The Loyalty Ecosystem

In nature, ecosystems are dynamic. The denizens of an ecosystem don’t simply live peaceably side by side; they exist in symbiotic harmony. They benefit, interact with and feed each other. And to survive, ecosystems adapt to change. Because of these characteristics, an ecosystem is the perfect metaphor for a customer loyalty strategy.

High-frequency merchant environments with consumer loyalty programs are perhaps the strongest customer ecologies. They teem with customers, products and purchases, all leaving their imprint on the loyalty biosphere. Customers who use your services every week instead of once a year represent a profound opportunity to redefine how you go to market by building an ecosystem based on insight into your customers’ needs as derived from analysis of purchase behavior.

Given the advances in loyalty value propositions, database design and analytical techniques, these retailers have unprecedented opportunity to join with their partners in the packaged-goods industry to implement best-in-class enterprise customer-management programs. Retailers can develop in house solutions or partner with an outsourced service provider.

Your own optimum path will depend on your organization’s strengths and your ability to invest ahead of the curve. To create an information and segmentation structure that makes your loyalty ecosystem come alive, consider these best practices:

1. Understand your segments
Every customer-management system starts with analysis to develop comprehensive customer insights. What are your customer segments and their current and potential value? What profitability drivers will truly impact your ROI? What categories of products do consumers buy?

With most transaction analysis, it’s easy to understand who’s coming in and what they’re buying – what’s more difficult to understand is why. What product and service solutions do valuable customers seek? Can we identify life stages and lifestyle elements by virtue of customer activity? Does the store format or layout itself reveal activity based on need?

To answer these burning questions, implement segmentation dimensions that make sense for your business model and provide the foundation of relevant communications with your most valuable customer groups.

In the kitchen and food categories, for example, best-practice companies employ sophisticated proprietary models to determine which items define, say, a “kitchen connoisseur” segment. What purchases signal cooking aptitude?

These models are able to score items according to their fit and value to this particular segment; for example, high scores for fresh ingredients and low scores for prepared foods.

To validate this approach, conduct extensive consumer research and market tests to definitively prove the accuracy of your behavior-based segmentation models in identifying consumer needs and lifestyles. For example, you can use consumer research to demonstrate that the “kitchen connoisseur” is much more likely to agree with statements such as “I love to try new recipes weekly.”

More important, extensive market tests definitively prove that customizing content and messages to focus on relevant products and solutions drives dramatically higher response rates and increases the profitability of direct communications to this segment. This model of testing and analysis has demonstrated real-world success in using customer transactions to predict purchase behavior.

Continue to test and to hone your scoring methodology over time. Because consumer behavior changes, the best retailers consistently update their models to segment shoppers on multiple attributes that create a true 360 view of the consumer. This life-cycle regeneration keeps the loyalty ecosystem vital and fresh.

2. Segment ahead of the curve
Expert analysts can take this approach a step further and build segmentation strategies by identifying changing needs in some cases, before the customer is even aware of the need. What offers can you deliver that anticipate what products a consumer might purchase for the first time? This approach creates symbiosis by returning emotional value to the customer.

Here’s an example from the grocery world. Maria and Joe are married and are loyal, high-value customers. Every time Maria shops for groceries, her food choices tell a story. As Maria begins substituting her regular purchases with healthier alternatives, you can now identify her as a high-potential customer in the “health-conscious” segment.

What you can’t know is that, six months ago, Joe suffered a minor heart attack. By using needs-based segmentation, Grocer A is now able to change the content and offers that Maria receives. She still gets tips and recipes based on her past shopping behavior, but she now also receives significantly more offers for heart-healthy products.

But that’s not all. Since you know what other products “health-conscious” customers purchase regularly, you can now introduce Maria and Joe to additional relevant products and categories that can both drive incremental sales and enhance the emotional connection to your brand.

3. Enhance the customer environment
Another important element of the loyalty ecosystem is the customer experience. Is your retail biosphere designed to grow the quality of your customer relationships? Needs-based segmentation offers a solution. Suppose your segmentation analysis reveals a significant index of convenience purchases. The “time-starved” segment makes up the lion’s share of your most valuable customers. Why not design cross-functional strategies to drive a better experience for customers who aren’t going to spend a lot of time impulse shopping?

Make no mistake: this level of detailed transactional analysis, customized communications and experience management will increase your marketing costs. But your investment will drive two significant results: strong emotional resonance with consumers who will perceive that you’re paying attention to them, and strong incremental margin per offer. For example, one of our clients achieved a 113% increase in profitability of a direct-marketing initiative by providing targeted, relevant content vs. a control group that received generic content.

Who can argue with those results? Within the loyalty ecosystem, needs-based segmentation is a triple-win: it creates relevance, builds relationship value and drives profit into the business. Such a retail environment, one that balances mutual benefit and fulfills mutual need, one that nurtures and adjusts dynamically, will elevate your loyalty efforts from mere programs to customer-centric ecosystems that thrive in the business biosphere.

Bryan Pearson is president of Alliance Data Loyalty Services.

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