Whitepaper Maximisereturns


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Whitepaper Maximisereturns

  1. 1. About SurfGold Founded in June 1999, SurfGold is Asia’s premier customer Our highly scalable system was designed to handle escalating relationship management consultancy. We develop, market and transaction volumes, multiple registrations, point award and implement incentive-based strategies and technologies to build redemption. Besides being a vital factor in building trust and loyalty and reward long-term relationships through the utiliza- confidence amongst members, partners and investors, the tion of the Internet, wireless technology and offline solutions. robust technology allows us to capture valuable information Our proprietary technologies and loyalty marketing services about members buying patterns. are designed to fit organizations across all verticals and enhance an organization’s competitive edge. BROAD NETWORK OF PARTNERSHIPS SurfGold's clients include leading multinational corporations Our strong focus on building a Business-to-business slant in and traditional Asian businesses. With robust funding from ABR addition to our Business-to-Consumer edge is reflected in our Holdings Ltd, Techpacific.com, Tekbanc Limited and Walden diverse partnerships. International, SurfGold's presence extends across Hong Kong, Large MNCs and smaller companies have found our rewards India, Indonesia, Korea, Singapore and Taiwan. program effective in complementing their marketing strategy. One of SurfGold's core strengths is an outstanding manage- Whether online or offline, SurfGold aims to provide our partners ment team with 60 years of combined experience in marketing, with a loyalty program that makes a difference to their business. loyalty solutions, e-commerce infrastructure and online business Some of the companies that have adopted the SurfGold development. Loyalty infrastructure include Compaq, Hewlett-Packard, Seagate, AMD, Microsoft, Epson, Computer Associates and TECHNOLOGY INFRASTRUCTURE Samsung. Key enablers of our technology include the ability to easily inte- grate with a wide spectrum of merchants and partners, both online and offline. SurfGold Building Loyalty in Relationships
  2. 2. Contents Determing ROI and Lifetime Value 1 Demystifying ROI The benchmarks to use Points-based ROI ROI-based campaigns Lifetime Value RFM Models RFM, LTV and Hurdle Rates How to Maximize Loyalty 12 The secrets of successful loyalty programs What to do once your program is up and running Transform frequency programs into true loyalty programs Maximize your Returns from Loyalty Programs SurfGold Building Loyalty in Relationships
  3. 3. Determing ROI Lifetime Value & F Frederick Reichheld study clearly showed that a 5% increase in track to seeing it, while CRMCommunity.com found that 42 per- customer retention rates could improve profitability by nearly cent surveyed were measuring distinct ROI. 95%. In certain industries such as credit card, this increase could be nearly 125%. But a successful (in terms of increasing compa- Demystifying ROI ny value) loyalty program is not one which offers the most dis- Return on Investment (ROI) is the additional revenue generated counts or the most points per dollar. It is one which succeeds most divided by the net amount spent for a specified period of time. in increasing the lifetime value or extending the relationship with ROI measures on loyalty programs are an indicator to the way the the customer. company is progressing in terms of customer loyalty and retain- Typically, measurement of loyalty programs ing existing customers. It gives a firm parameter by comes under the CRM evaluation. Two recent which you can measure whether the objectives of studies suggest that those companies that your loyalty programs are being fulfilled and what is increase the value of their customer relationships the value of these programs. At the same time, ROI are seeing the highest ROI. According to a study tells you whether the returns are justifiable or not. If by AMR Research, 78 percent of respondent com- the ROI is less than 6% or what is offered normally panies said the key metric to defining CRM suc- by government bonds, then you are much better off cess was the customer satisfaction rate. A similar investing in these secure investments than spending study by CRMCommunity.com found that 72 per- on loyalty programs. cent of surveyed members defined CRM success Of course, customer measures, while quantifi- as improved customer communication. So far, the able, can be hard to define. Also, customer loyalty ROI for the customer-centric companies has been is basically a measure of relationships that involve impressive: AMR discovered that 68 percent of emotions, and it’s equally important to understand respondents that had implemented some part of the emotional connection and get the complete cus- a CRM solution had either seen ROI or were on tomer viewpoint. Maximize your Returns from Loyalty Programs 1 SurfGold Building Loyalty in Relationships
