Key Concepts of Loyalty Marketing
In the U.S., and increasingly in other countries as well, loyalty marketing has become a key element in many companies’ marketing mix, because it has proven to be measurable, and measurably effective. In fact, many companies have shifted large portions of their marketing budgets from mass-market advertising to direct marketing generally and loyalty-marketing programs in particular.
There are several key concepts underlying the design and execution of loyalty-marketing programs.
- Lifetime Value of the Customer In the past, marketers used a transaction model when analyzing customer purchases: What is the revenue and profit effect of this purchase? The new model calls for viewing customers–actual and potential–on the basis of their expected purchases over the course of their lifetimes. A business traveler, for example, could spend more than $500,000 on airline ticket purchases over his or her lifetime. This long-term perspective is largely responsible for the new emphasis on “relationship” in today’s consumer marketing.
- Share of Customer In the context of a long-term relationship with a customer, loyalty marketing seeks to maximize the share of the customer’s category spending over a lifetime of purchases. Hilton Hotels, for example, might set for itself the goal of capturing a 75% share-of-customer among current users of its hotels. That means that current Hilton customers (as identified and tracked through the company’s frequent stay program) would choose Hiltons 75% of the time, for as long as they continue staying in hotels in the Hilton competitive set or product category.
- “Cost-to-Retain” Versus “Cost-to-Acquire” Depending on whose estimate you choose to accept, it is 4 – 15 times more expensive to acquire a new customer than to retain an existing customer. Loyalty marketing leverages this disparity by focusing on customer-retention: the more frequently you purchase our product, the greater will be your reward. (At the front end, it is the job of traditional mass-media advertising to build awareness of the brand and help induce trial.)
- The 80-20 Rule In general, the 80-20 rule asserts that 80% (or some disproportionately high percentage) of any given effect is likely to be caused by a mere 20% (or some disproportionately low percentage) of the relevant variables. In marketing terms, 80-20 says that 80% of a company’s revenues are likely to be generated by 20% of its customers. In the travel industry, that 20% is the IBT (individual business traveler) segment, whose frequent flights, stays and rentals, at high-yield rates, combine to account for a big slice of the revenue and profit pie. Loyalty marketing allows marketers to identify those “elite” customers and provide them with recognition and benefits commensurate with their revenue contribution.
The Goals of Loyalty Marketing
Loyalty marketing has five main goals:
- Enrollment Enrollment is the logical and chronological beginning of loyalty marketing because it results in the creation of a customer file. And the customer file is the foundation for all future loyalty-marketing activities: tracking, analysis, communication, and targeted benefits and offers.
- Customer ActivationHaving enrolled a potential customer in a loyalty program, the next step is establishing regular communication (newsletters, statements, ad hoc mailings), designed to raise awareness and, ultimately, induce trial. Activation is an important milestone in the customer-company relationship, because the earnings (points, miles, stamps) from that first purchase must be supplemented with earnings from future purchases in order to reach award thresholds established by the program.
- Customer Retention Customer retention is the core goal of loyalty marketing. As is often pointed out, it is significantly less expensive to retain an existing customer than it is to develop a new one. So if a loyalty program succeeds in protecting a significant portion of the company’s proven customer base, it will have made an important contribution to cost-efficient revenue production. (This is a variant of “A penny saved is a penny earned.”
- Maximize Share of Customer By the same logic-of-efficiency which underlies the customer retention strategy, loyalty marketing seeks to increase the share of the customer’s total category spending. In the case of United Airlines, for example, it is recognized that most United customers—-even their best customers–are also customers of Delta, American, etc. The goal: increase the customer’s category spending on United to 100%, while decreasing his spending on Delta and American to 0%.
- Customer Reactivation The customer database at the heart of loyalty marketing programs allows a company, through tracking and analysis, to identify not only current customers, but also lapsed customers: those who have stopped or significantly reduced their use of the company’s product or service. The goal: reactivate them. Where it can be verified (or reasonably assumed) that the customer is still actively using the product–but has switched away from your brand–it may be worth the expense to make a special offer (bonus points, elite status, a personal visit from a company representative, etc.) in order to recapture that customer’s business.
Other Sources of Information
For more on loyalty marketing, check in with Brierley & Partners. This is one of the best of the agencies which specialize in designing these programs. Brierley’s clients include United Airlines, Hertz, Hilton and UPS, so you’ve probably had some first-hand experience with programs they developed.
Another agency specializing in loyalty programs is The Lacek Group. Their new web site includes a discussion of the economics of what marketers refer to as “customer retention,” one of the main goals of FFPs.
For a more general view of the industry behind the marketing side of FFPs, the Direct Marketing Association (DMA) is the trade association to which most companies and their agencies belong.
Side note. The DMA site includes information about how to eliminate (or at least reduce) the amount of unsolicited “junk mail” and phone calls you receive.