We have discussed the first four elements of how VRM can transform customer loyalty: CDP, CLV, CX and CL. It is time for the fifth and final ‘C’ – and perhaps the most important of them all. CEO. If the digital transformation of marketing has to succeed, then it has to become the most important priority of the CEO.
A CEO should remember Peter Drucker’s wise words: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”
Marketing as a function is also being impacted by technology. The customer is becoming increasingly digital and engaging with the business through many different touchpoints. What customers want is a continuity of experience. For example, if a Best Customer who has primarily shopped online enters an offline store, the right time to identify such a customer to provide an enhanced experience is right at the moment of entry, and not at checkout. This can only be possible if all customer interaction points are digitised. Customers are willing to share personal information if they know that data can provide them with a special, superior experience.
All that a CEO has to do is to wear the hat of a customer, and then see the experience provided. We are all customers of many different brands. Think about those brands where we have a deep connection with– both from an emotional and financial standpoint. Are we really special for the brand? Will the brand miss us if we are gone? Sadly, for most brands, the answer will be a No.
Every CEO says that customers are the most important focus for their business. And yet, much of the nitty-gritty is left to the marketing department. The ideas that we have discussed call for a complete transformation of the way businesses think about marketing. Such effort cannot be delegated – it has to be led from the front. For the VRM initiative to succeed, it needs to cut across every function that touches the customer – and therefore it has to be on the CEO’s agenda.
That is the opportunity CEOs have – to become the leaders in the effort to completely transform the way customers interact with their brands. Here, the focus needs to be on the experience provided to the brand’s Best Customers. A loyalty program is not the be-all and end-all of engagement. Rather, it may actually lead CEOs and businesses down a sense of false satisfaction. This is where the idea of Velvet Rope Marketing comes in. It can be the fulcrum for the transformation that customer loyalty needs. Forward-thinking CEOs can be the customer centricity champions in this journey and put their companies on the path to capturing industry profits and becoming a “profi-poly.”
CDP, CLV and CX (customer experience) are the first three steps in the process of transforming loyalty using VRM. The fourth step is CL (continuous learning) – creating a feedback loop where new data is ingested by AI-ML systems to create an even better system. Daily, and forever. This is a marketer’s dream – where every action taken by a customer is fed back into the system, and that is used to further personalise the content and experience.
What used to be a slow, time-consuming process by analysts can now be done by machines faster, better and cheaper. This lays the foundation for the 4Rs of customer experience – right message to the right person at the right time on the right channel. CL is at the heart of this world of “omnichannel personalisation”. It is even more important to do this for the most important customers.
Continual Learning (CL) is built on the idea of learning continuously and adaptively about the external world and enabling the autonomous incremental development of ever more complex skills and knowledge.
In the context of Machine Learning it means being able to smoothly update the prediction model to take into account different tasks and data distributions but still being able to re-use and retain useful knowledge and skills during time.
The simplest application of CL is in scenarios where the data distributions stay the same but the data keeps coming. This is the classical scenario for an Incremental Learning system.
You can think of a lot of applications like Recommendation or Anomaly Detection systems where data keeps flowing and continually learning from them is really important to refine the prediction model and in the end improve the service offered.
However, nowadays, for most of the commercial DL applications it’s ok to re-train the model from scratch with the cumulated data. The game becomes really interesting instead when the scenario keeps changing over time. This is where Continual Learning really shines and other techniques are unable to solve the problem.
In the world of marketing, the rise of digital customers is creating a continuous stream of data. Machines are best placed to process this and then provide the necessary guidance on the next best actions for every customer. While brands can apply this to all customers, the critical requirement must be to do this for the Best Customers. These 20% customers are where all personalisation efforts need to be super-charged. CL is the way to make systems better daily. If a system becomes 1% better each day, over a year the improvement is 3700%, or 37 times. That’s the power that an AI-ML powered CL system can deliver.
We now come to the third step – the CDP is in place, the CLV has been calculated, and the Best Customers have been identified. The next focus is on creating a differentiated customer experience for the Best Customers so they maximise their spend with the brand, and also refer friends and family members. The attributes of the Best Customers can then be used to acquire new customers with similar characteristics, thus creating a Best Customers flywheel. As we discussed earlier, every category has a limited number of Best Customers, and a brand’s focus should be to maximise such customers. This is the key to generating ever-increasing profits despite competitive pressures.
Velvet Rope Marketing is the solution that can provide the differentiated customer experience. I have written extensively about VRM in previous essays:
The big idea in VRM is in differentiated customer experiences that go beyond a loyalty program. Every aspect of the business must be involved in ensuring that Best Customers are treated like royalty. Because such experiences are rare, businesses which do this will stand out. All we have to do is to look at our own interactions with brands – in most cases, we will find that even where we are loyal customers, the experience we get is ordinary. This is the monotony that brands have to break, and VRM provides an ideas framework to do exactly that.
More information is available on VelvetRopeMarketing.com, and the Ideas page gives a number of suggestions on how to get started with creating memorable customer experiences.
