Show Me the Money!

By Mikkel Korntved & Lars Jepsen, Loyalty Group A/S

This is the first excerpt from our white paper "Show Me the Money!" It will give you financial arguments for increasing the customer focus in your company.

Once you've read our white paper, you'll have tangible arguments supporting the value of customer retention, share of budget and increased customer focus that you can bring to the management table. First, we focus on loyalty segmentation of your customers, which is the foundation for attaining the financial results.

Loyal Customers are "Golden"

Let's start with stating that Loyal Customers is one of the most neglected sources to increase growth and profit. Several businesses are so concerned about getting new customers that they totally miss the potential that exist within the current customers. The purpose of this white paper is to show the financial effect of increasing Customer Loyalty.

We often hear business leaders say that satisfied customers is a goal for the company, - and already at that point the alarm should go off! Satisfied customers sound nice, but they don't necessarily have a strong and valuable relation to your business. The risk is that they leave you as soon as they get a better offer elsewhere.

Loyal customers on the other hand find great value in being a customer of your business. They spend more, visit more often and appreciate your relation even if competitors come up with better offers. Your most loyal customers are also your ambassadors, who help you attain new customers through their referrals.

Satisfaction should therefore just be seen as a step on the way to attaining a loyal behavior that will directly influence your business' growth and bottom line. 

"Businesses with the highest Customer Loyalty typically grow twice as much as their competitors"
Frederick Reichheld, Bain & Co

Get an overview of your customer's loyalty status

The basic fundament of dedicated customer loyalty efforts is an efficient segmentation model that separates your customers into groups based on their loyalty. Several usable models exist depending on your business' needs.

The LoyaltyMatrix divides your customers into green, yellow and red groups depending on their customer relation to you and your attractiveness within the market.

  • The Green customers (Ambassadors and Loyal) feel a strong relation to your business. They are very satisfied with you and find you more attractive than the competitors.  This is why they stay with you, spend more and are more receptive of new offers. Ambassadors even help to bring new customers in through referrals.
  • The Yellow customers (At Risk) have a more neutral attitude to your business. In general they are satisfied because you've lived up to their expectations, but they don't find that you stand out from the crowd. That's why there's a risk that they will leave you if they get a better offer from one of your competitors.
  • The Red customers (Shopping Around & Lost) are disloyal customers that you're about to lose. They're already looking at other alternatives, since they don't see a large enough value in staying, or feel that they are not treated like a valuable customer. They are going to leave you if you're not able to change their impression.

Nps

Net Promoter Score (NPS) is another and simpler model of loyalty segmentation. Here your customers are divided into 3 groups based on their answer to the following question:

"How likely are you to recommend XXXX to friends/family/others?" The customers answer the question on a scale from 0-10 where 0=Not likely at all and 10= very likely. The scores then give the following groups/segments.

  • Promoters (Green, answer 9-10) are loyal customers that come back and also recommend your business to others.
  • Passives (Yellow, answer 7-8) are satisfied, but don't have any preferences for you and therefore will be an easy target for your competitors.
  • Detractors (Red, answer 0-6) are dis-satisfied customers that are about to leave you.

Common for both models, is that they easily give a status overview of your customers, but alone they can't help in the work to strengthen the loyalty.  The reason is, the lack of information regarding the reason behind the customer's loyalty, and even more importantly, what can be done to change it in a positive way. It's therefore also important to try revealing the "drivers" of loyalty for the individual customer.

Go from knowledge to measurable results

The Choice of segmentation model depends on your business' needs and goals in the work with Customer Loyalty. We won't point out one model from the others, but just understand that if you're seeking increased revenue from your customers, you'll need both the overview and insight to their attitudes and behavior.

Many businesses have a large number of "Red" and "Yellow" customers and with them a large potential for improvement. There's a large financial incentive to move your customers up the loyalty ladder to a higher level; - this is what the rest of this white paper is all about.

"A 2% increase in Customer Loyalty can have the same effect as a 10% cut in costs."
Leading on the Edge of Chaos (Murphy 2002)

LRS

Focus on customer retention and repurchase

In the next issue of LoyaltyNews we begin to describe and document the financial effects of having loyal customers. We start by taking a closer look at customer retention and repurchase. Do you for example know, how many percent of the loyal customers, who come back to repurchase compared to the disloyal customers? Get to know more in the next issue of LoyaltyNews.