Not All Customers Are Created Equal

The Practice Of Loyalty MarketingLoyalty Marketing has become the buzzword of the nineties. It has generated a seemingly endless stream of philosophical debates, viewpoints and application theories. But the concept is not new. Loyalty programs have been around since the middle ages and the "baker's dozen" concept. Its theory was based upon "the more you spend, the more you earn" philosophy. That basic concept is the foundation for what we now refer to as the Relationship or Loyalty Marketing industry. There are many issues facing U. S. companies that have brought on the current increased demand for marketing strategies focusing on Customer Loyalty. An increasingly global economy, the rapid onset of technological advances, heavy merger and acquisition activity and smarter consumers are realities faced in almost every marketplace. Loyalty Marketing can be defined using many terms: Loyalty, Frequency, Retention, Relationship Marketing, etc. While specific meaning can be applied to each term, in reality these names are used interchangeably to define the same marketing solution:A long-term flexible marketing strategy that helps companies identify, retain and grow best customersäby communicating to them and recognizing and rewarding them based on their purchase activity.Loyalty Marketing can be found across all industries and segments. Whether companies are trying to retain their customers, motivate them to increase their purchase activity, or trying to establish loyal relationships, the basic principles of Loyalty Marketing are being applied all over.Why LoyaltyMore and more, companies are realizing that their most precious asset is their existing customer base, and among that base not all customers are created equal. The 80/20 rule usually applies: 80% of a company's revenue comes from 20% of its customer base. Loyalty Marketing provides countless benefits to marketers who are trying to market to their best customers. To summarize, well designed and executed Loyalty programs can:Produce profitable long-term customer relationshipsMaximize return on investment in a measurable way, allowing companies to identify profitability among individual customer segmentsResult in a better understanding of what customers want across product and service linesDrive customer purchase behavior Establish a competitive advantage, allowing companies to differentiate without price discountingAllow marketers to allocate marketing resources to those customers with the greatest potentialEnable marketers to track and measure customers' purchase and usage behaviorUnderstanding CustomersUnderstanding customers is the first step. Who they are and what influences them is critical in the development of value-added Loyalty initiatives. Examples of some of the basic components include:Demographics -- Who are they? Age, income, location, number in household, etc.Behaviors -- What are they doing? Product line, usage patterns, tenure, etc.Attitudes -- Why are they doing what they're doing? How they feel about the company's quality, service, competition, value, level of choice, etc.To be truly competitive, best customers must not be solely defined in terms of the value they represent today. Understanding key share of wallet drivers help companies identify customers who represent greater degrees of profitability in the future. Once those customers have been identified, service enhancements and product bundling strategies can be employed to yield greater profitability. Using Segmentation To Identify Best CustomersSegmentation can be used at various times during a Loyalty Marketing effort. Many marketers apply basic segmentation approaches at the beginning of an initiative and refine the strategy as they learn more about their customers through tracking response and behaviors associated with the Loyalty treatment. This is usually the case when a lot is already known about the targeted customer base at the time of the program launch. Other times, marketers use what knowledge they've gained over the course of the Loyalty program to develop a segmentation strategy. Once they've segmented their customers based on basic behaviors associated with the Loyalty program, they then look to apply this knowledge to refine their program initiatives and identify other methods of strengthening their customer relationships.Definition of SegmentationThere are nearly as many definitions for segmentation as there are for loyalty, but at its essence, segmentation is a system for sorting. In order to effectively sort "things" you must understand their role, their physical properties, their characteristics. For instance, on most work benches there are items, which are classified as "fasteners." For ease of selection, and appropriateness of application, most people would further classify fasteners into at least two sub-sets: nails and screws. However, there are drywall screws, sheet metal screws, and wood screws. Screws come in various lengths, diameters, finishes, and head configurations. Same litany of variables for nails. So, it would be short-sighted to state that you wished to build a fine piece of furniture, and that you intend to do so using "fasteners."Likewise, a business which has customer-centric growth strategies will be limiting its chances for success if it fails to segment (sort) its customers into meaningful groups. A customer segment is a group of customers--or targeted non-customers--with similar characteristics, wants, needs, behaviors and attitudes. When an organization decides to conduct segmentation research it is implicitly indicating an intent to develop marketing strategies that are customized by customer group, rather than relying on a single marketing strategy for all consumers. In other words, "any old fastener" simply won't do.Objectives of SegmentationThe goal of segmentation is to identify groups of customers within a product category--such as Financial Services--who are similar to one another so that highly effective marketing efforts can be directed towards them. Segmentation gives management insight into market structure and customer identity. Such market intelligence can be used to mold strategies that improve product offerings, drive loyalty and retention efforts, customize communication, and anticipate customer needs, to name a few.As it relates specifically to Loyalty Marketing, the goal of segmentation is to produce groups of customers who are similar to one another and for whom a customized loyalty marketing plan can be developed, or enhanced. Segmentation helps answer the question of which customers are most important to the business, and what are the critical decision-making issues for those customers. This leads directly to a Loyalty Marketing plan which influences attitudes, behaviors, and loyalty among those important customers.Conceptual FrameworkThere are a few different approaches to segmentation, but the classification scheme used most often involves