  4. 4. CUSTOMER SATISFACTION: A MEASUREMENT PC market, it might be 18 months, for food or supermarket chains OF CUSTOMER VALUE? it could be a week, for travel it might be 1-3 months. Customer For companies that are serious about achieving outstanding attrition rates can then be compared with industry benchmarks. levels of service, customer satisfaction is an inadequate Attrition is normally calculated for each segment as the customer measure. Satisfaction is just a fleeting attitude and too low a value can vary widely across segments within the industry. standard for excellent companies. A better indicator would be Hurdle Rate: This is the percentage of customers demonstrating a monitoring a customer’s purchase patterns and retention rates, certain activity level based on recency, frequency or monetary coupled with a survey that focuses on customer loyalty. value. It’s the percentage of customers who have engaged in a When Bain, a US-based consulting company, benchmarked some of the best companies in a survey called the acid test, it behavior since a certain date, engaged in a behavior a certain found that 70 to 80 percent of customers agree that the number of times, or have purchased a certain amount. organization has earned its loyalty. Yet for those same Customer Life Cycle: Life Cycle metrics measure predictable pat- companies, more than 95 percent of their customers would terns in customer behavior occurring from the first interaction with say they are satisfied or very satisfied. So, there are at least a business through the last. Life Cycles are usually required to 20-30 percent of customers who call themselves satisfied but determine Lifetime Value (LTV). are not loyal. Lifetime Value: The single most ROI Metrics effective measure, The best metrics for calculating ROI in loyalty programs revolve LTV is calculated around the customers themselves. Typically, experts look at the as the net rev- following values: enues the cus- Customer Satisfaction: Customer satisfaction is qualitative in tomer will gener- nature and can be measured by observing behavior or captured ate over the life of in surveys. Satisfaction surveys normally look at customer attitudes his relationship, in relation to the entire brand as opposed to a specific scheme or minus the costs of function. goods sold and Customer Attrition: Customer attrition is a term that defines the the cost of serving period when a customer has not made a repeat purchase. For the the goods. Maximize your Returns from Loyalty Programs 2 SurfGold Building Loyalty in Relationships
  5. 5. RFM: RFM stands for Recency, Frequency, and Monetary value correlation between the loyalty program and the results. Other and is a method of ranking a customer relative to all other cus- variable factors could also influence the results. tomers in their likelihood to respond to promotions and ranking Industry benchmarks: Measuring your success in loyalty program the customer’s future value to the company. against similar players in the same category could Often, it is not possible to capture all the infor- If you give a be useful. Access to industry figures could, howev- mation required to make use of these metrics. In rebate/ discount er, pose a problem. such cases, it is better to use common sense, as these metrics aren’t still absolutely perfect. of 2 percent Points-based ROI Companies can use approximations, measure and at variable When we award points that can be redeemed at a trends and repeat the same calculations across the later point of time, the calculation gets a bit com- same segments. margins of plicated since we also have to account for break- 30 percent, all the ages and the purchase value of every point. The benchmarks to use Brian Woolf in his book, Loyalty Marketing, The There are different benchmarks companies can loyalty members Second Act, showed how the break-even for points use to measure the influence of their loyalty pro- would have to system can be calculated. In a 1 point for $1 spend grams. Some of these include: point system, if we make the following assump- Establishing control groups: If possible, always spend about tions: have a control group for the loyalty programs. The 6 percent more to 80% of the total sales are captured on the loyal- control group will have customers who have not ty card. been exposed to the loyalty program. Therefore, break even Of the points that are issued, 80% are later after the loyalty scheme is over it is possible to redeemed. compare results with the experimental and control group. The On the incremental sales gained as a result of the point problem in this kind of benchmarking is that companies do not program, the company earns 10%. want to leave out potential customers just to measure ROI. To earn the same profit as before, given these three assump- Before and after results: Tracking results before the introduction of tions, an increase in sales of 6.84% is required. a loyalty program and after its introduction offers another set of If you give a rebate/discount of 2 percent and at variable mar- benchmarks. Here, the problem might be in assessing a direct gins of 30 percent, all the loyalty members would have to spend Maximize your Returns from Loyalty Programs 3 SurfGold Building Loyalty in Relationships
