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Why Reward Loyal Customers

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Why Reward Loyal CustomersMcKinsey and Co. reports that while 75 percent of all large U.S. grocery store chains offer loyalty programs, 70 percent of shoppers still seek alternatives. How loyal are your customers? Despite an increase in promotional spending from $98 billion in 1998 to $300 billion today, the American Customer Satisfaction Index is lower than it was in 1994 with more than 25 percent dissatisfied.

Through coupons, cash incentives and free upgrades, many MPI suppliers and their customers have been trained by multiple industries to demand as much as possible in exchange for their business. The idea that MPI members should retain as many customers and prospects as possible may be economic suicide. To stay in business you must attract and keep not just loyal, but profitable and loyal customers.

Realizing Pareto
The Pareto Principle indicates that 80 percent of revenues come from 20 percent of prospects and customers. But profitability, not revenue, is the only sensible measure to use in attracting and keeping loyal customers. Those who generate the most rev¬enue could be costing you big money if they take up too much time, are too demanding or require significantly more service than others.

However, we have often heard that loyalty is important because it costs five times more to acquire a new customer than to keep an existing one. Faulty assumptions often ignore the fact that advertising and marketing expenses are not devoted entirely to attracting new customers and that existing customers may not be currently profitable. Will customers remain profitable after availing themselves of the benefits of your loyalty program?

Question the idea that it costs more to serve new customers than to serve existing ones. Ask yourself, “What exactly is the additional cost when serving new customers?” If you’re retaining your best customers, my guess is nothing. If, on the other hand, you’re losing good customers it is probably because you need to treat them like new customers every day.

The authors of Loyalty Myths state that activity-based costing consistently shows that the most profitable 20 percent of customers contribute an astound¬ing 150 percent to 300 percent to profitability and the least profitable 10 percent to 20 percent actually detract between 50 percent and 200 percent per account. The middle 60 percent to 70 percent just about break even.

Many suppliers could do better by first managing customer and prospect selection and then focusing on customer retention. Ask yourself how to attract and keep more of the 20 percent contributing to profitability. The other 80 percent may be made more profitable through various strategies such as reducing cost of servicing.

Many profitable organizations are only succeeding because their best customers are making up for losses incurred by their worst customers. Make all customers contribute equally to your profitability or send them to the competition; freeing up time for better service for your best customers will build loyalty and give you a competitive advantage.

Launch an Anti-Loyalty Campaign?
First National Bank of Chicago, now Bank One, enjoyed the largest market share in its area but the lowest return on capital. Studies revealed that profitable customers used the bank’s self-service channels, mainly ATMs and online services. Its unprofitable customers insisted that routine interactions be done with bank tellers, causing high costs.

First Chicago decided to get its unprofitable customers to access banking services through self-service by charging customers with low balances $3 if they sought teller assistance for basic transactions. The goal was to get them to be profitable or leave. A survey by U.S. Banker Magazine showed that 54 percent of respondents indi¬cated they would change banks if required to pay a $3 teller fee.

However, in the first full month after the announced charges, self-service ATM transactions doubled and were up anoth¬er 50 percent a year later. Soon, 80 percent of the bank’s transactions were conducted elec¬tronically and profits jumped 28 percent.

The value of customer service extends to every facet of the meetings industry as well.

“At Harrah’s we figure out who we should be targeting,” said David Norton, Harrah’s vice president of loyalty marketing. “We treat different customers differently.”

“Membership reward cards capture transactional data, customer game preference, length of play, frequency of visits and favorite locations.”

“By knowing our individual customer preferences we come up with more attractive incentives,” Norton said. “The program has contributed more than $100 million to revenues since its inception. By looking at the particular segments, instead of the aggregate, that’s where you really drive profitability.”

The service known as “The Ritz-Carlton Mystique” is based on the understanding that front-line employees know of and can solve customer problems if authorized to do so. A housekeeper can solve a guest problem without having to get a manager’s approval up to a certain dollar amount. Research shows that both staff and customer loyalty increase when both have a voice. Staff wants authority, and customers are the beneficiaries.

Failing Loyalty Efforts
Customer loyalty efforts fail when MPI members base them on generalities rather than specific data. A successful customer, prospect or referral center loyalty program requires seeking feedback, empowering front-line staff and gathering relevant information.

One MPI member discovered that although a customer had not booked an event in five years, he had referred 15 people and each one had booked with her. Although his organization had gone from large national meetings to very small regional events, he referred to her plenty of business that fit her niche conference size.

Where do your referrals come from? Are referrals from customers and other referral centers such as hotels or other suppliers and providers important to your business? Take care of your resources, recognize them and thank them for the positive contribution they make to your bottom line.

Organizations internationally, from supermarkets and credit card companies to airlines, hotels and banks, have dramatically increased spending on frequent flier and buyer programs to engender customer loyalty. The proliferation of loyalty programs has trained many of your prospects and customers to be demanding and often unprofitable.

In spite of dramatically increasing spending, both customer satisfaction and loyalty rates are down. MPI members must know their profitable loyal customers, prospects and referral centers, what they want and reward only them.

JOE MURTAGH, The DreamSpeaker, is a member of the MPI Carolinas Chapter. He can be contacted at joe@thedreamspeaker.com or via www.thedreamspeaker.com.
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