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THE LOYALTY ISSUE:

          Do you know who your best

          customers, members or donors are?

          If so, you better learn how to keep them. 

          If not, it may be costing you money.

                                                                                                                                 

 

by Betsy Vavrin,  SMC Marketing

 

(Reprint of an article from the Los Angeles Business Journal)

 

Do you know who your customers are?  Better yet, do you know where they are?  Have you seen them defect without knowing why, or how to have kept them?

 

If you have considered these questions recently, you are not alone.  Statistics tell us that customer loyalty is at an all-time low.  Companies offering both products and services have been focused on acquiring their customers at the expense of keeping them.  Typically, the corporate advertising budget is focused on bringing customers in, not keeping them.

 

It is time to think about the folly of this.  It is not a tightly guarded secret that it is more costly to replace lost customers than it is to keep them and sell them up to other products and services.

 

So, how do you keep them?  And, just as importantly, who do you keep?  It is possible that you do not want to keep every customer you have.  Some of your customers are slow payers.  Others come in the door for the low-rate introductory offer, and defect after just three months.  These are customers to whom you do not want to direct your customer retention efforts.

 

WHO ARE YOUR BEST CUSTOMERS?

 

For each of those customers, however, there are probably 3 to 5 other customers who are eligible for your best efforts.  These are the customers who do not refinance their home loan at each interest rate dip.  They aren’t constantly calling your cable TV company for unnecessary service calls.  They haven’t moved their market accounts from stocks to bonds, depending upon what happened on the Street yesterday.

 

They are, instead, the most profitable customers you have.  And, unless you recognize this and treat them accordingly, they may just wake up someday, and because of a friend’s suggestion, an ad in the paper or just ‘intuition,’ decide that it’s time to move on.

 

You have lost them.

 

Before this happens, take some time to assess your customer base.  Whether your company is a cable TV company, a bank, an Internet service or the local jewelry store, it can profit from finding out whom your customers really are.  Similarly, museums and other nonprofit organizations must know who their donors are and understand the needs of their members.  

 

It is time to learn who your profitable customers, members and donors are.   Remember, they are the ones who not only are not costing you money, they are helping you make—or raise—money. 

 

WHAT MAKES A CUSTOMER VALUABLE?

 

A customer’s value to you actually increases over time.  For example, the cost to acquire a typical bankcard customer has been valued at $55.00.  It will take the first year of customer purchases (and interest costs) to pay for his acquisition.  It won’t be until the second year that the financial institution realizes its first profit. 

 

From there on, the benefits increase almost exponentially.  The servicing costs are reduced.  The customer understands how to read his statement without unnecessary calls to customer service.  He knows his statement cut off dates and plans his purchases accordingly.  Also, as his tenure with your company increases, so does his satisfaction and likelihood of referring other customers, who are consequently acquired without the usual marketing, advertising and sales costs. 

 

And, as a loyal customer, he is more inclined to pay full price, and not scout out discounts, than are first-time buyers.

 

Learning who your most profitable customers are will take some time, and the measurement varies from organization to organization.  Some organizations already know product and customer profitability, so the measurement is easily constructed.  For most, however, it is a more involved process, usually looking at a number of customer, donor or member attributes.  These may include any or all of the following:  average account size or donation; average account or donor age; date and size of first transaction or donation compared to consequential ones; and, actual defection or inactivity rates.  This will give you a situation analysis of what your donor or customer looks like.  Many other elements can also be considered and should be tailored to your individual needs.

 

FINDING YOUR BEST CUSTOMERS

 

Using the information from your situation analysis, you can begin to segment your customers or donors into categories.  Even without a profitability analysis, you can determine “best” to “worst” customer or donor, depending upon size of account or donations, number of years with your organization, recency of their last transaction or donation and similar statistics that are meaningful to you.  In the end, you will learn who not to pitch a loyalty message.

