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Editor’s Note: Mike Capizzi is Managing Director of Marketing Strategists, LLC, an independent consulting practice which focuses on best customer marketing. Often called the “Loyalty Evangelist” by his industry peers, he has written, spoken, advised and educated on the topic of loyalty marketing programs around the world for more than a decade. We hope you enjoy his thoughtful article on getting back to the Basics of Loyalty Marketing. Mike can be reached via Mike@mktgstrategists.com



Back to Basics
By Mike Capizzi

 

There is an old adage among seasoned and experienced loyalty marketers that says “big is the enemy of great.”   The phrase is a succinct reminder that loyalty marketing programs are about best customers, not customer databases.  Once the magnitude of a marketer’s loyalty program exceeds the parameters of best customer marketing, then the accountants start lurking in the shadows. The bean counters will soon jump in and admonish the loyalty marketing team that “X” cost per member times an ever growing membership equals runaway budgets.

Communications activity and engagement drivers get cut out; the value proposition gets diluted; behavioral, segment or tier bonuses disappear and currency inflation hits the rewards redemption catalogue.  Big weakens the whole schematic; innovation dies and great falls victim to affordable, which is accounting talk for cheap.

Recent research and respected blog commentators reinforce the “big vs. great” debate. The most recent Loyalty Census published by COLLOQUY pegs the U.S. loyalty population at 1.8 billion members.  The average U.S. household now belongs to more than 14 loyalty marketing programs, yet is active in only 6.  Led by runaway growth in the financial services sector, plus a frenzy of new activity in non-traditional vertical markets, the U.S. loyalty population grew an outstanding 25% between the 2006 and 2008 Census counts.  Going all the way back to the original 2000 Census, the industry has witnessed a CAGR which has exceeded 10% in every year except the tumultuous season post 9/11.

Can all of these members truly be best customers? The credit card rewards marketers thought so, and we all know what happened there.  The travel industry swears by it, but continues to count my dad as a best customer (he passed away in 1997; RIP).  Retailers rush to bulk up, but lose sight of basic tenets which have successfully framed this industry since its inception in the early 1980’s.  I recently asked the CEO of a very respected entertainment industry brand what his definition of loyalty marketing program success would be.  “More members than my major competitor”, he told me, “I’m tired of being second.”

The point is not lost on other loyalty disciples.  My partner, Terri Gaughan, has often written and spoken about this very issue. In a recent blog post at Loyalty Truth, my old friend and colleague Jim Kuschill lamented on the obsessive focus on cost per point in driving recent loyalty program decisions.  Looks like the accountants are at it again!  And Loyalty Truth originator Bill Hanifin recently reminded us that Measurement Plan basics would go a long way in sorting the wheat from the chaff.

Add in the rambling, raving commentaries I hear every day about loyalty marketing costs enveloped by the dark clouds of the current economic environment. Are we headed for ships sinking in a storm?   Big, heavy, bloated ships I might add.  Where not all cargo is precious.  Maybe it is time to throw some things overboard?

Or maybe, we simply need to get back to basics.

While the loyalty marketing program is a great device for capturing customer transaction detail, it is not a great device for recognizing and rewarding entire continents of customers.  The technique was designed for best customers and can only serve best.  Has everyone forgotten about Pareto? Whether its 80/20, 70/30, or 60/40 depends upon your business but the fact remains that in 30 plus years of working on best customer initiatives I have never seen a database where all customers were created equal.   As soon as loyalty marketers lose focus on the raison d’être, and start letting everybody in, and never take anybody out (my dad); then you are headed for a massive migraine when you meet the accountants.

Simple math.  Take $2 million total program costs (I mean total, see Jim’s post) and divide by 250,000 best customers and watch an annual investment of $8 per best customer yield an incremental $16 in annual profit per same.  Take the same $2 million in cost and divide by 1,000,000 members – active or inactive, dead or alive – and watch $2 per database name turn into disappointment.  Start writing your resume.  You are doomed to failure.

We have confused customer loyalty with loyalty marketing programs.  I don’t know how this happened, it just did, and I could write a treatise on why these things are not necessarily related.  I like the French and the Spanish; they use two different words to describe loyalty – one rational and commercialized; one emotional and highly personal.  We don’t.  Loyalty in business or brand relationships is about things I can’t begin to describe, explain, control or consistently measure.

Loyalty marketing programs are about one thing and one thing only – the ability to identify your best customers by segment, the ability to retain their business over a lifetime or service/product cycle, the ability to increase your yield (i.e. incremental profit over incremental cost to serve) vs. others in your category.  Share of customer, not share of market.  Not everybody can be a best customer.  Let’s not forget the basics.

Put a great value proposition on the table for those segments that are truly your best today and/or have potential to be your best tomorrow.  Consider dancing with the others, but don’t spend until you hear the music being played.  Twenty percent of your customers give you a disproportionately high percentage of your profits.  Invite them out, listen to them, learn what they like, collaborate and dance with them. Stay small, stay focused, keep engaging, concentrate on the return and not the budgeted costs.  Your best customers will appreciate the attention and reward you with their patronage, advice and advocacy.  This is and always will be the basic strategy involving a loyalty marketing program.

If we can remember all of this, then current economic woes will not give us migraines.  And we can keep the accountants at bay.

If you need help fending off the bad guys, give me or Terri or Bill Hanifin a call.  We’ll see if we can help you cook up a gourmet feast with only three ingredients.  It’s easy when you know the basic recipes.

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