Whitepaper Maximisereturns

SurfGoldBuilding Loyalty in Relationships

Founded in June 1999, SurfGold is Asia’s premier customerrelationship management consultancy. We develop, market andimplement incentive-based strategies and technologies to buildloyalty and reward long-term relationships through the utiliza-tion of the Internet, wireless technology and offline solutions.

Our proprietary technologies and loyalty marketing servicesare designed to fit organizations across all verticals andenhance an organization’s competitive edge.

SurfGold's clients include leading multinational corporationsand traditional Asian businesses. With robust funding from ABRHoldings Ltd, Techpacific.com, Tekbanc Limited and WaldenInternational, SurfGold's presence extends across Hong Kong,India, Indonesia, Korea, Singapore and Taiwan.

One of SurfGold's core strengths is an outstanding manage-ment team with 60 years of combined experience in marketing,loyalty solutions, e-commerce infrastructure and online businessdevelopment.

TECHNOLOGY INFRASTRUCTUREKey enablers of our technology include the ability to easily inte-grate with a wide spectrum of merchants and partners, bothonline and offline.

Our highly scalable system was designed to handle escalatingtransaction volumes, multiple registrations, point award andredemption. Besides being a vital factor in building trust andconfidence amongst members, partners and investors, therobust technology allows us to capture valuable informationabout members buying patterns.

BROAD NETWORK OF PARTNERSHIPSOur strong focus on building a Business-to-business slant inaddition to our Business-to-Consumer edge is reflected in ourdiverse partnerships.

Large MNCs and smaller companies have found our rewardsprogram effective in complementing their marketing strategy.Whether online or offline, SurfGold aims to provide our partnerswith a loyalty program that makes a difference to their business.

Some of the companies that have adopted the SurfGoldLoyalty infrastructure include Compaq, Hewlett-Packard,Seagate, AMD, Microsoft, Epson, Computer Associates andSamsung.

About SurfGold


Maximize your Returns from Loyalty Programs

Determing ROI and Lifetime ValueDemystifying ROI The benchmarks to usePoints-based ROIROI-based campaignsLifetime ValueRFM ModelsRFM, LTV and Hurdle Rates

How to Maximize LoyaltyThe secrets of successful loyalty programsWhat to do once your program is up and runningTransform frequency programs into true loyalty programs

Contents1

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Maximize your Returns from Loyalty Programs 1

Frederick Reichheld study clearly showed that a 5% increase incustomer retention rates could improve profitability by nearly95%. In certain industries such as credit card, this increase couldbe nearly 125%. But a successful (in terms of increasing compa-ny value) loyalty program is not one which offers the most dis-counts or the most points per dollar. It is one which succeeds mostin increasing the lifetime value or extending the relationship withthe customer.

Typically, measurement of loyalty programscomes under the CRM evaluation. Two recentstudies suggest that those companies thatincrease the value of their customer relationshipsare seeing the highest ROI. According to a studyby AMR Research, 78 percent of respondent com-panies said the key metric to defining CRM suc-cess was the customer satisfaction rate. A similarstudy by CRMCommunity.com found that 72 per-cent of surveyed members defined CRM successas improved customer communication. So far, theROI for the customer-centric companies has beenimpressive: AMR discovered that 68 percent ofrespondents that had implemented some part ofa CRM solution had either seen ROI or were on

track to seeing it, while CRMCommunity.com found that 42 per-cent surveyed were measuring distinct ROI.

Demystifying ROI Return on Investment (ROI) is the additional revenue generateddivided by the net amount spent for a specified period of time.ROI measures on loyalty programs are an indicator to the way thecompany is progressing in terms of customer loyalty and retain-

ing existing customers. It gives a firm parameter bywhich you can measure whether the objectives ofyour loyalty programs are being fulfilled and what isthe value of these programs. At the same time, ROItells you whether the returns are justifiable or not. Ifthe ROI is less than 6% or what is offered normallyby government bonds, then you are much better offinvesting in these secure investments than spendingon loyalty programs.

Of course, customer measures, while quantifi-able, can be hard to define. Also, customer loyaltyis basically a measure of relationships that involveemotions, and it’s equally important to understandthe emotional connection and get the complete cus-tomer viewpoint.

