Identifying the ideal metrics for measuring customer loyalty

article-author
Jeremy Schell

Over the past twenty years I’ve been fortunate to have worked with a number of great companies and helped develop and manage their various CRM and loyalty programs. Many of these include National City Bank, Makers Mark, Valvoline Instant Oil Change, Canadian Mist, Kentucky Lottery and Purina to name a few. With any loyalty program and marketing campaign, it is imperative from the beginning to establish goals and develop measurements against those to identify success as well as areas of improvement.

The following four areas of measurement must always be evaluated when measuring a CRM or loyalty program’s consumers.
  • Engagement – How are you communicating and, more importantly, interacting with your customers across all the potential touch points and platforms including direct mail, banner and display advertising, email, web site visitation, trade shows, and other experiential events as well as social interaction? It is also import to evaluate if this engagement is based upon outbound touch points, where you are speaking to the consumer versus inbound touch points where they are reaching back and communicating with you and developing a dialog. How is this dialog becoming a conversation and does the dialog have reach with other consumers?
  • Consumption – What is the consumer purchase volume or use of the product or service? What is the typical life-cycle of its use? For example, an oil change service center may only provide services every 3 – 6 months per vehicle and a mortgage company may refinance a home or provide a new mortgage every seven years however a lottery player may purchase a game ticket several times each week or even daily. This product life-cycle varies and must be considered when evaluating consumer consumption.
  • Referrals – Are consumers recommending your brand or service to others? To what degree are they influential to the purchase decisions of others? Within their sphere of influence, have the people they referred the product or service began to or increased their movement in the other areas of measurement.
  • Frequency – How much, how often and when are engagement, avocation and referrals influencing consumer consumption and engagement with the product or service? For example, how many touch points occur before a purchase is made? How many consumers are referred in order to engage a new customer?
  • A fifth area of measurement which should be frequently reviewed as a sub category of all the above is the Channel of Interaction.  The channel is the method or vehicle of each of these where they occurred. For example; within Engagement, where did engagement take place, a broadcast email, on your web site, facebook, twitter, at a trade show, a walk-in consumer at a brick and mortar location, etc.  For consumption, was it purchased directly or through an affiliate; online, over the phone or in-person.  Referrals happen from a variety of locations including; in person, from a tell-a-friend function within a web site or from forwarding an email.  Identifying the various channels and vehicles can have a significant impact to the overall functionality and effectiveness of a CRM and loyalty program. Identification of these channels can also help fine tune your marketing efforts to focus on the maximum return.

These four measurements can be used to develop a methodology to evaluate, segment and identify your most valuable and invaluable consumers but more importantly, identify your growth area of consumers who will have the most impact on your overall success. These consumers combine consumption of your product or service with influential recommendation and reduced requirement of interaction. Most modern CRM programs have methods to track, maintain and score each of these areas however depending upon the industry, product and method of distribution, one or more of these may be more complicated to measure.  For example, within the beverage alcohol industry connecting the consumer to their individual consumption and purchase history is especially difficult due to distribution methods, legal restrictions and multiple venues for consumption e.g. home, restaurants, bars, etc.  For more information about the difference between a Business Contact Management program and a CRM program, read this blog post.

