Terry Vavra's Blog

Why So Many Loyalty Programs Fail – Pt. 1

Posted on 27. Aug, 2011 by tvavra in Loyalty

The customer loyalty movement in 2010 has come a long way from its beginnings in the 1990’s.  No longer is it necessary to convince companies that they should have a customer loyalty strategy.  Today, most companies actually have one; a scant minority talk avidly about creating one.  And yet a challenge still remains.  The fact is, few of these strategic visions are properly conceived.  Most are seriously flawed in one of several ways; many fail.

A frequent flaw is exactly who the strategy is directed towards (or said another way, the strategy’s lack of direction).  Convention shows that businesspeople execute a loyalty program as if they’re running a democracy (i.e. all customers are equal).  The problem with this approach is, no matter how altruistic they want to feel, customers are not all created equally.  The fact is customers interact with our businesses in vastly unequal ways.  In the book, Loyalty Myths, I described three types of customers – a useful triage for most businesses to adopt.  There are Breakeven Customers – those who neither add to or subtract from corporate profitability (either they buy a lot but demand equally heavy servicing, or they buy very little); there are Costly Customers – those who demand so much attention or such excessive price concessions that maintaining them as customers reduces a business’s bottom line; and there are 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 see why a business shouldn’t want, nor be encouraged to retain all of its customers!  A loyalty basic, therefore, should be the focus of attention on keeping Desired Customers and trying to improve the profitability of current Breakeven Customers.  Any envisioned loyalty program or tactics should be qualified against these two goals.  Any spending directed at retaining Costly Customers is a recipe for bankruptcy!

Tags: customer loyalty, customer scoring