those farther away). Or it could be purchasers of a category (e.g., buyers of digital cameras make up a disproportionate number of high-value customers, because owning the camera leads to so many additional purchases). The goal is to find the wedges that separate your great customers from your average customers.

Grid your customers
Now create a grid, with each box in the grid defining a segment of customers. Your strategy will be built around addressing the needs of each box in the grid.

Spend the time to describe the profile of each of these segments, including such elements as the customer experience across all channels, the time spent interacting with each channel, the estimated media consumption, the percentage of revenue, and the drivers of choice. The goal is to get inside the head of each segment and understand its needs.

If a group is too small, changing the members’ behavior will not drive revenue or income, and you will have wasted time and resources. So reevaluate your segmenting schema until you have groups that are large enough to matter.
One caveat to this last point: If your organization is sophisticated enough to manage a large number of segments, by all means keep the smaller groups.

Set objectives for each segment
Now that you’ve developed a basic segment profile, develop the loyalty objective(s) for each segment. The key here is to determine what changes in behavior are most advantageous to your company. This could be increased frequency, more units per transaction, increased retention, increased referrals, or one of many other value-increasing objectives.

An alternative is to focus on increasing behavior that is expected to correlate with value increases, such as increased use of reminders, registrations for e-mail, applications for a credit card, or attendance at a seminar.

The objectives for each segment could look very, very different. That’s just fine. Don’t worry how your loyalty efforts will tie them together just yet. Focus on developing the right objectives that, if reached, will make a significant impact on your business.

Develop strategies to accomplish each objective
Now comes the fun part: Figure out what it will take to reach each objective. My personal preference is to use an if-then hypothesis model to document the strategy. For example, “If we incorporate a large benefit for reaching a particular number of reminders, then more customers will use our reminder system.”

There are many ways to reach each objective. Documenting more than one is helpful in the next step, but prioritize the strategies based on potential for success and return on investment.

Tie it all together
At this point, you have a one-page summary of everything your company should try to accomplish, along with a set of methods by which you will accomplish them. If you are lucky, the methods are very consistent, and you can impose an overall strategy that is a cohesive rollup of the low-level strategies.

But most companies are not so lucky. Shaping and forming these low-level strategies into a general strategy for loyalty may take serious ideation, iteration, research, arguments, outside help, and/or flashes of brilliance. The difference, however, is that you have a scorecard against which to evaluate your ideas. Your overall strategy will probably consist of three or four of the now-ubiquitous if-then statement, and must accommodate or enable the majority of the ideas on your one-page summary.

Next steps
Add your overall strategy as the introduction to your one-page summary, and you are all set to start on a program structure that delivers on the strategy. You can use the one-pager to communicate internally and build support for your effort and to evaluate potential partners’ expertise in program development. That, in fact, is the subject of next month’s column. For now, take a couple of hours to go through this exercise and see if it improves your ability to move forward with a cohesive loyalty strategy.

Michael Greenberg is vice president of marketing for Loyalty Lab, a San Francisco-based developer of customer loyalty programs for the retail industry, and writes a monthly column for “Chief Marketer,” a sister publication of MULTICHANNEL MERCHANT. He can be reached at Michael@LoyaltyLab.com.

Other articles by Michael Greenberg:

The 10-Year Customer

Empowering the Lonely Loyalty Champion

Microsegmentation for Macro Returns

Balancing Visible and Hidden Relationship Programs

Evolving Loyalty: How to Stay Current

The Best Marketing Investment You Can Make

The Case for Simultaneous Concept Testing

Planning for the Coming Online Standard

Objectives Are Everything

Why Do You Have High-Value Customers?

Build a Fence Around Your Customers