Determing ROI Lifetime Value &



ROI MMetricsThe best metrics for calculating ROI in loyalty programs revolvearound the customers themselves. Typically, experts look at thefollowing values: Customer SSatisfaction: Customer satisfaction is qualitative innature and can be measured by observing behavior or capturedin surveys. Satisfaction surveys normally look at customer attitudesin relation to the entire brand as opposed to a specific scheme orfunction. Customer AAttrition: Customer attrition is a term that defines theperiod when a customer has not made a repeat purchase. For the

PC market, it might be 18 months, for food or supermarket chainsit could be a week, for travel it might be 1-3 months. Customerattrition rates can then be compared with industry benchmarks.Attrition is normally calculated for each segment as the customervalue can vary widely across segments within the industry. Hurdle RRate: This is the percentage of customers demonstrating acertain activity level based on recency, frequency or monetaryvalue. It’s the percentage of customers who have engaged in abehavior since a certain date, engaged in a behavior a certainnumber of times, or have purchased a certain amount.Customer LLife CCycle: Life Cycle metrics measure predictable pat-terns in customer behavior occurring from the first interaction witha business through the last. Life Cycles are usually required todetermine Lifetime Value (LTV).

Lifetime VValue:The single mosteffective measure,LTV is calculatedas the net rev-enues the cus-tomer will gener-ate over the life ofhis relationship,minus the costs ofgoods sold andthe cost of servingthe goods.

CUSTOMER SATISFACTION: A MEASUREMENTOF CUSTOMER VALUE?For companies that are serious about achieving outstandinglevels of service, customer satisfaction is an inadequate measure. Satisfaction is just a fleeting attitude and too low astandard for excellent companies. A better indicator would bemonitoring a customer’s purchase patterns and retention rates,coupled with a survey that focuses on customer loyalty. When Bain, a US-based consulting company, benchmarkedsome of the best companies in a survey called the acid test, itfound that 70 to 80 percent of customers agree that theorganization has earned its loyalty. Yet for those same companies, more than 95 percent of their customers wouldsay they are satisfied or very satisfied. So, there are at least20-30 percent of customers who call themselves satisfied but are not loyal.



RFM: RFM stands for Recency, Frequency, and Monetary valueand is a method of ranking a customer relative to all other cus-tomers in their likelihood to respond to promotions and rankingthe customer’s future value to the company.

Often, it is not possible to capture all the infor-mation required to make use of these metrics. Insuch cases, it is better to use common sense, asthese metrics aren’t still absolutely perfect.Companies can use approximations, measuretrends and repeat the same calculations across thesame segments.

The benchmarks to useThere are different benchmarks companies canuse to measure the influence of their loyalty pro-grams. Some of these include: Establishing ccontrol ggroups: If possible, alwayshave a control group for the loyalty programs. Thecontrol group will have customers who have notbeen exposed to the loyalty program. Therefore,after the loyalty scheme is over it is possible tocompare results with the experimental and control group. Theproblem in this kind of benchmarking is that companies do notwant to leave out potential customers just to measure ROI.Before aand aafter rresults: Tracking results before the introduction ofa loyalty program and after its introduction offers another set ofbenchmarks. Here, the problem might be in assessing a direct

correlation between the loyalty program and the results. Othervariable factors could also influence the results.Industry bbenchmarks: Measuring your success in loyalty program

against similar players in the same category couldbe useful. Access to industry figures could, howev-er, pose a problem.

Points-based ROIWhen we award points that can be redeemed at alater point of time, the calculation gets a bit com-plicated since we also have to account for break-ages and the purchase value of every point.

Brian Woolf in his book, Loyalty Marketing, TheSecond Act, showed how the break-even for pointssystem can be calculated. In a 1 point for $1 spendpoint system, if we make the following assump-tions:

80% of the total sales are captured on the loyal-ty card.

Of the points that are issued, 80% are laterredeemed.

On the incremental sales gained as a result of the point program, the company earns 10%.

To earn the same profit as before, given these three assump-tions, an increase in sales of 6.84% is required.

If you give a rebate/discount of 2 percent and at variable mar-gins of 30 percent, all the loyalty members would have to spend

If you give arebate/ discount

of 2 percentand at variable

margins of 30 percent, all theloyalty memberswould have tospend about

6 percent more tobreak even



about 6 percent more to break even on the cost of rewards alone.But if only half of the members spent more money, that averagespending increase would have to double, to 12 percent. Anythingless would mean negative ROI.

