All businesses have a unique customer relationship path that leads to optimum profitability. As a marketer, your challenge is to identify the steps on that path, then drive customer behavior through a marketing stimulus to move them along it – thereby forging what we call the “relationship chain.”
The trick is to start with the end in mind. For example: A major retailer recently examined its customer file to try to identify high-value segments. It found a subset of customers who had spent $2,000 in the past 10 months, placing them in the high-value category. Further study revealed that some of these customers came in once, bought a low-margin, big-ticket appliance and never returned. Others spent only $200 per visit, but visited once a month for the previous 10 months and spent that money on high-margin merchandise.
Few marketers would argue that though both sets of customers are of high value, the high-margin, once-per-month customers are more valuable to the brand than those of the low-margin, “once-and-I’m-outta-here” variety. Every enterprise has a subset of these high-value, optimal customers. They’re valuable because they repeat a cycle of profitable behavior: They buy the right products, they shop a particular number of times monthly, they spend the right amount of money in the right mix of departments.
Database marketing makes it possible not only to identify those high-value customers, but also to break down that value into its component variables: recency, frequency, cross-sell and upsell potential, and monetary value. The specific variables are unique to each enterprise. Once you isolate and catalog these components of profitable behavior, how do you then get newly acquired customers to evolve into these optimal specimens?
Through our examination of loyalty programs, we’ve seen that there are a series of links that connect the path to customer profitability. The forging of each link deepens the customer relationship in measurable ways and is accompanied by a corresponding rise in the value of the customer to the brand. Using an example from a typical loyalty program, we might identify these links as:
Enrollment. To forge the first link, you must enroll the right customer in the program – one who raised his hand and asked to be identified, and who shows the potential for high-value behavior.
Participation. The next link involves encouraging the customer to participate in the program – to raise his hand again and show a sign of engagement. Her first action might involve contacting the call center with a question about the program, filling out a survey or checking her point value on the Web site.
Redemption. This link is forged when your customer has accrued value in the program and redeems that value for a tangible benefit. He may redeem program points for a voucher or gift certificate, for example, and then stop at the store to spend it. The customer is now a partner in the value exchange.
Multiple redemption. A single redemption, however, does not an optimal customer make. You must track multiple redemptions, paying close attention to recency and frequency. Look for signs that the customer is displaying optimal behavior and reward him for continuing that behavior.
Spin cycle. A customer who reaches the spin cycle is at the most profitable stage of customer development. He is redeeming regularly and displaying that mix of component variables that defines the optimal, high-value customer. The customer recognizes the value of the program, perceives a mutually beneficial relationship and has become a brand advocate.
We’re using loyalty program participation as an example, but this concept can apply to any marketing strategy. The challenge is the same: Quantify the links in the chain, understand the difference in incremental revenue between each step and direct your marketing dollars toward incentives that cause behavior shifts.
As you forge the links of this relationship chain, you can track the incremental value of each customer and maximize their lifetime value, at each stage, as the profitability gap between low- and high-value customers widens. Finally, you’ll have a solid understanding of the path taken by your best customers along the road to maximum profitability.