thought-starter # 3, loyalty versus frequency

Thought-starter # 3: Loyalty versus frequency

“At the core of any successful enterprise, enabling its very existence is the value creation process. Value creation generates the energy which holds the business together… The forces of loyalty are measurable in cash flow terms

because of the linkages between loyalty, value and profits. Loyalty is inextricably linked to the creation of value.”

-Fred Reichheld, Bain

Examining the historical purchase behavior, captured in our marketing database, we can define the value our customers have had in prior years. We can also project out what these same customers might be worth over the next five to ten years. Most of us know this projection as lifetime value (LTV). As we examine

the value of our customers to make the decision to establish loyalty bonds, it’s essential that we recognize three things:

1. LTV is a projection based on historical behavior.

2. LTV has more to do with how we treat our customers after

we have acquired them than how we acquired them.

3. LTV is most effectively measured by measuring the re l a t i o n s h i p

we have with our customers, not with measuring transactions.

Frequency Programs vs. Loyalty Programs

This brings us to frequency programs. Frequency programs are usually transaction-focused, non-selective and often destructive. Most of us participate in a multitude of them. Initiated in the early 1980s by the airlines to entice business travelers, many companies have successfully replicated these once highly successful programs.

All too often, however, frequency programs are created as me-too administrative programs, programs that merely respond to competitive offerings, programs that shift-the-burden away from a true loyalty solution. Following this logic, a poorly conceived or executed frequency program will not help us select the best customers for our business. A frequency program may cause us to acquire customers we cannot service adequately or, even worse, diminish the perceived value of our product offering. In short, frequency programs and loyalty programs are two distinctly different animals.

Executed as relationship-welding, relationship-enhancing efforts, loyalty programs must be derived from the strategic corporate mission. The best loyalty programs aim to create value-based relationships with our best customers. The determinant variables in this equation are:

1. How well do your external service values align with your customers’ needs?

2. Do your external service values align with your core competencies?

3. Do your core competencies rest on a foundation of loyal employees?

Let us offer this simple comparative matrix to allow you to evaluate the purpose of your own loyalty effort.

Loyalty Focus Frequency Focus

Recognizes… • Heterogeneity • Homogeneity

• Employee contribution • Responses to mailings

• Value-added • Transaction-based

• Customer-focused • Competitive-focused

• Needs-based • Incentive-driven

• Relationship-focused • Payout-focused

• Two-way dialog • One-way communications

• One size fits one • One size fits all

• Needs-based • Mailing list bias

• Outside-in focus • Inside-out focus

• Focused targeting • Indiscriminate targeting

Measures… • Share of customer • Response rate

• Share of requirement • RFM

• Duration of relationship • Cost per response

• E:R for customer • E:R for mailing

Loyalty Management and Customer Experience Management at their foundation use the best tools and practices of the data-based, integrated, direct marketing practitioners to build, develop and foster relationships and loyalty where appropriate. Always based upon the delivery of value. Data-based relationship marketing affords you the opportunity to redefine the traditional “value chain.” Today’s loyalty-based marketer is more about building community: mutually interdependent alliances of stakeholders including employees, customers and vendors. All predicated on delivering value to the relationship and relevance in each and every individual contact. Fully recognizing that value changes with each new touch, or contact, between your customers and your company.

Customer Retention Strategies and Tactics