ROI involving campaignsTypically, ROI for a marketing campaign looks at the cost of cam-paign in relation to the profits generated. So, if you are sellinghard disks at $100 of which margin is 50% and 10% is opera-tional expenditure, then actual profit is $40.Now, if you spend $1,000 in a campaign to sell these hard disks.and manage to sell 30 of these, you have a total profit of $1,200(30x40). If we subtract the cost of the campaign, the returns are$1,200 - $1,000 = $200. The return on investment (ROI) is $200/$1,000 = 20%.This is the simplest form of calculating ROI without including con-cepts of time or any loyalty features. Discounted RROIIn cases, where discounts are offered on products, the calculationis similar. Just that the profit would be reduced by the discountpercentage. So, if in the above example, there was a 10% dis-count to loyal customers, then the total profit would have been$30 x $36 (discount of $4) = $1,080. The returns would be $1,080 - $1,000 =$80 and the return oninvestment would have been $80/$1,000 = 8%.

Specifically, when products are distributed through a channelwith discounts, the ROI = total additional revenue generated/totalspending on the program.Factoring iin aadditional ccostsThere’s more to ROI than the simplified revenue generated versusinvestment. There are other values such as customer repeatbehavior and cost to the organization. Not to forget operationalcosts apart from costs of servicing repeat or increased purchases.

ROI = total additional revenue generated/total spending on the program

CCAASSEE SSTTUUDDYY II:: CREDIT UNION OF TEXASFor Dallas-based Credit Union of Texas, with nearly $1 billionin assets, first campaign objective was to raise the profitabilityof the 44,000 low-value members the bank was serving.These accounts carried low balances and subscribed to onlyone bank offering. With Unica’s Affinium Model, Thompsonidentified which of the institution’s 109 services were most like-ly to interest each low-value member. A personalized direct-mail campaign, with three different offer-ings to each customer, garnered a whopping 10.4 percentresponse rate. Among responders, 2,272 customers signed upfor additional services, resulting in $150,000 additional netprofit for 2001 alone. Another 3,600 customers decided toclose their accounts, which saved the bank $73,000 in servic-ing costs. The campaign itself cost only $45,000, and CreditUnion plans follow-up mailings to offer a different set of serv-ice options to the non-responders, or the chance to close theiraccounts altogether.



Let’s say a company spent $80,000 advertising on a websitefor a loyalty program. This advertising generated $100,000unique customers and translated into $100,000 in revenues ($1per customer). Assume cost of servicing each customer is $.10. Total cost of servicing is $100,000 x $.10 = $10,000$100,000 revenue - $10,000 cost = $90,000$90,000 net profit - $80,000 campaign -= $10,000ROI == $$10,000/$80,000 == 112.5%

Here, we have just taken operational costs. There would beother costs involved such as program design, implementation andmonitoring. Increased sales would also result in companies hav-ing to increase capacity and infrastructure. The true ROI needs tofactor in these costs including creative fees, communication costs,credit card service charge, distribution and logistics, etc.

If getting all these details is a difficulty, another method mightbe to get details of actual revenue dollars that actually flowthrough to the bottom line, to cash flow or EBITDA. FrederickReichheld reveals that in the cellular business the number thatmatters to Wall Street is called EBITDA Margin, and it can rangefrom 25% to 45%, depending on the growth stage of the compa-ny. If this EBIDTA margin for a given cellular company is 30%,then any $1 this company generates in revenue has to cost lessthan $.30 to generate, else it loses money, since 30% is all that‘flows through’ on each revenue dollar.

Lifetime ValueThe concept of Lifetime Value (LTV) is difficult for most companiesto grasp. This is because LTV looks at the worth of a customer overtime instead of rigid, financial statements and ROI figures. SinceLTV looks at the value and relationship factors, reconciling it withstrictly financial figures is problematic.

CASE STUDY II: A CELLULAR TELEPHONE COMPANYIn a customized loyalty program for a cellular telephone com-pany designed by a loyalty marketing agency, the programimplementation methods allowed for accurate tracking of cus-tomer behavior using control groups. By comparing thebehavior of the customers in the loyalty program with thosenot in the program, the financial impact of the loyalty programcould be precisely determined. Since this program was notadvertised anywhere but through the mail to specific cus-tomers, a perfect “blind test” of loyalty program effectivenesswas created in this cellular market. Over the 2 year periodfrom January 1999 to December of 2000, customers in theloyalty program spent an average of 35% more than cus-tomers not in the program. After calculating the EBITDA mar-gin on this increase and subtracting the cost of the program,this loyalty program generated a Return on Investment of252% annually over the two years of the test period. The ROIon the top 20% of spenders averaged 665% for each year.Notable also in this program: the increased customer prof-itability came from both churn reduction and increased spend-ing by customers.