  6. 6. about 6 percent more to break even on the cost of rewards alone. CASE STUDY I: CREDIT UNION OF TEXAS But if only half of the members spent more money, that average For Dallas-based Credit Union of Texas, with nearly $1 billion spending increase would have to double, to 12 percent. Anything in assets, first campaign objective was to raise the profitability less would mean negative ROI. of the 44,000 low-value members the bank was serving. These accounts carried low balances and subscribed to only ROI involving campaigns one bank offering. With Unica’s Affinium Model, Thompson identified which of the institution’s 109 services were most like- Typically, ROI for a marketing campaign looks at the cost of cam- ly to interest each low-value member. paign in relation to the profits generated. So, if you are selling A personalized direct-mail campaign, with three different offer- hard disks at $100 of which margin is 50% and 10% is opera- ings to each customer, garnered a whopping 10.4 percent tional expenditure, then actual profit is $40. response rate. Among responders, 2,272 customers signed up Now, if you spend $1,000 in a campaign to sell these hard disks. for additional services, resulting in $150,000 additional net and manage to sell 30 of these, you have a total profit of $1,200 profit for 2001 alone. Another 3,600 customers decided to (30x40). If we subtract the cost of the campaign, the returns are close their accounts, which saved the bank $73,000 in servic- ing costs. The campaign itself cost only $45,000, and Credit $1,200 - $1,000 = $200. Union plans follow-up mailings to offer a different set of serv- The return on investment (ROI) is $200/$1,000 = 20%. ice options to the non-responders, or the chance to close their This is the simplest form of calculating ROI without including con- accounts altogether. cepts of time or any loyalty features. Discounted ROI Specifically, when products are distributed through a channel In cases, where discounts are offered on products, the calculation with discounts, the ROI = total additional revenue generated/total is similar. Just that the profit would be reduced by the discount spending on the program. percentage. So, if in the above example, there was a 10% dis- Factoring in additional costs count to loyal customers, then the total profit would have been There’s more to ROI than the simplified revenue generated versus $30 x $36 (discount of $4) = $1,080. investment. There are other values such as customer repeat The returns would be $1,080 - $1,000 =$80 and the return on behavior and cost to the organization. Not to forget operational investment would have been $80/$1,000 = 8%. costs apart from costs of servicing repeat or increased purchases. ROI = total additional revenue generated/total spending on the program Maximize your Returns from Loyalty Programs 4 SurfGold Building Loyalty in Relationships
  7. 7. Let’s say a company spent $80,000 advertising on a website CASE STUDY II: A CELLULAR TELEPHONE for a loyalty program. This advertising generated $100,000 COMPANY unique customers and translated into $100,000 in revenues ($1 In a customized loyalty program for a cellular telephone com- per customer). pany designed by a loyalty marketing agency, the program Assume cost of servicing each customer is $.10. implementation methods allowed for accurate tracking of cus- Total cost of servicing is $100,000 x $.10 = $10,000 tomer behavior using control groups. By comparing the $100,000 revenue - $10,000 cost = $90,000 behavior of the customers in the loyalty program with those not in the program, the financial impact of the loyalty program $90,000 net profit - $80,000 campaign -= $10,000 could be precisely determined. Since this program was not ROI = $10,000/$80,000 = 12.5% advertised anywhere but through the mail to specific cus- Here, we have just taken operational costs. There would be tomers, a perfect “blind test” of loyalty program effectiveness other costs involved such as program design, implementation and was created in this cellular market. Over the 2 year period monitoring. Increased sales would also result in companies hav- from January 1999 to December of 2000, customers in the ing to increase capacity and infrastructure. The true ROI needs to loyalty program spent an average of 35% more than cus- factor in these costs including creative fees, communication costs, tomers not in the program. After calculating the EBITDA mar- gin on this increase and subtracting the cost of the program, credit card service charge, distribution and logistics, etc. this loyalty program generated a Return on Investment of If getting all these details is a difficulty, another method might 252% annually over the two years of the test period. The ROI be to get details of actual revenue dollars that actually flow on the top 20% of spenders averaged 665% for each year. through to the bottom line, to cash flow or EBITDA. Frederick Notable also in this program: the increased customer prof- Reichheld reveals that in the cellular business the number that itability came from both churn reduction and increased spend- matters to Wall Street is called EBITDA Margin, and it can range ing by customers. from 25% to 45%, depending on the growth stage of the compa- ny. If this EBIDTA margin for a given cellular company is 30%, Lifetime Value then any $1 this company generates in revenue has to cost less The concept of Lifetime Value (LTV) is difficult for most companies than $.30 to generate, else it loses money, since 30% is all that to grasp. This is because LTV looks at the worth of a customer over ‘flows through’ on each revenue dollar. time instead of rigid, financial statements and ROI figures. Since LTV looks at the value and relationship factors, reconciling it with strictly financial figures is problematic. Maximize your Returns from Loyalty Programs 5 SurfGold Building Loyalty in Relationships
