An introduction to Customer Life Time Value (LTV) and Loyalty Marketing for SMEs

August 19, 2010 By Leave a Comment

We recently participated in a written interview for the SME magazine of one of our major Australian banks. The article was not all about us, so some of the input was edited to meet space restrictions; but we post the transcript here for those of you interested in Customer Lifetime Value and loyalty programs.

(Please excuse us for retaining the Q&A structure of the original).

Q: Please explain the theory behind customer lifetime value.

The concept of customer lifetime value is quite simple; customers give you value by buying from you now and if you do a good job, buying from you again in the future. Lifetime value is the sum of these two cash flows.

If your service makes it more likely that the customer will return in the future and spend again, you have increased the customer’s lifetime value.

If bad service decreases the likelihood that they will ever come back, you have just destroyed future cash flow, or decreased that customer’s lifetime value to you.

I first came across the concept in a book written by a Dallas Cadillac salesman in the 1980’s. He always personally delivered the car to a new customer, freshly detailed, with a full ‘tank of gas’ and a picnic basket in the ‘trunk’, paid for personally.

A good investment as it turns out.

The majority of his customers bought 3 cars from him in the next 6 – 8 years compared to the one sale enjoyed by his peers. They came back because they remembered the experience. He viewed each customer’s value as the commission he earned from 3 car sales, not 1, so he could afford to invest a little more up-front in the relationship.

These common sense concepts are no less relevant today;

  • Consider the future potential of customers when you serve them, look past the current sale and think about what you can do to make future business more likely today. In fact, add up the value of your best customers for as far back as you can to get some idea of the potential value a new customer could have if they become a ‘best’ customer.
  • Customers that remember you favourably are cheaper to attract – they do it of their own accord. Attracting new customers, strangers, is expensive. You have to advertise in some way and that is wasteful because you pay for the attention of a whole lot of people who do not become customers. At least you know customers needed your products once, which makes them qualified candidates, at the very least, better than mass marketing to strangers.

Just don’t spend more on making them really happy than they will likely contribute to your profitability in the future, allowing for the fact that cash today is more valuable than cash tomorrow.

Q: From an SME’s perspective, what are the benefits in considering existing and potential customers from a lifetime value perspective?

Small companies cannot afford to view marketing as solely about conquest; common wisdom says that retaining a customer is 5-7 times cheaper than converting a stranger into a customer, for the same revenue. Understanding the differences in the profitability of business that comes from existing customers versus prospects really helps you balance the allocation of modest marketing budgets.

Q: What is the latest thinking / best practice in loyalty marketing?

Certainly for SMEs with repeating business, best practice is to understand the customer’s buying cycle so you can present a marketing offer at the correct time; when it is relevant because they are thinking of buying again.

Give them a reason to not Google. Otherwise your email/flier/letter is spam.

Q: What top five tips would you advise an SME to consider when embarking on a loyalty marketing program?

Six tips here, one extra to encourage repeat visits;

  1. Customer loyalty makes you more money than any other strategy. Think about what would make customers come back, at an acceptable cost, every day.
  2. Think about loyalty marketing as a way to keep good customers loyal and possible good customers interested, not as a way to give free stuff to everyone
  3. Think about how to only reward incremental business, not business you were going to get anyway
  4. The best loyalty program is to always have the best product at the cheapest price. Can you confidently do that and avoid bankruptcy? If you can, stop reading this article and start promoting!
  5. Loyalty marketing raises expectations of delivery quality for customers. Make sure you can deliver consistently to expectations; the customer backlash will be impressive but not pleasant.
  6. Do the numbers. As painful as it is, fire up Excel and work out how much extra you will make and how much it will cost you if you are successful increasing customer loyalty with your loyalty marketing. Personalized service becomes an entitlement in customer eyes instantly, so taking it away causes you angst. If you cannot see meaningful profits, be very careful.

We can help you with these 6 tips, happy to, if you need it.

Q Please comment on: Cost of acquisition vs. retention

It is 5 – 7 times more expensive to acquire new customer revenue than existing customer revenue if you get it right

Q: Please comment on: Opportunities to build share of wallet

If you remember what customers’ want/like/need you are more convenient than a competitor

Q:Please comment on: Engaging consumers suffering from loyalty program overload

Personalise! SMEs are supposed to be more personal, prove it. Large scale programs must treat you like a number.