But LTV is a central idea for customer retention and CRM; afterall, if one cannot extend and increase the value of a customer,then why bother with CRM at all? The reason why LTV has provedto be a more sophisticated measurement is that LTV calculationsinclude such factors as the retention rate, the referral rate and the(long term) spending rate, rather than just the response to animmediate promotion. The marketing efforts are judged by the

ability to retain andincrease the loyalty andspending rate of cus-tomers, rather than justconsidering the resultof a single investment.

With LTV, the idea isthat all informationabout a customershould be analyzed interms of current andfuture profitability to thefirm. When a profit fig-ure can be assigned toeach customer, the mar-keting manager canthen decide which cus-tomers to target.

The margin a partic-ular customer brings

minus the cost spent on targeting the customer gives the profitattributable to that customer. The costs spent on targeting individ-ual customers may not be easily available unless it involves directmailers or tele-marketing efforts. For mass advertising, the totalcost of advertising spend can be divided by the total reach toarrive at the per customer spend. LTV is calculated by addingforecasts for the major parameters and discounting back. Thisobviously requires assumptions about future purchasing, productand marketing costs, as well as how long the customer can beexpected to remain with the firm. Generally, this will result in anumber of scenarios for each customer depending upon theseassumptions.

The LTV formula can also be used to show where additionalprofits can be obtained from customers. Increased profits canresult from:

Increasing the number of products purchased, by cross-selling; Increasing the price paid, by up-selling or charging higher

prices; Reducing product marginal costs Reducing customer acquisition costs

Measuring LLTVTypically, while measuring LTV you look at the following parame-ters:

Current RevenueCurrent CostsFuture RevenueFuture Costs



Loyalty or Retention RateReference or Influence Value

Based on these parameters, a description for LTV can be:

If we put it as a formula, then it would be:

Where pi = sales profit in period i, minus any non-sales benefit (references, col-laborative value, etc.) less the cost of maintaining the relationship. In this equation,d = discount rate, n = estimated lifetime horizon for this customer.

Case Study: LTV with Loyalty Programs

(The charts here are taken from the work of Andy Kardos, President of BCP Directin Toronto. The charts are based on his experience with several retailers.)

Chart AA shows the lifetime value of the customers in the controlgroup (those not in the loyalty program). Their lifetime value, inthe third year, was $162.91. Their retention rate was 73% in thefirst year and 79% in the second year. Their spending rate was$138, $149 and $161 in the first three years.

In CChart BB (on next page) we look at the lifetime value of the5,000 customers in the loyalty program. The loyalty program hashad a measurable effect on the customers enrolled in it. In the first

place, their retention rate increased to 79% and 84%. This added434 customers who would otherwise have disappeared in thethird year. These retained people spent $78,988 alone in the thirdyear. In addition, the referral program really paid off.

By giving an incentive of $15 per customer, 640 new customerswere added in two years. These new customers brought in$116,480 in sales in Year 3. The loyalty program also affectedthe spending rate. It increased to $162, $175 and $182—a bigjump over the spending of the control group.

Why did these people spend more? Because they were beingtreated as someone special. They were recognized, communicat-ed with. They felt a new special relationship with the retailer. The

Lifetime Value of a Control GroupYear 1 Year 2 Year 3

Customers 5,000 3,650 2,884Retention Rate 73% 79% 80%Spending Rate $138 $149 $161

TToottaall RReevveennuuee $$669900,,000000 $$554433,,885500 $$446644,,332244Variable Costs (%) 50% 45% 40%

Variable Costs ($) $345,000 $244,733 $185,730

GGrroossss PPrrooffiitt $$334455,,000000 $$229999,,111188 $$227788,,559944Discount Rate 1.00 1.15 1.33Net Present Value Profit $345,000 $260,102 $209,469

Cumulative NPV Profit $345,000 $605,102 $814,572LLiiffeettiimmee VVaalluuee $$ 6699..0000 $$ 112211..0022 $$ 116622..9911