  8. 8. But LTV is a central idea for customer retention and CRM; after minus the cost spent on targeting the customer gives the profit all, if one cannot extend and increase the value of a customer, attributable to that customer. The costs spent on targeting individ- then why bother with CRM at all? The reason why LTV has proved ual customers may not be easily available unless it involves direct to be a more sophisticated measurement is that LTV calculations mailers or tele-marketing efforts. For mass advertising, the total include such factors as the retention rate, the referral rate and the cost of advertising spend can be divided by the total reach to (long term) spending rate, rather than just the response to an arrive at the per customer spend. LTV is calculated by adding immediate promotion. The marketing efforts are judged by the forecasts for the major parameters and discounting back. This ability to retain and obviously requires assumptions about future purchasing, product increase the loyalty and and marketing costs, as well as how long the customer can be spending rate of cus- expected to remain with the firm. Generally, this will result in a tomers, rather than just number of scenarios for each customer depending upon these considering the result assumptions. of a single investment. The LTV formula can also be used to show where additional With LTV, the idea is profits can be obtained from customers. Increased profits can that all information result from: about a customer Increasing the number of products purchased, by cross-selling; should be analyzed in Increasing the price paid, by up-selling or charging higher terms of current and prices; future profitability to the Reducing product marginal costs firm. When a profit fig- Reducing customer acquisition costs ure can be assigned to Measuring LTV each customer, the mar- Typically, while measuring LTV you look at the following parame- keting manager can ters: then decide which cus- Current Revenue tomers to target. Current Costs The margin a partic- Future Revenue ular customer brings Future Costs Maximize your Returns from Loyalty Programs 6 SurfGold Building Loyalty in Relationships
  9. 9. Loyalty or Retention Rate CHART A: LIFETIME VALUE OF A CONTROL GROUP Reference or Influence Value Lifetime Value of a Control Group Based on these parameters, a description for LTV can be: Year 1 Year 2 Year 3 LTV = Value (Initial Revenue - Costs) Customers 5,000 3,650 2,884 + net present value (Loyalty*[Future Revenue – Costs]) Retention Rate 73% 79% 80% + net present value (Loyalty*Influence Value) Spending Rate $138 $149 $161 Total Revenue $690,000 $543,850 $464,324 If we put it as a formula, then it would be: Variable Costs (%) 50% 45% 40% Variable Costs ($) $345,000 $244,733 $185,730 Gross Profit $345,000 $299,118 $278,594 Discount Rate 1.00 1.15 1.33 Net Present Value Profit $345,000 $260,102 $209,469 Where pi = sales profit in period i, minus any non-sales benefit (references, col- Cumulative NPV Profit $345,000 $605,102 $814,572 laborative value, etc.) less the cost of maintaining the relationship. In this equation, d = discount rate, n = estimated lifetime horizon for this customer. Lifetime Value $ 69.00 $ 121.02 $ 162.91 Case Study: LTV with Loyalty Programs place, their retention rate increased to 79% and 84%. This added 434 customers who would otherwise have disappeared in the (The charts here are taken from the work of Andy Kardos, President of BCP Direct in Toronto. The charts are based on his experience with several retailers.) third year. These retained people spent $78,988 alone in the third year. In addition, the referral program really paid off. Chart A shows the lifetime value of the customers in the control By giving an incentive of $15 per customer, 640 new customers group (those not in the loyalty program). Their lifetime value, in were added in two years. These new customers brought in the third year, was $162.91. Their retention rate was 73% in the $116,480 in sales in Year 3. The loyalty program also affected first year and 79% in the second year. Their spending rate was the spending rate. It increased to $162, $175 and $182—a big $138, $149 and $161 in the first three years. jump over the spending of the control group. In Chart B (on next page) we look at the lifetime value of the Why did these people spend more? Because they were being 5,000 customers in the loyalty program. The loyalty program has treated as someone special. They were recognized, communicat- had a measurable effect on the customers enrolled in it. In the first ed with. They felt a new special relationship with the retailer. The Maximize your Returns from Loyalty Programs 7 SurfGold Building Loyalty in Relationships