 

Once you have segmented your customer base—determine who is a profitable customer or donor versus who is not—you must measure their lifetime value to you.  This is a real eye-opener.  You will see how much these customers drive your profitability statements and how these donors drive your capital campaign’s success.  And, how much it means to lose them.  Mostly, you will learn just how important it is to keep them.

 

Those remaining are good targets for your loyalty messages.  You need to determine what gives meaning to them.  Why have they stayed with you and not left?  There are many ways to determine meaning.  The best way is to ask.  This means research.  Focus groups.  Surveys.  Time.

 

But, if you don’t ask them, you may never know.  Getting to this step is similar to addicts admitting they have a problem.  If they don’t admit there is a problem, they will never be cured.  Similarly, if you don’t find out what your customers and donors need and expect from you, you will never know how to keep them.  It is the most important step you will take.  It is a turning point.

DEVELOPING YOUR PROGRAM

 

Once you know what they want, how do you ensure they get it?  This is how a customer loyalty or retention program is built.  Beyond knowing what the customer wants, you must be certain you can deliver.  Or know whether it is cost-effective based upon the earlier calculation of the customers’ lifetime value.  We have all watched as American Airlines invented the new ‘currency’ of frequent flyer miles.  Most of us have a credit card that accrues free miles when we use it.  Is this what will work for you?

 

Depending upon the business you are in, and what you have to offer, the incentive will vary.  There is no one correct answer.  Sometimes a ‘frequency’ program, similar to the American Airlines program, is the way to go.  You want to reward your profitable customers for using your products or services, supporting your organization, or visiting your store, museum or restaurant. 

 

The next step is to decide whether you want to build an ongoing frequency program to reward your customers, such as the American Airlines program.  Or, you may decide you just want to promote frequent or add-on purchases at certain times of the year or on particular items. 

 

Regardless of your decision, be certain you can deliver.  Tracking these frequent purchases may require new or enhanced database and billing systems.  If you are a small retailer, it may mean adding another employee just to track and update the program.  You also must ensure that the rewards are attainable and measurable, not something that your customer or donor feels he will never be able to achieve.  Rewards must also be compatible with the donor or customer’s desires, something he really wants.

 

Another way to reward your customers or members is to offer them products or services at better prices than you do to the ‘customer off the street.’  Or give them a chance to see new merchandise or view new exhibits before these are available to the public.

 

WHEN YOU DON’T WANT (OR CAN’T GET) MORE OUT OF THEM

 

A word of caution.  Sometimes you can’t get more out of a customer or donor.  Not all businesses or nonprofits can benefit from a frequency program.  For example, pool-cleaning services find that not even their most loyal customers want their pools cleaned more often, or add a second swimming pool because the cleaning fees are so reasonable and the work so good.  Cleaners will find that their customers soil clothing at approximately the same rate, regardless of frequency opportunities.  Sometimes, donations are made to a good cause as a memorial to honor a specific person’s wishes, and the donor is not likely to make another donation. 

 

Revenue growth and fund-raising from existing customers and past donors, in these cases, may not be generated through frequency programs, but rather through referrals.  What ever you decide, review your operational capabilities.  Make sure your organization can support a frequency effort.

 

COMMUNICATING WITH YOUR CUSTOMER

 

Regardless of how you design your program, the key word to remember is ‘communication.’  You must establish a dialogue with your customers, donors and members so that you know what they want, and to be certain you are delivering.  You may have a product or service that is ‘selling faster than hotcakes.’  So did Bartles & James and California Coolers when these products were first introduced.  Ditto for Snapple.  But times change and people’s needs change, too.  Make sure you keep on top of these changes.

 

Identifying your key loyalty prospects has another benefit.  It reduces your marketing costs.  Once you have determined who your best customers, donors and members are,  and which ones are not, you can more effectively communicate to them via direct mail and other programs.  And, you won’t send an offer to a ‘slug’ for a 3-month no-cost program, because you know they will take you up on the offer.  It will cost you money.  They will get something for free.  And, they will never buy up to another offer that is more profitable for you.  They just want to use your money for free.