CCHHAARRTT AA:: LIFETIME VALUE OF A CONTROL GROUP

LTV = Value (Initial Revenue - Costs) + net present value (Loyalty*[Future Revenue – Costs])+ net present value (Loyalty*Influence Value)



results could be seen in the numbers on the chart.To accomplish this gain in spending and retention, the retailer

had to spend $12 per customer per year. This was spent on com-munications, a special 800 number for this favored group withspecial treatment when they called, member nights and a host ofother benefits which amounted to 6.6% of total sales revenue

from this group in the third year. Chart CC (on next page) is the comparison of the lifetime value

of the control and the test group. In the first year, the LTV of thetest group is actually lower than the control group. Why? Becausethe extra $12 per customer per year spent on loyalty maintenanceexceeded the gains from increased retention and spending.

The net gain, $24.28 per customer per year in the third year, isremarkable since this figure represents profits after expensesincurred under different heads.

It’s therefore vital to understand that customer lifetime valuemay not show an immediate result in the first year, butit’s only once that the program starts off that the real-worth comes across. It is necessary to set up tracking systemsthat measure the outcome for different periods instead of justlooking at the immediate period.Customer AAccountingLTV may not fit in with the strict financial structuring of the organ-ization. But managing a business by customer value allows for anunmistakable advantage—the ability to predict future profitabilityand the effects of changes to the operation before they create anysignificant economic impact, positive or negative.

A customer accounting system can take the form of customervalue reporting, designed to track the value of new and currentcustomers over time. Generally, two types of customer account-ing reports are valuable—an overall view of customer value sta-tus and a campaign or project specific view. The idea behind boththese reports is simple—they allow you to monitor project expen-

Lifetime Value of Test GroupYear 1 Year 2 Year 3

Referral Rate 6% 8% 10%Referred Customers 0 300 340Retained Customers 0 3,950 3,570Customers 5,000 4,250 3,910Retention Rate 79% 84% 87%Spending Rate $162 $175 $182TToottaall RReevveennuuee $$881100,,000000 $$774433,,775500 $$771111,,662200

Variable Costs (%) 50% 45% 40%Variable Costs ($) $405,000 $334,688 $284,648Loyalty Program($12/member)

$60,000 $51,000 $46,920

Retention Incentives ($15) $0 $4,500 $5,100Total Costs $465,000 $390,188 $336,668GGrroossss PPrrooffiitt $$334455,,000000 $$335533,,556633 $$337744,,995522Discount Rate 1.00 1.15 1.32Net Present Value Profit $345,000 $307,446 $283,518Cumulative NPV Profit $345,000 $652,446 $935,963LLiiffeettiimmee VVaalluuee $$6699..0000 $$113300..4499 $$118877..1199

CCHHAARRTT BB:: LIFETIME VALUE OF TEST GROUP



diture in relation to customer value generated and also projectrevenues over a period of time fairly accurately.

RFM ModelsSimply stated, the RFM model believes that a customer who hasvisited a store Recently ((R) and Frequently ((F) and created a lot ofMonetary VValue ((M) through purchases is much more likely to visitand buy again. The assumption is that:

Customers who purchased recently are more likely to buy againversus customers who have not purchased in a while

Customers who purchased frequently are more likely to buy again versus customers who have made few purchases

Customers who have spent the most money in total were morelikely to buy again.

Customers are ranked based on their R, F, and M characteris-tics, and assigned a ‘customer value score’ representing this rank.Assuming the behavior being ranked (purchase, visit) using RFMhas economic value, the higher the RFM sscore, the more prof-itable the customer is to the business now and in the future. HighRFM customers are most likely to continue to purchase and visit,and they are most likely to respond to marketing promotions.The opposite is true for low RFM score customers; they are theleast likely to purchase or visit again and the least likely torespond to promotions.

By determining a RFM value, companies can: Decide who to promote to and predict the response rate

Optimize promotional discounting by maximizing response ratewhile reducing overall discount costs The customer value score (CVS) is a single variable, derived fromRFM, which companies can use to place customers into a singlehierarchy. Another value, based on recency, known as the VelocityIndex (VI) is used to define recency relative to the average lag

between transactions, and ismost commonly expressedas the date of a customer’slast transaction minustoday’s date.These three variables—Fmultiplied by the M multi-plied by the VI—give you theCustomer Value Score.