  10. 10. CHART B: LIFETIME VALUE OF TEST GROUP from this group in the third year. Chart C (on next page) is the comparison of the lifetime value Lifetime Value of Test Group of the control and the test group. In the first year, the LTV of the Year 1 Year 2 Year 3 Referral Rate 6% 8% 10% test group is actually lower than the control group. Why? Because Referred Customers 0 300 340 the extra $12 per customer per year spent on loyalty maintenance Retained Customers 0 3,950 3,570 exceeded the gains from increased retention and spending. Customers 5,000 4,250 3,910 The net gain, $24.28 per customer per year in the third year, is Retention Rate 79% 84% 87% remarkable since this figure represents profits after expenses Spending Rate $162 $175 $182 incurred under different heads. Total Revenue $810,000 $743,750 $711,620 It’s therefore vital to understand that customer lifetime value Variable Costs (%) 50% 45% 40% may not show an immediate result in the first year, but Variable Costs ($) $405,000 $334,688 $284,648 it’s only once that the program starts off that the real- Loyalty Program $60,000 $51,000 $46,920 ($12/member) worth comes across. It is necessary to set up tracking systems Retention Incentives ($15) $0 $4,500 $5,100 that measure the outcome for different periods instead of just Total Costs $465,000 $390,188 $336,668 looking at the immediate period. Gross Profit $345,000 $353,563 $374,952 Customer Accounting Discount Rate 1.00 1.15 1.32 LTV may not fit in with the strict financial structuring of the organ- Net Present Value Profit $345,000 $307,446 $283,518 ization. But managing a business by customer value allows for an Cumulative NPV Profit $345,000 $652,446 $935,963 unmistakable advantage—the ability to predict future profitability Lifetime Value $69.00 $130.49 $187.19 and the effects of changes to the operation before they create any significant economic impact, positive or negative. results could be seen in the numbers on the chart. A customer accounting system can take the form of customer To accomplish this gain in spending and retention, the retailer value reporting, designed to track the value of new and current had to spend $12 per customer per year. This was spent on com- customers over time. Generally, two types of customer account- munications, a special 800 number for this favored group with ing reports are valuable—an overall view of customer value sta- special treatment when they called, member nights and a host of tus and a campaign or project specific view. The idea behind both other benefits which amounted to 6.6% of total sales revenue these reports is simple—they allow you to monitor project expen- Maximize your Returns from Loyalty Programs 8 SurfGold Building Loyalty in Relationships
  11. 11. CHART C: PAYBACK FOR INVESTMENT Customers are ranked based on their R, F, and M characteris- tics, and assigned a ‘customer value score’ representing this rank. Payback for Investment in Loyalty Program Assuming the behavior being ranked (purchase, visit) using RFM Source Year 1 Year 2 Year 3 has economic value, the higher the RFM score, the more prof- Control Group LTV $69.00 $121.02 $162.91 itable the customer is to the business now and in the future. High Test Group LTV $69.00 $130.49 $187.19 Difference $0.00 $9.47 $24.28 RFM customers are most likely to continue to purchase and visit, and they are most likely to respond to marketing promotions. Additional revenue with $0 $1,894,000 $4,856,000 200,000 customers The opposite is true for low RFM score customers; they are the Cost of Loyalty Program $2,400,00 $2,400,000 $2,400,000 least likely to purchase or visit again and the least likely to respond to promotions. Return on Investment 0.00 0.79 2.02 By determining a RFM value, companies can: Decide who to promote to and predict the response rate Optimize promotional discounting by maximizing response rate diture in relation to customer value generated and also project while reducing overall discount costs revenues over a period of time fairly accurately. The customer value score (CVS) is a single variable, derived from RFM, which companies can use to place customers into a single RFM Models hierarchy. Another value, based on recency, known as the Velocity Simply stated, the RFM model believes that a customer who has Index (VI) is used to define recency relative to the average lag visited a store Recently (R) and Frequently (F) and created a lot of between transactions, and is Monetary Value (M) through purchases is much more likely to visit most commonly expressed and buy again. The assumption is that: as the date of a customer’s Customers who purchased recently are more likely to buy again last transaction minus versus customers who have not purchased in a while today’s date. Customers who purchased frequently are more likely to These three variables—F buy again versus customers who have made few purchases multiplied by the M multi- Customers who have spent the most money in total were more plied by the VI—give you the likely to buy again. Customer Value Score. Maximize your Returns from Loyalty Programs 9 SurfGold Building Loyalty in Relationships
