Loyalty vs VRM
The aspiration of every business is customer loyalty. In simple terms, customer loyalty translates into repeat business. The cost of acquiring a new customer is many times that of retaining an existing customer, hence customer loyalty also means higher profits for a business. If customer churn, a business cannot create a growth story and a profits flywheel. Thus, customer loyalty is central for business success.
I started thinking more deeply about customer loyalty during recent conversations with CMOs as part of the meetings I have been doing on Velvet Rope Marketing (VRM). VRM is about a focus on the Best Customers – the top 20% or so customers who account for a disproportionately high share of revenue and profits. For many businesses, Best Customers can deliver 60% or more revenues and greater than 100% of the profits – since many of the Rest Customers can be loss-making when acquisition and servicing costs are factored in. VRM’s key thesis is that Best Customers need a differentiated experience because of their importance to the business.
Loyalty programmes are one way to reward customers. The more a customer spends, the more points they earn. These points can in turn be redeemed for rewards. To make it more lucrative for loyal customers, tiers can be created where higher tiers generate more points. Airlines do this very well. There is hardly a frequent flyer to be found who is not part of the airline’s loyalty program.
As I see it, there are some very big differences between the standard loyalty programs offered by brands and VRM. Typically, anyone can opt-in to a loyalty program and start earning points. The brand does not control who joins. There is also very little experience differentiation – the points are linked to spending, and that’s about it. In VRM, it is the brand which decides who gets to be part of the differentiated experience. Think of VRM as ‘By Invitation Only’, an exclusive club whose entry is decided by an algorithm which calculates Customer Lifetime Value (CLV), a forward-looking and predictive metric based on the expected future transactions and their value. CLV, as used for VRM, can be a better measure of segmenting customers and determining Best Customers.
Any brand can offer a loyalty program with rewards. Customer Experience differentiation via VRM for Best Customers can become the moat a brand builds to ensure greater customer loyalty, higher spending and a ‘profits monopoly.’ This can give us a new definition for customer loyalty – receiving more than 50% of the spending by a customer in the category. We will build on these ideas in this series.
Tomorrow: Part 3