Payback for Investment in Loyalty ProgramSource Year 1 Year 2 Year 3Control Group LTV $69.00 $121.02 $162.91Test Group LTV $69.00 $130.49 $187.19Difference $0.00 $9.47 $24.28

Additional revenue with200,000 customers

$0 $1,894,000 $4,856,000

Cost of Loyalty Program $2,400,00 $2,400,000 $2,400,000

RReettuurrnn oonn IInnvveessttmmeenntt 00..0000 00..7799 22..0022

CCHHAARRTT CC:: PAYBACK FOR INVESTMENT



Determining RRecency To predict the likelihood of a customer to repeat an action, onecalculates Recency, or the number of days that have gone by sincea customer completed an action (purchase, download, etc.).

Each passing day after a customer has completed the actionindicates that the customer is less and less likely to repeat it. Themore recently customers have done something, the more likelythey are to do it again. Recency can predict the likelihood of pur-chases, log-ins, game plays, or just about any “action-oriented”customer behavior.

Customers who are more Recent have higher potential valuethan customers who are less Recent, for any given activity. So, acustomer who made a purchase 15 days ago has higher poten-tial value than a customer who made a purchase 60 days ago.

Customers engaging in multiple actions could be assigned aRecency metric for each action. For example, the customer couldbe very Recent on visiting the store, but low on purchases. Thiswould imply the customer is likely to visit again but is becomingless likely to purchase—just the kind of customer companies cantarget.

While designing a marketing communication, companies tendto measure the response rate by recency. They might get figuresthat suggest that the response rates for customer inactive for morethan 4 months is just 5%, whereas 1-month inactive customershave response rates of 25%. If these figures are mapped againstthe cost of the campaign and break-even response rates, then itbecomes very simple to decide which customers to target.

LOYALTY & PROFITABILITY: THE CORRELATION?Many loyalty programs are successful; they enhance the valuepropositions of companies, capture valuable data, draw inhigher-profit customers, and persuade those customers tospend more. But many or more programs unwittingly deployvalue-destroying mass-discount vehicles, thereby eroding thevalue of the program.In the July 2002 issue of the Harvard Business Review, WernerReinartz and V. Kumar argue that the most loyal customers arenot necessarily the most profitable ones. Titled TheMismanagement of Customer Loyalty, the article asserts thatdespite the “gospel of customer loyalty,” engendering faithfulcustomers simply doesn’t pay. The problem is, Reinartz and Kumar correlate profitability andloyalty among different customers at a single point in time,rather than correlating these variables for a selected group ofcustomers tracked over a period of time. Loyalty and prof-itability are two different and fairly independent componentswhen calculating a customer’s lifetime value, and their corre-lation with each other depends on the nature of the businessand the uniformity of the customer base. Yes, it is true thatcustomers who are already loyal are not necessarily very prof-itable, and vice versa. But it is also true that customers whobecome more loyal over time will become more profitable.These two statements do not contradict each other in any way.The other major problem is the concept of loyalty. Loyalty formost businesses today has to move beyond retention andrepeat behavior. Loyalty has an emotional tang to it that can-not often be quantified. That’s why measurements such asLifetime Value are prominent.



RFM, LTV and Hurdle RatesThe higher the RFM score, the more profitable the customer is tothe company now and in the future. For this reason, RFM isclosely related to LTV. RFM techniques can therefore be used tomeasure the future profitability of a busi-ness. High RFM customers have thehighest Lifetime Value. Low RFM scoresrepresent dwindling business opportunity,low LTV, and are an indication that com-panies need to either drop these cus-tomers or woo them with some schemes. Hurdle RRate AAnalysisOne simple application of RFM is HurdleRate Analysis, where ‘hurdles’ are select-ed for Recency, Frequency, and MonetaryValue, and the entire customer base isevaluated against these hurdles as agroup. A Hurdle Rate is simply the per-centage of customers who have at least acertain activity level for Recency,Frequency, and Monetary value. It’s thepercentage of customers who have engaged in a behavior sincea certain date (Recency), engaged in a behavior a certain num-ber of times (Frequency), or have purchased a certain amount

over time (Monetary value). Because of the link between RFM andLifetime Value, it can be concluded that if the percentage of cus-tomers over each hurdle (Recency, Frequency, Monetary value) isgrowing, the business is healthy and thriving. Customers are

responding positively to the experiencethey receive, and as a group are morelikely to engage in profit generatingbehavior in the future.