  12. 12. LOYALTY & PROFITABILITY: THE CORRELATION? Determining Recency Many loyalty programs are successful; they enhance the value To predict the likelihood of a customer to repeat an action, one propositions of companies, capture valuable data, draw in calculates Recency, or the number of days that have gone by since higher-profit customers, and persuade those customers to a customer completed an action (purchase, download, etc.). spend more. But many or more programs unwittingly deploy Each passing day after a customer has completed the action value-destroying mass-discount vehicles, thereby eroding the indicates that the customer is less and less likely to repeat it. The value of the program. more recently customers have done something, the more likely In the July 2002 issue of the Harvard Business Review, Werner Reinartz and V. Kumar argue that the most loyal customers are they are to do it again. Recency can predict the likelihood of pur- not necessarily the most profitable ones. Titled The chases, log-ins, game plays, or just about any “action-oriented” Mismanagement of Customer Loyalty, the article asserts that customer behavior. despite the “gospel of customer loyalty,” engendering faithful Customers who are more Recent have higher potential value customers simply doesn’t pay. than customers who are less Recent, for any given activity. So, a The problem is, Reinartz and Kumar correlate profitability and customer who made a purchase 15 days ago has higher poten- loyalty among different customers at a single point in time, tial value than a customer who made a purchase 60 days ago. rather than correlating these variables for a selected group of customers tracked over a period of time. Loyalty and prof- Customers engaging in multiple actions could be assigned a itability are two different and fairly independent components Recency metric for each action. For example, the customer could when calculating a customer’s lifetime value, and their corre- be very Recent on visiting the store, but low on purchases. This lation with each other depends on the nature of the business would imply the customer is likely to visit again but is becoming and the uniformity of the customer base. Yes, it is true that less likely to purchase—just the kind of customer companies can customers who are already loyal are not necessarily very prof- target. itable, and vice versa. But it is also true that customers who While designing a marketing communication, companies tend become more loyal over time will become more profitable. These two statements do not contradict each other in any way. to measure the response rate by recency. They might get figures The other major problem is the concept of loyalty. Loyalty for that suggest that the response rates for customer inactive for more most businesses today has to move beyond retention and than 4 months is just 5%, whereas 1-month inactive customers repeat behavior. Loyalty has an emotional tang to it that can- have response rates of 25%. If these figures are mapped against not often be quantified. That’s why measurements such as the cost of the campaign and break-even response rates, then it Lifetime Value are prominent. becomes very simple to decide which customers to target. Maximize your Returns from Loyalty Programs 10 SurfGold Building Loyalty in Relationships
  13. 13. RFM, LTV and Hurdle Rates over time (Monetary value). Because of the link between RFM and The higher the RFM score, the more profitable the customer is to Lifetime Value, it can be concluded that if the percentage of cus- the company now and in the future. For this reason, RFM is tomers over each hurdle (Recency, Frequency, Monetary value) is closely related to LTV. RFM techniques can therefore be used to growing, the business is healthy and thriving. Customers are measure the future profitability of a busi- responding positively to the experience ness. High RFM customers have the they receive, and as a group are more highest Lifetime Value. Low RFM scores likely to engage in profit generating represent dwindling business opportunity, behavior in the future. low LTV, and are an indication that com- If the opposite is true, and the per- panies need to either drop these cus- centage of customers over each hurdle tomers or woo them with some schemes. (Recency, Frequency, Monetary value) is Hurdle Rate Analysis falling over time, high value customers One simple application of RFM is Hurdle are defecting and the future value of Rate Analysis, where ‘hurdles’ are select- your business is falling. Customers as ed for Recency, Frequency, and Monetary a group are responding negatively to Value, and the entire customer base is the overall service they are receiving. evaluated against these hurdles as a group. A Hurdle Rate is simply the per- centage of customers who have at least a certain activity level for Recency, Frequency, and Monetary value. It’s the percentage of customers who have engaged in a behavior since a certain date (Recency), engaged in a behavior a certain num- ber of times (Frequency), or have purchased a certain amount Maximize your Returns from Loyalty Programs 11 SurfGold Building Loyalty in Relationships
