A Narrow Perception of Loyalty

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You have heard this all before. You've heard it enough to even believe it. "Companies can boost profits almost 100 percent by retaining just 5 percent more customers." Keep your loyal customers and grow your revenue - and profit - by 25 percent to 85 percent. Others say that "loyal customers tell 20 of their friends when they get great service" from you.


Everything you have heard is probably wrong.


Your best customers are not loyal to you. Your "best customers" may even be the ones taking advantage of you. These best customers bleed you dry by shopping only your sales. They tell their friends, often sharing promo and discount codes, when there is a new way to take advantage of you. When you come out with new merchandise, they are nowhere to be found. When that merchandise goes on sale, there they are, ready to take the product off your hands at 90 percent write-downs. Isn't that what your outlet division is there to do?


Are your so-called best customers slowing killing you?


The root cause is relatively simple. As database marketers, we trade in several shopworn theories and approaches. The holiest of these is the reliance on RFM - recency, frequency, monetary. We believe that by looking at the last 52 weeks of the customer file we can quickly determine best customers by segmenting them into RFM buckets. If this customer bought four times over the past year for a total of $500 and the average customer bought only twice for a total of $200, the first customer must be better, right?


Maybe, maybe not. Maybe the cost of goods for your first customer was actually $600. That means you lost $100 (at least) from both top- and bottom-line revenue when this customer shopped with you, though by RFM standards he looks "best." Maybe the second customer bought two full-price items, one at each visit, for a total net margin of $100 to your store. Upon further inspection, this would be the "best customer." But he only bought twice, and for less total revenue!


Loyalty programs are seen as a way to retain best customers, but they do not provide the whole picture. Mine your loyalty program data and compare results to your non-members. You may find that some of your best loyalty program members are not your best customers. They may be sale customers or could be gaming your point system. Recognizing this, you can look at your loyalty program customers in the context of your overall CRM strategy.


Market to them differently. Look at the margins that all your customers deliver. Hidden within your loyalty program is something that your current database may be unable to tell you. These trends and patterns of spending can inform your multichannel marketing strategy so that you can start promoting to your best customer as you define her, not as defined within the narrow conception of RFM.


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