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Where do most companies focus their attention?

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The rules of customer loyalty remain simple: Customer retention begins by delighting your customer with a dynamite product or service and a positive, consistent purchasing experience. After that, it's up to you to provide continuously increasing the value that will keep your customers coming back for more.

Channing Rollo, Business Intelligence Manager, ClientLogic says: "Customer loyalty is the brass ring of business: Everyone is chasing it, yet no one seems to have quite grasped it. The mind-boggling speed and immense selection offered through electronic commerce, coupled with reduced shopping involvement and declining brand allegiance, have made customer loyalty even more elusive."

Where do most companies focus their attention?
On profit, cash flow and customer acquisition? This concentration is misguided, according to Frederick Reichheld, author of The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value. Reichheld claims that the one business principle most likely to be ignored - customer loyalty - is the only true reflection of how much value a company is generating.

Many financial experts view customer retention rate as a window to a company's future, the foremost predictor of strategic success. Why? Customers are typically the first to notice when a company's offerings decline in value or when competitors offer superior value and they communicate this by shifting their business.

The empowered customer
Customers have three currencies to 'spend' in their relationships with a vendor - time, money and data (increasingly defined as privacy). Providing superior value through a loyalty program involves all of these.

"Demonstrating ongoing value is the governing principle behind reward incentives. Such incentives - which can include private label points programs, continuity/club options and others - can be extremely effective," says Rollo. Recent studies of American customers reveal that at least 60% of individuals report that they increase their purchases from a particular vendor when offered incentives.

Rules that will optimise your loyalty program
Channing Rollo offers us these rules for developing an optimal loyalty program.

1. Emphasise the relationship. Loyalty reward initiatives should not be thought of as mere marketing promotions or customer bribes. They are relationship-builders - a means by which you share value with your customer in proportion to the value your customer's loyalty creates
for you.

2. Deliver sustained and progressive value. One-time offers will get you one-time customers. For lifetime loyalty, you must offer sustained service and rewards. While sustained rewards may be a costly investment, the returns are enormous - customers will stay with a business whose benefits are reliable and permanent. To that end, as your customer's purchase level, monetary and/or frequency increases (RFM), so should your customer's incentive. Instead of throwing money away on endless customer acquisition, you should direct your marketing investments and efforts into retaining your best customers via a tiered rewards system. Implementing a program that rewards every repeat buyer, with heightened rewards for increasing commercial activity, will ensure that your customers stick around. It also helps prevent competitors from luring your customers away.

3. Focus on the brand. When developing a loyalty program or initiative, you should be cautious not to encourage deal loyalty as opposed to brand loyalty. To bolster your brand through rewards, the brand or product itself should comprise the incentive.

4. Communicate. Personalised, sincere communication is a critical element of loyalty initiatives. A good loyalty program will seek to learn more about your customer and remain in frequent contact using meaningful, individualised letters, messages and offers - not just mass-mail
advertising pieces. And true communication is not one-way - it is interactive - solicit your customer's input and opinions. Customers enjoy the opportunity to 'talk back' to their favourite business.

5. Mix 'hard' and 'soft' rewards. Because companies attempt to use loyalty initiatives, customers tend to be sceptical of program requirements and rewards. Offering only small trinkets and 'soft benefits' like improved service may not be sufficiently compelling to your customer. 'Hard rewards' - those your customer would have to pay for if it were not for the reward program - can demonstrate real measurable value.

6. Personalise and customise incentives. To push your customer toward their next purchase, rewards or incentives should be personalised. This is due to the fact that loyalty programs and incentives are easily duplicated by competitors in a crowded marketplace. To ensure that your customer does not later defect to a competitor's reward program, your program should - from the outset - offer increasing levels of personalised rewards that reflect your customer's purchase history, preferences and interests.

7. Target profitable customers. Detailed customer segmentation and target audience analyses are essential to establishing a profitable loyalty initiative. Reward programs should be designed to retain your very best customers, not low-margin buyers. When applying the 80/20 rule of marketing, loyalty initiatives are best when created with the profitable 20% in mind.

8. Avoid the satisfaction trap. Countless studies have shown that customer satisfaction alone does not equal customer loyalty. A powerful statement from Reichheld, "Companies can avoid the satisfaction trap if they remember that what matters is not how satisfied you keep your customers, but how many satisfied and profitable customers you keep." Don't confuse the two - measure the success of your program by retention.

9. Make participation easy. Loyalty initiatives with optimum participation are entirely hassle-free. Your customer joins by merely making a purchase and is informed immediately that they are a valued customer who can expect valuable returns. Following the purchase, they should receive clear details about how your program works and what each successive purchase will earn them.

The importance of loyalty and a rewarding future
Customer loyalty, in addition to serving as a value indicator, also has a powerful effect on a business' bottom line. We all know the statistics - a 5% increase in retention can result in a bottom-line profit increase of up to 75%, depending on the industry. The dramatic financial benefit of customer retention is further revealed when viewing customers in terms of lifetime value (LTV).

It is clear, that there is little business risk in investing in on-going value aimed at fostering customer retention. Loyalty has again-and-again demonstrated its ability to generate enormous financial returns.

Therefore, a smart customer loyalty program - if implemented in conjunction with a great product or service and 'step up' customer support - will give your customer ample incentive to purchase frequently over their lifetime, thereby justifying the expenditure.

And if you think customer retention programs are expensive?
Try churn.

Winnifred Knight

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