  14. 14. How to Maximize Loyalty “Companies can no longer focus solely on their top-tier customers. In fact, the greatest opportunity for improving customer loyalty is by migrating the majority of your customers up the value chain. And the way to drive this migration is not through CRM, but rather through CVM—Customer Value Management. This shift can only take place if you become more intimate with your customers—learning all you can about their likes, dislikes, buying habits, etc,—in order to manage customer value and gain their loyalty. Programs must proactively engage customers in ways that are relevant to them, both increasing the inherent value of the brand and profits at the same time.” Janet Kraus, CEO and co-founder of Circles T The rules of customer loyalty are simple—delight the customer cleanliness, etc. For instance, Starwoods has a with a superior product or service and by providing a positive, preferredguest.com site where it allows its chosen customers to consistent purchasing experience. Then keep on increasing value manage room preferences, bed preferences (including pillow that will keep the customers coming back for more. type), preferred floor level, credit card information for express But in most cases, loyalty programs tend to do well in the first booking and choice of newspaper to be delivered in the morning year, but falter later on. As Brian Woolf puts it, loyalty marketing (among other things). is like good theatre, where “you have to find ways to keep filling the seats…. This has less to do with the value of points or dis- The Secrets of Successful Loyalty Programs counts to a customer, and much more to do with a company’s use The fastest method to build customer loyalty and increase cus- of data mining to improve the customer experience.” tomer value is by making it as easy as possible for customers to Most companies collect the data, but do not know how they can do business with the company repeatedly. If companies make it translate this into a marketing strategy aimed at retaining and easier for customers to buy from them, relative to their competi- enhancing the value experience of customers. The best loyalty tion, then they will continue to win their business, assuming the programs use customer data to improve not only promotions, but products or services are comparable. also service quality, production quality, and other factors such as Maximize your Returns from Loyalty Programs 12 SurfGold Building Loyalty in Relationships
  15. 15. Five key points in creating a loyalty program are: Have a long-term focus t The loyalty program has to be part of the marketing mix and Better retention has a linkage more importantly part of the company culture. Personalized rela- to profits only over time, and tionship is a concept that has to be imbibed in every employee of this typically may extend up the company and into every product and service offering. to two years. Therefore, it is Learn from customers what they really want from the company. essential to establish a base- Talk to the customers and find how to increase share of business. line performance measure Target specific and appropriate messages to the right customers. and then monitor it across Make the right offer to the right customers, and at the right time. years. Set realistic achievement goals. Have the resources in terms of Companies are typically people, money and time to match the goals. eager to analyze data gath- Plan to measure all possible results at all times. ered from a loyalty program in the first 3-6 months of the What to do once the program is up and running program. This may provide Most managers just relax once the program is up and running. incorrect information as this However, the first two years are typically critical and companies period normally has high need to spend time and effort in enhancing the relationship. enrolment and spending, Some of these methods include: and may not give the correct picture. Communicate at all times The short-term objectives of getting to know the customer can Communicate about your loyalty program at all forums and at all be achieved in the first phase, but the long-term objective of times. The loyalty program is like an asset which can be used any- building relationships and maximizing profits takes time. where… in advertisements, on company website, within retail out- Have strong, back-end databases e lets, at points-of-sale, etc. Companies need to reinforce the pro- The success of loyalty programs depends to a large extent on the gram message to customers. This can be done using email mail- information gathered and captured in the database. Not only is it ers, newsletters, direct mailers, gift certificates, toll-free numbers, important to have a strong database architecture, but it is equal- events, etc. All these communication materails should emphasize ly important to have the expertise to mine this information. the benefit to loyal customers. Maximize your Returns from Loyalty Programs 13 SurfGold Building Loyalty in Relationships
  16. 16. Get the measurement parameters right keting strategies as companies realize the importance of retaining Companies want to include as many customers as possible in the customers. This has led to a proliferation of loyalty programs with loyalty program. However, this creates a problem while measur- hardly any differentiation. Almost all companies offer some type ing the effectiveness of the program. That’s why it is best to have of scheme, which in most cases is a discount in some form or the a control group that is not exposed to the loyalty program. This other. The lack of differentiation of benefits among companies allows accurate measurements and helps drive better business has led to loyalty programs losing their competitive edge. decisions. The members of the control group can be included in A majority of so-called loyalty programs