 

The same is true for nonprofit organizations and their membership and donor mailings.  Unless these databases are updated often—and if more than one database is maintained, the changes must be made on all lists—there are members, prospective members and past donors who are not even paying for the mailings they receive.  For example, you may still have a donor on your list who receives your quarterly newsletter—which costs you postage and printing expenses—and has not given you a donation in 10 years. 

 

Think that doesn't happen?  Think again.  How many of us have continued to receive newsletters and solicitations from well-known national nonprofit organizations to which we have donated once, perhaps many years ago?  We may finally make another donation, but it will never be enough money to pay for what the organization has spent on sending us their mailings.  This is costing the nonprofit organizations plenty of  money, all because our names are still on their database.  They haven’t done their research to learn our net value to them.

 

To accomplish a thoughtful program that becomes part of how you do business, you  may need to spend some time with this ‘busy work’ of learning who your profitable customers are.  But the time and money you put into this process, whether you do it yourself or have a consulting company help you, will be well worth both the time and the money.  You may find it will pay for itself. 

SPREADING THE WORD

 

Remember to build the loyalty program into how your organization markets itself.  How often do you hear about frequent flyer miles available through other retailers, such as hotels?  These airlines have advertised the benefits of their frequent flyer miles through tie-in advertising with other partners.  Developing and communicating your loyalty program to potential clients will help you differentiate yourself from the competition.  Even nonprofit organizations reward their donors for revenue growth in their fund-raising activities.  These sometimes included tiered rewards such as T-shirts, Walkmans, boom boxes and other gifts, for bringing in larger donations.

 

CAN YOU AFFORD IT?  CAN YOU AFFORD NOT TO?

 

How do you justify the cost of establishing a customer loyalty program?  Let us look at the alternative.  Consider that the average business loses 15% of its customers each year.  Assume, for a minute, that you have 1,000 customers.  Potentially, that means losing 150 customers each year! 

 

Perhaps you own a gourmet food store, with an average annual revenue of $1,200.00 per customer.  This translates into losing $180,000 in sales revenue.  If the profit margin is 0.12 per account, you have lost $21,600.  Effectively, this is the cost of not having a customer loyalty program.  Should you have had a customer retention program and lost just 5% fewer customers, it would have been a difference of $60,000 in sales revenues retained.  And these figures don’t even include the multiplier effect of larger purchases over the years, new customer referrals and the premium prices paid by loyal customers.

 

Having a loyalty program requires a commitment—  to yourself, to your employees and, most importantly, to your customers.  It demands record keeping, budgeting and research.  It means training your front line people and those in customer service to understand the program, and most importantly to understand the value of the customer and their needs.  It involves effective communication with your customer—in their statements and perhaps in a special newsletter developed especially for the program. 

 

A loyalty program is not just about numbers.  It is about people.

 

WHERE DOES THIS FIT IN?

 

Developing an effective loyalty program does not mean you stop your efforts to acquire new customers or donors.  It does mean that your new acquisitions will be that much more meaningful.  The new customers are not just replacing the old ones who leave.  They are adding value by their acquisition. 

 

Consider the leaky bucket analogy.  A certain number of customers will be lost each year, just as a bucket with a leak loses water.  If that leak is fixed so that the fewest number of customers leave, the bucket will fill quicker with new customers than it would if the leak wasn’t fixed.  Similarly, by keeping your current customers through a customer or donor loyalty campaign, you will see your profits build quicker with new customers and donors than they would otherwise.  The difference is the loyalty factor.

 

Loyalty.  Is it costing you money, or is it making you money?                                 

                                                                                                                                 

 

 

About the author:  Betsy Vavrin is president of SMC Marketing in Studio City, California.  Her company specializes in developing customer retention programs for national multi-unit companies, nonprofit organizations, and smaller single-site businesses and retailers.  She may be reached at 818-505-8550.

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