either: --A priori (pre-determined) segmentation, or --Post hoc (market-defined) segmentationA priori SegmentationA priori segmentation requires prior knowledge about the variables that segment a particular market. This approach classifies consumers in advance based on prior baseline segmentation studies or experience, e.g., value of an investment portfolio. Since the segments have been pre-determined, the results of the research do not have any bearing on the definition of the segments themselves. The focus of segmentation rests on characteristics that help distinguish between segments. Post-hoc SegmentationPost-hoc segmentation begins with the premise that the exact nature of market segments are unknown prior to data analysis. Several hypotheses may exist regarding the nature of the segments based on marketing theory and experience. Post hoc segmentation analysis generally looks for patterns in product usage, attitudes, perceptions and the like, to identify key market segments. By including information such as acquisition costs, revenue growth, share of wallet and cost of servicing among the segments, conclusions can be reached about the connection between long-term loyalty and profitability among those segments.Data analysis techniques test the hypothesized relationships to determine the existence of segments and their profiles. The results of such segmentation may yield the existence of numerous sub-groups. In order to be considered a viable segment, the subgroup must be relatively stable over time and should have the property of being efficiently reached by marketers. Since post-hoc segmentation is a process of exploring and confirming segment definitions, it is more time-intensive than a priori segmentation. TechniquesThe most common technique used to segment customers is cluster analysis. There are several other analytical techniques that are used as well, most of which fall into two categories: dependent and interdependent techniques. Interdependence techniques are used to identify segments and provide information regarding attributes that help classify individuals into segments.Cluster analysis: It is the name of a group of multivariate techniques which are used to identify groups of individuals based on certain characteristics they possess. These characteristics can come from product usage information, product performance, demographic information, etc. Neural networks: Is an information processing technology where the system has been designed to learn complex patterns and trends in a particular data set. After the network has been trained and validated on a particular data set, the model can be successfully used to segment incoming data.Dependence techniques are used when segments are already known but the characteristics that distinguish between segments are unclear or unknown.Interaction Detection Techniques (AID - Automatic Interaction Detection, CHAID - Chi-squared Automatic Interaction Detector, CART - Classification and Regression Trees)These techniques, which are also referred to as classification tree methods, allow you to identify characteristics that distinguish between segments in one or more steps. The procedure is sequential and involves splitting groups created at a prior step into smaller sub-groups. There are few, if any, restrictions on the type of data needed for conducting interaction detection techniques. Discriminant, Logit & Regression analysis are predictive techniques which seek to classify individuals into one of the a priori defined segments based on other information available in the data. To estimate the relationship of individual attributes with the segmentation variable, these analytical techniques develop models/equations. The type of data needed to use these techniques are more restrictive.Let us assume that the Brand X Shoe Company knows their customers fall into two segments, those who spend less than 100 dollars and those who spend more than 100 dollars every three months. In attempting to predict whether a customer will be in one of the two segments, the marketer runs a discriminant using attitudes towards fashion, family size, appearance, etc. as independent variables. The results of the discriminant analysis will provide information as to the type of attributes that will be helpful in predicting group membership.Applying the InformationIt is important to always keep in mind that the end-goal of segmentation is the development of marketing plans--in this case, loyalty marketing--tailored to different consumer groups. Thus the test of whether a particular segmentation scheme is of value is whether it identifies practical opportunities for improved marketing efforts. The best way to ensure a successful market segmentation is to decide in advance which marketing elements are being considered for change and customization. If the primary focus of the segmentation effort is to enhance the efficiency and effectiveness of a Loyalty Marketing program, then the segmentation study will have been designed to mesh with the key elements of such a program. Synchronizing the research design to ensure that relevant consumer dimensions for the Loyalty Marketing elements are measured will help achieve the desired results of driving positive attitudes and behaviors among the best customers.Turning Best Customers Into Loyal CustomersOnce a customer segmentation strategy based on a solid foundation of customer understanding has been developed, marketers can begin to leverage the information to optimize their Loyalty Marketing program components. Communications Plan - the right messages delivered the right way to the right people at the right time. Segmentation learnings should be applied to develop specially crafted messages targeting key customer segments.Rewards Structure - an effective payout schedule with a broad selection of rewards matching customers' needs and desires. In some cases, Loyalty rewards and benefits are applied based on how customers are segmented. While not all customers are created equal, neither are all marketing budgets. Many marketers with limited Loyalty Marketing resources use the customer profitability metrics of the segments to determine which ones will be targeted and eligible for various rewards and benefits. Many existing Loyalty program have various payout and rewards structures for different customer segments depending on the amount of revenue and profit they represent.Reporting & Analysis Plan - a plan to track and measure key performance objectives and analyze data against program objectives. Tracking customer activity is critical to understanding the various similarities and differences among customer segments. The measurement plan should be developed so that marketers can determine which customer segments are most responsive to the Loyalty treatments and identify opportunities for increasing responsiveness among the others.

Not All Customers Are Created Equal

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