Entrepreneur Corner

Loyalty problems tend not to be on the forefront of entrepreneurs’ minds. But an aggressive retention marketing program, even in early stages of a company’s history, can pay big dividends.

The relevance of such programs depends on your business model. Your customer value can be the deciding factor in how useful these programs can be for you.

In businesses where a typical customer spends large amounts per interaction or tends to stay for a long time (this is typical in consulting, wholesale, professional, B2B and long-term subscriptions), losing just one can have a big impact.

Service levels at these sorts of high customer value companies tend to be high and individualized.  Loyalty programs will focus on enhancing the relationship through recognition, special benefits, private events and volume based discounts.

A structured, formal loyalty program might make sense if you’re already doing this and want to organize your efforts into more logical and automated systems. Loyalty programs can also help augment account management and reduce the labor cost.

In general, though, they don’t make a lot of sense for these sorts of businesses unless there is a lot of competition with low switching costs.

Businesses such as retail and certain consumer software or consumer goods companies have a couple more options. Their customers have more modest values, with a small group of highly valuable customers accounting for a large percentage of sales (and an even higher percentage of earnings). There are two approaches that work for this sort of company.

Best Customer Focus – In this model, the value comes from three areas: increased retention and reduced downward migration of an existing ‘best customer’ and increased ‘next best’ customer upward migration.

Best customers lose value through leaving or reducing their spending. Loyalty programs can help ensure there is little splitting behavior, reducing or eliminating the problem. Any loss of value with these customers is then limited to changes in their lifestyle or some other factor beyond your control.

Meanwhile, your next best customers are presented with a path that rewards them for consolidating their spending with your company.  If they have the potential to be best customers, they’ll increase frequency and average order value.

New Customer Focus – When customers have a tendency to buy once, a frequency-based approach can be very productive. Reward thresholds are set low. Rewards expire quickly. Published benefits are augmented with other promotions. And, in general, the program has just one objective – the second sale.

For new and growing businesses this can be an excellent choice, since you don’t really know the long term value of customers and just want repeat business of any type.

Subscription-based businesses, including traditional media, telecom and certain services, have customer bases that have stable values by month. Unfortunately, the customers can leave at any moment – and they often do.

The problem is: No one likes to be reminded they are spending money every month. Loyalty programs for these sorts of companies should focus on engagement, usage, referrals and word of mouth – activities that correlate with retention, but aren’t tied directly to the monthly or annual bill.

If you’re in advertising, lead generation or any other high volume/low-revenue-per-customer businesses, you know there just isn’t enough money to go around.

You can’t give $3 back to the customer who only generates $4 or $5 a year.  However, if you can figure out an extremely low cost benefit (content, extended term, etc.), it might make sense. These benefits will help you differentiate from competing firms since they will be unexpected, valued, and difficult to replicate.

Above all, never take existing customers for granted. In many cases, a structured program can improve retention, leading to improved revenue growth, lower marketing costs and a great story for that next round of investors.

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Tags: customer loyalty, rewards program