today, are mainly fre- the next program. quency programs driven by points and discounts. These may have Keep the customer’s faith benefits in the short-term but do not provide insights into the cus- A customer reveals personal information in a loyal- tomer’s behavior pattern—an essential require- ty program with the assumption that the company Loyalty is more ment to forge a long-term relationship. Frequency will respect his/her privacy. Companies shouldn’t about a company’s programs, therefore, have to be seen as a means break this trust and allow customers to opt-out of for collecting information. This information can communication material at all points. business philosophy provide the necessary content for designing a These factors are critical when operating a loyal- than about strong loyalty program. ty program. It is only after the first year that compa- In Customer Loyalty Programs and Customer nies get a clear picture of their best customers. giving discounts Clubs, author Stephan A. Butscher writes that Targeted messaging and loyalty programs will through a “Loyalty marketing has reached a plateau. It must improve retention and profitability. now move to the next level, which is value-orient- In a nutshell, managing loyalty is all about find- frequent buyer card ed customer loyalty programs. The new value-ori- ing those pieces of information that will allow ented customer loyalty programs attempt to estab- enhancing a relationship in ways that are relevant, and ultimate- lish an emotional relationship between company and customer to ly move second and third-tier customers to the top rung. create long-term loyalty.” The premise in value-oriented customer loyalty programs is that a customer who joins a loyalty program Transform Frequency Programs into True Loyalty for a discount will leave it if he finds another program with a high- Programs er discount. Giving discounts is like giving away profits without a Customer loyalty programs are playing an increasing role in mar- guarantee that the increased sales will compensate for the dis- Maximize your Returns from Loyalty Programs 14 SurfGold Building Loyalty in Relationships
  17. 17. WIN BACK CUSTOMERS tangible (discounts) and intangible benefits (soft benefits). The dis- Few companies have any systems in place to get back lost cus- counts will get the customer to join the program and then the tomers or recover those at a high-risk of defection. Getting other benefits build the relationship. Thus, the identification of the back lost customers can also be a fundamental part of loyalty right mixture of hard and soft benefits is crucial to the develop- and retention activities. This helps to: ment of a successful customer loyalty strategy. Realize potential sales/profits by rebuilding customer rela- As Peppers and Rogers Group puts it, “Businesses that infuse tionships loyalty into their merchandising strategies, employee compensa- Minimize new customer acquisition costs tion policies and other business practices garner the devotion of Reduce negative word-of-mouth their customers without having to ‘bribe’ them with points and Better understand the customer process for relationship ter- perpetual discounts.” mination so that appropriate intervention and recovery steps That’s why many companies are promoting alternative systems can be taken that go beyond points. The Hertz #1 Gold program, for instance, Develop a profile for lost customers that can help detect ‘at allows best customers to pick up their rental cars and get onto the risk’ customers highway as quickly as possible. This benefit is more valuable to Build customer recovery into the customer-focused culture them than a discount. Amtrak, in an effort to compete with air- lines for business-traveler revenue, provides the elite tier of its count. Therefore, while designing loyalty programs, marketers try rewards-program members with conveniences such as a special to upsell and cross-sell other products. toll-free number for reservations, first-class upgrade coupons and Discounts are given to reward customers and direct their passes to the first-class lounges in train stations. behavior towards other products with more profitability or to Personalization allows companies to separate their most valued increase purchasing volume. This type of discounting structure customers and reward them accordingly. For instance, Starwood builds a protection barrier that makes it difficult for competitors to Hotels & Resorts Worldwide doubled its lucrative platinum-level lure the customers. For example, banks and credit card compa- members because its elite customers who stay 75 nights or more nies will always try to sell their other financial instruments to their in a year get personal concierges, fresh flowers daily, complimen- high net-worth individuals. tary in-room bars and snacks, use of a town car, etc. Marriott Therefore, value-oriented programs do not focus solely on dis- International allows its Most Valuable Customers to pick their own count but offer a combined package of advantages consisting of preferred reward from a wide range of options. Maximize your Returns from Loyalty Programs 15 SurfGold Building Loyalty in Relationships
  18. 18. Maximize your Returns from Loyalty Programs 16 SurfGold Building Loyalty in Relationships