Terry Vavra’s Blog

Misguided Loyalty Programs

Posted on 10. Mar, 2010 by Terry Vavra in Loyalty

In most developed countries these days there is a basic cultural value which recognizes the unquestioned equality of all people - requiring they all be treated with equal respect.  But, as appropriate as this perspective is for cultures, it isn’t a good basic premise for the conduct of business.  If a business manages its customers as if they are all equal and does so without applying any discretion, it can be a recipe for financial disaster! 

The Troubling Fallacy 

Businesspeople, it seems, want to extend the same treatment to all of their customers.  They appear, mistakenly, to want to be perceived as fair and magnanimous.  So they proceed to offer all of their customers the same benefits within a loyalty program.  The problem with this approach is that no matter how egalitarian businesspeople want to feel, they cannot consider all of their customers to be of equal value to their business.  The hard fact is customers aren’t all equal.  They don’t all interact with businesses in equal ways and they don’t all yield equal profits.  In my book, Loyalty Myths, I described the three types of customers all businesses have.  Recognizing these three types provides a useful customer triage process for businesses to adopt. 

The Three Types of Customers 

While appearing outwardly similar, there are three basic types of customers based on how they impact a business’s bottom line.  Businesses have Breakeven Customers – those customers who neither add to nor subtract from corporate profitability (either they buy a lot but demand equally heavy servicing, or they buy very little).  Businesses also have Costly Customers – those customers who demand so much attention or such excessive price concessions that maintaining them as customers reduces a business’s bottom line.  Finally (and hopefully not least), businesses have Desired Customers – those cherished customers whose volume of purchases and reasonable requests for servicing makes their transactions highly profitable. 

A typical company’s customerbase when dissected into these three segments, will show about 20% as Desired, 60% Breakeven and up to 20% as Costly customers.  With this insight, it’s easy to understand one of the basic myths of customer loyalty; we’ve been misguided by the maxim to retain as many customers as possible.  Customer retention (and a loyalty program specifically) is appropriate only when directed at Desired, profitable customers.  The objective of any strategically sound loyalty program should be on keeping Desired Customers and trying to improve the profitability of current Breakeven Customers.  Any spending directed at retaining Costly Customers is a recipe for bankruptcy!

 Strategy or ?

But ask yourself, just how many loyalty programs actually start with such a basic, yet strategically sound objective?  The unfortunate truth is the genesis of far too many loyalty programs is some form of incentive or need for customer tracking, with only a modicum of attention directed at who to retain or which behaviors to reinforce.  It’s a sad truth that most loyalty programs are far more tactical than strategic.