If the opposite is true, and the per-centage of customers over each hurdle(Recency, Frequency, Monetary value) isfalling over time, high value customersare defecting and the future value ofyour business is falling. Customers asa group are responding negatively tothe overall service they are receiving.

“Companies can no longer focus solely on their top-tier customers. In fact, the greatest opportunity for improving customer loyalty is bymigrating the majority of your customers up the value chain. And the way to drive this migration is not through CRM, but rather throughCVM—Customer Value Management. This shift can only take place if you become more intimate with your customers—learning all youcan about their likes, dislikes, buying habits, etc,—in order to manage customer value and gain their loyalty. Programs must proactivelyengage 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 customerwith a superior product or service and by providing a positive,consistent purchasing experience. Then keep on increasing valuethat will keep the customers coming back for more.

But in most cases, loyalty programs tend to do well in the firstyear, but falter later on. As Brian Woolf puts it, loyalty marketingis like good theatre, where “you have to find ways to keep fillingthe seats…. This has less to do with the value of points or dis-counts to a customer, and much more to do with a company’s useof data mining to improve the customer experience.”

Most companies collect the data, but do not know how they cantranslate this into a marketing strategy aimed at retaining andenhancing the value experience of customers. The best loyaltyprograms use customer data to improve not only promotions, butalso service quality, production quality, and other factors such as

cleanliness, etc. For instance, Starwoods has apreferredguest.com site where it allows its chosen customers tomanage room preferences, bed preferences (including pillowtype), preferred floor level, credit card information for expressbooking and choice of newspaper to be delivered in the morning(among other things).

The Secrets of Successful Loyalty ProgramsThe fastest method to build customer loyalty and increase cus-tomer value is by making it as easy as possible for customers todo business with the company repeatedly. If companies make iteasier for customers to buy from them, relative to their competi-tion, then they will continue to win their business, assuming theproducts or services are comparable.

How to Maximize Loyalty



Five key points in creating a loyalty program are: The loyalty program has to be part of the marketing mix and

more importantly part of the company culture. Personalized rela-tionship is a concept that has to be imbibed in every employee ofthe company and into every product and service offering.

Learn from customers what they really want from the company.Talk to the customers and find how to increase share of business. Target specific and appropriate messages to the right customers.

Make the right offer to the right customers, and at the right time. Set realistic achievement goals. Have the resources in terms of

people, money and time to match the goals. Plan to measure all possible results at all times.

What to do once the program is up and runningMost managers just relax once the program is up and running.However, the first two years are typically critical and companiesneed to spend time and effort in enhancing the relationship.Some of these methods include: Communicate aat aall ttimes Communicate about your loyalty program at all forums and at alltimes. The loyalty program is like an asset which can be used any-where… in advertisements, on company website, within retail out-lets, at points-of-sale, etc. Companies need to reinforce the pro-gram message to customers. This can be done using email mail-ers, newsletters, direct mailers, gift certificates, toll-free numbers,events, etc. All these communication materails should emphasizethe benefit to loyal customers.

Have aa llong-tterm ffocus Better retention has a linkageto profits only over time, andthis typically may extend upto two years. Therefore, it isessential to establish a base-line performance measureand then monitor it acrossyears.

Companies are typicallyeager to analyze data gath-ered from a loyalty programin the first 3-6 months of theprogram. This may provideincorrect information as thisperiod normally has highenrolment and spending,and may not give the correct picture.

The short-term objectives of getting to know the customer canbe achieved in the first phase, but the long-term objective ofbuilding relationships and maximizing profits takes time. Have sstrong, bback-eend ddatabases The success of loyalty programs depends to a large extent on theinformation gathered and captured in the database. Not only is itimportant to have a strong database architecture, but it is equal-ly important to have the expertise to mine this information.



Get tthe mmeasurement pparameters rright Companies want to include as many customers as possible in theloyalty program. However, this creates a problem while measur-ing the effectiveness of the program. That’s why it is best to havea control group that is not exposed to the loyalty program. Thisallows accurate measurements and helps drive better businessdecisions. The members of the control group can be included inthe next program. Keep tthe ccustomer’s ffaithA customer reveals personal information in a loyal-ty program with the assumption that the companywill respect his/her privacy. Companies shouldn’tbreak this trust and allow customers to opt-out ofcommunication material at all points.