Q: Please comment on: Making loyalty program retention attractive and easy

Relevant rewards are the key.

Q: Please comment on: Developing strategies to encourage and reward referrals

Always reward the customer that takes up the referral as much as you reward the customer doing the referral. We all want to feel like we have done a favour, not profited from our friends.

Q: Please give a good example of loyalty marketing?

I have personally bought 3 cars from a single salesman. He calls to tell me when the residual lease value matches market value of the car. He does it for all of his SME clients because it saves them the trouble of renegotiating end-of-lease ‘stuff’. An electronic calendar and 2 phone calls have tripled my lifetime value to him, so far.

Filed Under: Customer Analytics, Customer Retention Tagged With: , ,

The Buzz Insurance launch an innovative new customer loyalty program

July 28, 2010 By Leave a Comment

The Australian general insurance business has become a hot house of competition, with heavy promotion by new overseas online insurers.

Intense competition can be a catalyst for innovation and we believe that one insurer is innovating in a refreshing and effective way – by collaborating directly with customers.

The Buzz began life co-creating with customers. Through focus groups, market research and an online community / ideas exchange called ‘My Insurance Ideas’ the IAG-backed team shaped the company that became The Buzz. (Interest declared; we help The Buzz).

A consistent and dominant theme in these thousands of customer conversations was that insurance consumers are looking for an insurer who appreciates and recognises customer loyalty and customers want to be treated as an individual.

Given the ubiquity of no-claims bonuses in Australian car and home insurance,  and a belief by some  customers that Years of Insurance and multi product discounts are a pricing factor not necessarily about recognising individual needs , the insurance sector  are clearly not satisfying this desire. Unsatisfied customer needs offer an opportunity that The Buzz is determined to respond to.

As a formal response to this demand for recognition of customer loyalty reached the top of the task list, The Buzz asked existing customers what they liked and did not like about their other loyalty programs; ‘Simplicity and Fun’ was popular. But the stand out result was that 70% of customers responded with; ‘Give me more time to enjoy it” when asked what they would like most in their lives. Overwhelmingly customers did not want another card in their wallet and a high proportion felt that getting money back for not claiming was hypocritical as it was rewarding you for not using the product you had already bought. So the challenge was to come up with something with the customers that they would value.

Jacki Johnson, CEO at The Buzz, responded with a loyalty charter that says; implement a program that recognises customer loyalty with rewards that save time or make their time more enjoyable and safe. Give them gifts of time.

Buzz Time is the result.

The program concept is simple, as you renew your policies you receive points that can be redeemed for time-saving services from partner organisations such as Dial an Angel (home cleaning, gardening etc), Gizmo (PC and network set up & support etc), and Galmatic (driving and car maintenance courses). A range of novel merchandise and product options, real and online, fill out the reward choices available at program launch.

These rewards are a start, Buzz Time will next reach out to customers to ask and listen to determine what other rewards will appeal most to loyal customers. Co-creation is second nature in The Buzz.

To us, the strategic thinking underpinning Buzz Time is just as interesting as the points and time-saving rewards;

  • Program costs do not impact policy premiums which remain risk-based and competitive
  • No Claim bonuses are not required – The Buzz believes that claims are the reason for insurance and a service ‘moment of truth’ that may be the best customer loyalty creator. Loyalty should be recognised independently of claims.
  • Financial returns from Buzz Time investments will come from increasing customer lifetime value as higher rates of policy renewals result from giving customers an additional reason to stay with The Buzz when their renewal notice arrives.

We wish success for The Buzz – any company with such a laser focus on the needs and recognition of customers deserves to thrive.

Filed Under: Case Studies and Statisitics, Customer Loyalty Management Tagged With: , ,

Comcast and Amex invest in Customer Service

June 15, 2010 By 3 Comments

Customer service is  being seen by the big players as a key growth driver according to this recent Wall Street Journal article.

So important is it that the article reports on an Accenture study that shows that 25% of 1,405 companies surveyed will be investing in this crucial area of business before anything else as the economy grows.

Many of the case examples in the article ring true to the basic premise that if you provide superior customer service you will engender superior customer loyalty.  In identifying ways to create a sustainable competitive advantage, service is often a winner.

Great service and service systems are often difficult to copy because, if done right, they can become deeply ingrained in an organisation’s culture.  Over the last few years we have encountered several organisations where service staff dedication to deliver the best customer service comes despite poor company systems and processes.

