Whitepaper Maximisereturns

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

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

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

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.


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


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


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.


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


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


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-


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.


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.


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


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


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.


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-


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.


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