These factors are critical when operating a loyal-ty program. It is only after the first year that compa-nies get a clear picture of their best customers.Targeted messaging and loyalty programs willimprove retention and profitability.

In a nutshell, managing loyalty is all about find-ing those pieces of information that will allowenhancing a relationship in ways that are relevant, and ultimate-ly move second and third-tier customers to the top rung.

Transform Frequency Programs into True LoyaltyProgramsCustomer loyalty programs are playing an increasing role in mar-

keting strategies as companies realize the importance of retainingcustomers. This has led to a proliferation of loyalty programs withhardly any differentiation. Almost all companies offer some typeof scheme, which in most cases is a discount in some form or theother. The lack of differentiation of benefits among companieshas led to loyalty programs losing their competitive edge.

A majority of so-called loyalty programs today, are mainly fre-quency programs driven by points and discounts. These may havebenefits in the short-term but do not provide insights into the cus-

tomer’s behavior pattern—an essential require-ment to forge a long-term relationship. Frequencyprograms, therefore, have to be seen as a meansfor collecting information. This information canprovide the necessary content for designing astrong loyalty program.

In Customer Loyalty Programs and CustomerClubs, author Stephan A. Butscher writes that“Loyalty marketing has reached a plateau. It mustnow move to the next level, which is value-orient-ed customer loyalty programs. The new value-ori-ented customer loyalty programs attempt to estab-

lish an emotional relationship between company and customer tocreate long-term loyalty.” The premise in value-oriented customerloyalty programs is that a ccustomer wwho jjoins aa lloyalty pprogramfor aa ddiscount wwill lleave iit iif hhe ffinds aanother pprogram wwith aa hhigh-er ddiscount. Giving discounts is like giving away profits without aguarantee that the increased sales will compensate for the dis-

Loyalty is more about a company’sbusiness philosophy

than about giving discounts

through a frequent buyer card



count. Therefore, while designing loyalty programs, marketers tryto upsell and cross-sell other products.

Discounts are given to reward customers and direct theirbehavior towards other products with more profitability or toincrease purchasing volume. This type of discounting structurebuilds a protection barrier that makes it difficult for competitors tolure the customers. For example, banks and credit card compa-nies will always try to sell their other financial instruments to theirhigh net-worth individuals.

Therefore, value-oriented programs do not focus solely on dis-count but offer a combined package of advantages consisting of

tangible (discounts) and intangible benefits (soft benefits). The dis-counts will get the customer to join the program and then theother benefits build the relationship. Thus, the identification of theright mixture of hard and soft benefits is crucial to the develop-ment of a successful customer loyalty strategy.

As Peppers and Rogers Group puts it, “Businesses that infuseloyalty into their merchandising strategies, employee compensa-tion policies and other business practices garner the devotion oftheir customers without having to ‘bribe’ them with points andperpetual discounts.”

That’s why many companies are promoting alternative systemsthat go beyond points. The Hertz #1 Gold program, for instance,allows best customers to pick up their rental cars and get onto thehighway as quickly as possible. This benefit is more valuable tothem than a discount. Amtrak, in an effort to compete with air-lines for business-traveler revenue, provides the elite tier of itsrewards-program members with conveniences such as a specialtoll-free number for reservations, first-class upgrade coupons andpasses to the first-class lounges in train stations.

Personalization allows companies to separate their most valuedcustomers and reward them accordingly. For instance, StarwoodHotels & Resorts Worldwide doubled its lucrative platinum-levelmembers because its elite customers who stay 75 nights or morein a year get personal concierges, fresh flowers daily, complimen-tary in-room bars and snacks, use of a town car, etc. MarriottInternational allows its Most Valuable Customers to pick their ownpreferred reward from a wide range of options.

WIN BACK CUSTOMERSFew companies have any systems in place to get back lost cus-tomers or recover those at a high-risk of defection. Gettingback lost customers can also be a fundamental part of loyaltyand retention activities. This helps to:

Realize potential sales/profits by rebuilding customer rela-tionships

Minimize new customer acquisition costsReduce negative word-of-mouth

Better understand the customer process for relationship ter-mination so that appropriate intervention and recovery stepscan be taken

Develop a profile for lost customers that can help detect ‘atrisk’ customers

Build customer recovery into the customer-focused culture



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