What does a Loyal Customer Really Look Like?

By Paul Tyndall
Vice President, Analytics & Database Management
Tener Solutions Group
paul.tyndall@tenersolutions.com

One of the first things that companies interested in CRM often try to develop is a customer Loyalty program or a best customer program of one flavour or other. Customer Loyalty and Best Customers are terms that appeal to everyone across an organization. And who can say that they don't want to increase customer Loyalty and find additional Best Customers? However, companies can spend small fortunes establishing an in-house Loyalty program or by joining a larger coalition program. Without proper planning, these Loyalty programs can actually end up rewarding unprofitable or undesirable behaviour. In addition, eventually marketers have to be able to justify these investments by showing that they actually are improving customer Loyalty.

The Oxford dictionary defines Loyalty as "unswerving in allegiance; faithful to a cause, ideal, custom, institution, or product". But how does a marketer turn a subjective word like "faithful" into cold, hard numbers. How does a company objectively identify, profile, model, select, promote and track "Loyal" and "Best" Customers. In other words, what does a loyal customer really look like?

It is at that point where companies usually turn to their database to find the answers. However, most organizations would be hard pressed to find a field named 'Loyalty' in their customer database. Likewise, the label of Best Customer is equally hard to locate. Many companies have performed research to help them understand how their customers feel about them; but, in order to leave the fuzzy realm of Market Research and have a tangible impact on the bottom line, subjective concepts like Loyalty need to be converted into objective and quantifiable metrics that can be tracked on the customer database.

There are many attributes that can be tracked to describe behaviours most marketers would associate with Best Customers or Loyalty. Frequency, total spending, volume, cross-shopping or even profitability. Once coded on your database, you can easily identify those customers that fall within the top 5, 10 or 20% of all your customers based on any one of these attributes. However, there are no statistical silver bullets that can be applied that provide the right answer. And there are definitely no software tools that will "auto-magically" determine who are your best and / or most loyal customers. Every situation is going to be slightly different, and ultimately, deciding what qualifies a customer as Loyal or Best is subjective.

One key element that any successful measure of customer Loyalty must integrate is consistency over time. Following the original dictionary definition that included terms such as unswerving and faithful, Loyalty is only meaningful when considered as a behaviour that does not change over time. As such, you must measure the stability of behaviour in order to truly track Loyalty. For example, comparing the number of departments shopped by a customer in Period 1 to Period 2, your most Loyal customers are likely to maintain similar levels. While most companies would likely include customers that have increased their number of departments shopped over this time period as Loyal, this behaviour is ultimately not sustainable. This behaviour is definitely interesting and valuable and should be treated as such. However, a customer cannot continue to increase their spending by 5% every week or increase their frequency by 1 additional visit per month forever. For these customers, you need to determine whether this increase was maintained in subsequent periods, or did they decline back to earlier or lower levels. Only after a customer maintains the new level or returns to their original level, can they clearly be labelled as loyal.

To be pragmatic, very few customers in reality will transact in the exact same manner week after week, month after month. Therefore, you must allow some leeway in these comparisons by including such ranges so that if spending stays within plus or minus X% of their average from month to month they may still be considered loyal.

Using this approach a customer whose total shopping experience consists of purchasing exactly one pair of 50%-off jeans every 12 months at the same retailer could be considered as loyal as the customer that shops many departments and spends $250 a month. Conversely a customer that comes in once and only once and spends $5,000 on the Cadillac of lawn tractors would not, and likely should not, be considered loyal. Valuable? Yes, but Loyal? No. This definition highlights the fact that a customer can be loyal to an organization without being the most profitable or even a frequent customer. Clearly, something else is required to make Loyalty a more profitable and interesting concept to marketers.

Understandably, most companies seek to further refine their definition by adding criteria revolving around spending to bring some element of customer value into the mix. Therefore, customers need to both exhibit consistent and profitable behaviour to truly be considered Loyal. This is a reasonable extension of the definition. The jean purchaser in the earlier example may no longer be considered loyal after you add in the financial criteria. However, once again there is no magic mathematical formula that will tell you what that level of spending should be.

In a similar manner, defining Best Customers for a company is fraught with difficulty. While it seems simple on the surface, attempting to create a selection criteria that will result in a meaningful and useful definition is challenging. The easiest definition involves either setting a predefined spend level, $1,000 per year for example, or a relative level such as being amongst the top 10% of spenders for the year. Using this definition, the customer that previously purchased the luxury lawn tractor would be a Best Customer this year, regardless of whether they ever shopped at that store before or after. Is this a workable definition for marketers to build targeted programs around? Probably not. In the rush to build a quick and easy program, companies must be careful not to target the wrong behaviours. Companies also need to decide what the proposed benefits of these programs will be and use this as a guide to determine how stringent the definitions will be. A program offering free vacations should likely have much more stringent criteria than one offering only an annual birthday card.

There are no easy answers. Loyalty and Best Customer programs can be effective tools within an overall CRM strategy. However, you must be willing to put in the effort to develop definitions of Loyalty and Best Customer that are acceptable to you.

Tags: Analytics, Integration