You just can’t replicate that culture of dedication overnight so it presents a strong customer value differentiation and a good sustainable competitive advantage..

Even Amex staff are being told to look for opportunities for related sales rather than focusing on ending the call as quickly and keeping the average handle time (AHT), and therefore costs, down.  Organisations like Amex are now starting to recognise that service contacts come along much more often than sales contacts can really drive incremental business profitability by using those contacts wisely.

In all of this however you must know which element of the service experience are the most important to customers.  To gather that knowledge you need to have an ongoing process to gather and apply those insights.  Transactional Net promoter Score (NPS) is one such system.  If you haven’t investigated this approach now might be a good time to start.  Before you invest in organisational change.

Customer service is being seen by the big players as a key growth driver according to this recent Wall Street Journal article.

So important is it that the article reports on an Accenture study that shows that 25% of 1405 companies surveyed will be investing in this crucial area of business before anything else as the economy grows.

Many of the case examples in the article ring true to the basic premise that if you provide superior customer service you will engender superior customer loyalty.  In identifying ways to create a sustainable competitive advantage, service is often a winner.

Great service and service systems are often difficult to copy because, if done right, they can become deeply ingrained in an organisation’s culture.  Over the last few years we have encountered several organisations where service staff dedication to deliver the best customer service comes despite poor company systems and processes.

You just can’t replicate that culture of dedication overnight so it presents a strong customer value differentiation and a good sustainable competitive advantage..

Even Amex staff are being told to look for opportunities for related sales rather than focusing on ending the call as quickly and keeping the average handle time (AHT), and therefore costs, down.  Organisations like Amex are now starting to recognise that service contacts come along much more often than sales contacts can really drive incremental business profitability by using those contacts wisely.

In all of this however you must know which element of the service experience are the most important to customers.  To gather that knowledge you need to have an ongoing process to gather and apply those insights.  Transactional Net promoter score (NPS) is one such system.  If you haven’t investigated this approach now might be a good time to start.  Before you start to invest in organisational change.

By Adam Ramshaw

Filed Under: Case Studies and Statisitics, Customer Strategy Tagged With: ,

Control groups for customer loyalty programs; an impossible dream?

June 5, 2010 By 1 Comment

Measuring the effectiveness of customer loyalty programs has always been a bit of a problem.

We know the objectives of these programs clearly, customers who;

  • stay longer
  • consolidate their spending with you
  • recommend you to their family and friends

but even if members exhibit all of these behaviours, how can you be sure it is because of your customer loyalty program investments, or your products or even your other marketing efforts?

In other marketing channels we add credibility to claims of causality for our campaigns by holding back a portion of our customers in a control group. We try to ensure that this group is exposed to everything except the campaign we are measuring. This way, if there are differences in responses between the control and test customers it must be due to the campaign because that is the only difference.

This is a well understood discipline.

However, there are challenges adopting this approach with customer loyalty programs;

  • how do you exclude some customers from your program? Especially those high value customers most likely to benefit from the program and therefore most likely to join and the most interesting to measure. When we launch a program we want everyone to sign up and present their card every time they shop right?
  • if you even could exclude them, how would you track their behaviour when they do not carry your loyalty card when they buy?
  • program influence is long-lived and continuous. This makes it difficult to determine when to measure to allow for other marketing activity that may complicate results.

There is no need to give up on measurement and resort to blind faith however.

Traditionally we have relied on correlations between program membership and spending, tenure, share-of-wallet (and a touch of faith) to pile on enough circumstantial evidence to make a case for program return on investment. This is a good start but not completely satisfying for us numbers geeks.

There is a group of customers in many programs that approximate a control group. While these members do not completely solve the measurement problem, they give additional and useful insight into how your program is operating. This ‘control group proxy’ works in annual or fixed period programs, (where points expire) but not at all in programs that include automatic redemptions e.g. the quarterly issue of gift cards if you have enough points.

To use this control group approach, allocate members into tiers based on the value of their spending in the program and you will typically find customers in each tier who have reached rewards thresholds – they could receive rewards simply by asking – but who have not bothered to redeem. We call these members ‘non-redeemers’ in the (non-religious) sense that they do not redeem their points for rewards. Generally if you interview these (especially high value) non-redeemers they report a lack of engagement, an ‘I don’t care’ attitude to the program; even though they are members, it does not influence their behaviour. They just let their points expire.