Identifying Consumer Segments and understanding their mindset and value
 
There are four extremes used for the overall segmentation of consumers within a CRM and loyalty program. When evaluating a brand’s consumers, it’s important to determine the various growth opportunities within the segmentations which can increase both consumption and quality referrals. It is important to note that these are the extremes and the optimal growth area of potential advocates within a loyalty program extend across and are interwoven within several of these.
  • High Consumption/High Referral – This segment includes a brand’s ambassadors and advocates who have significant and frequent consumption but also openly recommend the brand as often as possible.  Typically, these consumers are considered to more outgoing and social with others and are readily willing to share their positive experiences with a brand. These consumers often do not need much “coaching” within a CRM program with promotions and discounts. Occasional reminders and reinforcement from the brand are all that is necessary for their continually motivation. 
  • Low Consumption/High Referral – This segment also includes a brand’s strongest advocates but is frequently the most overlooked within a loyalty program. Although these consumers have an extremely low consumption rate which causes them to be typically overlooked, somewhere in their past they have had a significant positive experience with the brand and they are willing to share it with others. The opportunity within this segment is to identify the value of their sphere of influence and measure the overall impact and reach of their network. These consumers are rarely influenced by promotions and discounts offered by the brand, in fact, often these are considered negatives to this segment.
  • High Consumption/Low Referral – This segment includes consumers who have frequent and regular consumption of the brand but do not necessarily recommend it to others. Their referral patterns vary either because they are cautious and do not willing advocate their passions or because they have never been properly asked or motivated to refer their experiences with the brand to others. Experimentation within this segment to promote referral and recommendation often produces positive results. Moderate consumption consumers within this segment also respond favorably to discounts and savings opportunities.
  • Low Consumption/Low Referral – This segment of consumers are difficult and not easily swayed into trail. Promotions and savings opportunities may encourage trial however most often conversion percentages are especially low. It’s important to note that consumers in this segment may opt into your loyalty program or marketing database through a promotion or chance to win however this should not be confused with sincere interest in the brand.  Often consumers in this segment have just entered with the interest of obtaining something for free and the overall expense to guide and move them into a loyal customer is cost prohibitive.
The following charts demonstrate samples of how fluctuations in the frequency impact these various segments. These diagrams will vary based upon industry, economic conditions and a variety of other factors.  These charts should just be used to demonstrate how consumer growth areas can be identified.
 
(1.1)
 
The above chart (1.1) shows with moderate frequency of engagement and interaction from the brand the four major consumer segments have relatively equal extremes.  The light green area shows the optimal audience of consumers who can be interacted with the most to impact an increase of consumption and recommendation.
 
 
 
(1.2)
 
The chart (1.2) shows how reduced frequency of interaction from a brand has significant impact to the extremes within the four major consumer segments. Notice how reduced frequency greatly increased the low consumption and low referral segment while reducing all other areas.  This demonstrates the overall need of increasing the overall frequency and engagement across all consumer segments. As Thomas Jefferson once said “The man who stops advertising to save money is like the man who stops the clock to save time”.
 
 
 
(1.3)
 
Adversely, chart (1.3) demonstrates that increasing frequency does not necessarily provide overall favorable results.  In fact, too much frequency of interaction with a brand, or being "pushy" can often trigger a negative response across much of the consumer segments. Interestingly, one area where increased frequency demonstrated positive results is within the high consumption/low referral segment. The discussion of frequency is covered within another post.  These consumers tend to steadily increase their consumption due with increased frequency of savings and discount communication from a brand.  Caution should be used however when increasing global frequency across all segments as the negative impact on consumption and referral may outweigh the incremental gain from the high consumption/low referral segment.
 
There are a number of other metrics which are especially useful when segmenting and valuating consumers within a loyalty program. These include: age, gender and other demographics, geographic location, sphere and scale of influence, e.g. how many people are within their social network, seasonal considerations and time of year, economic status and conditions, channel and method of acquisition into the program, channel of engagement and consumer life-cycle or how long they have been exposed to the loyalty program.  Also, the same charts and methodology above can be used to drill down and zoom into any area or cross segment of your consumers.  Finally, it is imperative that the last metric mentioned, consumer life-cycle or how long they have been exposed to the loyalty program, be measured repeatedly over time to determine how your program is evolving and how your program is influencing consumer behavior through engagement, consumption and recommendation.
 
It is important to note that within the CRM or loyalty program, your levels or frequency and engagement with consumers will not be equal across all segments.  The above charts and methods of evaluation can be used to segment consumers and vary the degree of frequency and levels of engagement within each.  This various tailoring of engagement based upon consumer segment will ultimately drive the growth of your optimal consumers while embracing and engaging the three key extreme consumer segments.
 
Before beginning a loyalty program or if you are looking to extend and enhance your existing program, it is critical to establish a series of metrics to measure the success of your program.  If you do not have a method of evaluation within your loyalty program, consult your CRM vendor or consultant and develop these.
 

 

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