Not a perfect control group, but if we view non-redeemers as our control group, comparisons within each customer value tier between redeemers and non-redeemers give us a better indication of what lift in customer value the program is actually delivering. These comparisons work best in the high value tiers because the lower tiers include new and low spending members who are yet to achieve rewards but will redeem when they do.

This approach is not perfect because individual customers may move into and out of the non-redeeming group, which makes their independence from program effects questionable. But the comparisons at best show the differences between a group of customers who pay attention to the program and a group who do not, despite being enrolled.

Next time you try to quantify the return from your loyalty program try looking at the difference in tenure between redeemers and non-redeemers of the same value. In our experience, for example, in credit card loyalty programs redeemers stay in the franchise 40% longer than non-redeemers. From there it is not hard to calculate the discounted value of that extra future cash flow and attribute it to your program.

Give it a try.

Clearly a reward redeemer

Filed Under: Customer Analytics, Customer Loyalty Management Tagged With: ,

Customer Surveys: Affecting customer purchase behaviors

March 12, 2010 By Leave a Comment

The number and range of customer feedback surveys being undertaken by organizations wanting to understand how their customer’s feel about the organization and its product is now substantial.

However, believe it or not, customer satisfaction surveys have a little bit of quantum mechanics in them!  Such surveys exhibit the Heisenberg uncertainty principle in that surveying a customer can in itself change the perception of that customer.

The effect of this principal can be seen in work by Dholakia and Morwitz.  For their Harvard Business Review paper, aptly titled: “How Surveys Influence Customers”, they surveyed members of a financial service company’s customer relationship program and then tracked them over two years.  Their results are quite amazing:

“A year after the survey was conducted, the customers we surveyed were more than three times as likely to have opened new accounts, were less than half as likely to have defected, and were more profitable than the customers who hadn’t been surveyed. These differences reached their maximum levels several months after the survey was done and persisted throughout the year”

A report in the Marketing Science Institute (“Firm-Sponsored Satisfaction Surveys: Positivity Effects on Customer purchase Behaviour”) reported similar results.  Surveyed customers, regardless of their overall satisfaction, bought more and were more loyal (evidenced by their repurchase rate) than un-surveyed customers. See the chart below:

My reason for raising this phenomenon is definitely not to suggest that marketers go out and attempt to influence customers by surveying them.  That approach is not only un-ethical but also illegal in some jurisdictions.

No, my reason for raising it is to reinforce that a customer survey is in fact another key customer contact and must be conducted in a way that reflects the way that you want your brand and company to be perceived.

As an example, we often perform customer service surveys for high value business to business organizations.  Our conversations with these clients invariably start with them wanting to perform an internet based customer service survey to gain insights into customer satisfaction and loyalty.

I will often ask them what they do as the CEO/COO/CFO of a large organization when they receive an internet survey.  “I delete it” is the common reply.   I then ask them if an internet survey makes them feel that their opinion is valued?”  “No”, is the common response.

It’s at this point that they understand that information transfer during the survey process not just from customer to company but also company to customer.  Because it is two way and our clients often decide to stratify their survey methodology by customer value to provide an appropriate survey interaction for different customer types.

There are three main methods of survey execution that we use:

Face to face interviews

We often suggest of face to face interviews for high value customer contacts.  This approach makes the customer feel the most valued and creates the best rapport with the interviewer.  It also gathers the most qualitative information regarding the users’ perceptions and how to improve those perceptions.

Note that the person performing the survey must be properly trained to avoid interviewer bias.  They must also dressed appropriately and be able to demonstrate a reasonable grasp of the interviewees high level business drivers for this approach to be effective.

Telephone interviews

In the same way that face to face interviews provide excellent feedback from key staff, mid-importance customer contacts can be interviewed by telephone.  This approach offers a good mix of cost control (they are less expensive than face to face surveys) and are able to gather substantial qualitative information.

Internet Surveys

This approach is not without merit.  It provides the ability to reach larger numbers of end users and provides solid quantitative outcomes for the scoring of various service elements but provides relatively less qualitative information.

So the next time that you are considering your customer survey methodology consider that how you perform a survey says as much about your organization as the products and services that it surveys.

Do you have a question about customer loyalty or satisfaction surveys?  Ask it below and I’ll respond.

By Adam Ramshaw

Filed Under: Customer Feedback Process, Customer Feedback Surveys Tagged With: ,
« Older Posts