Once the CDP is in place and all customer data is aggregated, the next step in using VRM to anchor a transformation in customer loyalty is to calculate the customer lifetime value (CLV) as a prelude to segmenting customers.
Here are a few quotes from Wharton professor Peter Fader on CLV, sourced from Retail Touchpoints:
The differences [between customers] are staring us in the face. And not only are customers vastly different from each other, but their lifetime value varies by orders of magnitude.
If you can come up with a lifetime value measurement, it’s like a number shining over each customer’s head. CLV provides a different framework for running a retail or brand business. Rather than focusing on product, you would want to figure out what you could do for these really valuable customers. What products and services should you offer to enhance the value of those customers, and to find more customers like them.
The truth is you’ll only get so far with innovation and efficiency; to succeed, you need to think of your customers as individual entities.
If you can quantify the CLV, you can figure out what kinds of discounts you should be offering — or, what kinds of value-enhancing activities you should offer instead of discounts.
Focusing on CLV doesn’t mean ignoring the remaining 80% of customers, but it does mean paying more attention to the high-value 20%.
There are many ways CLV can be wrongly calculated. Many brands just use an average of transactions done in a period of time to estimate CLV. A flawed CLV calculation will lead to an incorrect identification of Best Customers.
The right way to calculate CLV is to look at the recency and frequency of transactions, and then estimate future transactions for each customer. This is the model we use in VRM, building on work done by Peter Fader and others.
The challenge we face is how to generate forward looking forecasts of CLV. At the heart of any such effort is a model of customer purchasing that accurately characterizes buyer behavior and therefore can be trusted as the basis for any CLV estimates. Ideally, such a model would generate these estimates using only simple summary statistics (e.g., RFM) without requiring more detailed information about each customer’s purchasing history.
In developing our model, we assume that monetary value is independent of the underlying transaction process. Although this may seem counterintuitive (e.g., frequent buyers might be expected to spend less per transaction than infrequent buyers), our analysis lends support for the independence assumption. This suggests that the value per transaction (revenue per transaction × contribution margin) can be factored out, and we can focus on forecasting the “flow” of future transactions (discounted to yield a present value). We can then rescale this number of discounted expected transactions (DET) by a monetary value “multiplier” to yield an overall estimate of lifetime value:
CLV = margin × revenue/transaction × DET
Once the CLV has been correctly calculated, the easy next step is to segment customers and thus get a clear idea on the Best Customers.
The first step in using VRM to anchor a transformation in customer loyalty is to collect all the customer data into a single unified database. Data can come from multiple sources – one needs to look at all the touchpoints that a customer has with the brand.
Here is an explanation from Exponea about what a Customer Data Platform (CDP) does:
…It’s a kind of database software: one that creates persistent, unified records of all your customers, their attributes, and their data. A good CDP should both easily integrate with your existing data and allow for easy retrieval of the data it stores.
A CDP builds a complete picture of your customers on an individual level. It collects 1st party customer data (transactional, behavioral, demographic) from a multitude of sources and systems, and links that information to the customer that created it.
This creates a 360-degree customer profile, also called a single customer view, which can then be used by 3rd party tools or built-in marketing automation tools to execute marketing activities and analyze their performance.
A unified customer experience is impossible without unified customer data. Most data originates in separate systems that weren’t designed to share it with anything else. Traditional methods for collecting that data into unified customer profiles, such as an enterprise data warehouse, have failed to solve the problem. Newer approaches, like “data lakes”, have collected the data but failed to organize it effectively.
The Customer Data Platform is an alternative approach that has had great success at pioneering companies. A CDP puts marketing in direct control of the data unification project, helping to ensure it is focused directly on marketing requirements. CDPs apply specialized technologies and pre-built processes that are tailored precisely to meet marketing data needs. This allows a faster, more efficient solution than general purpose technologies that try to solve many problems at once.
The idea of a CDP has been around for a long time – its name has changed through the times. Enterprise Data Warehouse, Customer Relationship Management database, Data Lake, and so on. The key point is to collect all the data to help build a unified view of a customer which is the foundation for all customer engagement activities. With a CDP in place, the next action of calculating CLV can be done.
Here is a brief summary of the key ideas discussed so far:
Every category has some “Best Customers” – who have higher spending power than others, and therefore are more profitable than others
Identifying, acquiring and retaining these customers is critical for a business
These category-wide Best Customers can be instrumental in helping businesses build a profits flywheel
A standard loyalty-and-rewards program is not going to be enough for retaining such customers
What these customers need is something special – a differentiated experience
This is where Velvet Rope Marketing (VRM) comes in – by using tech and human-assistance to roll out the red carpet by offering exclusivity, ease and access
VRM is the secret sauce to ensuring customer loyalty and higher profits. Using CLV, it becomes possible to identify the current Best Customers for a business. Decoding the customer genome of the Best Customers offers the attributes to ensure more targeted new customer acquisition. This is the cycle that every business needs to drive.
And yet, the surprise is that few do it. Most think that rolling out a loyalty program is good enough to ensure that they will attract the best customers in the category and retain them. Nothing could be further than the experienced reality.
So, let’s now look ahead. How can VRM anchor the transformation of customer loyalty and loyalty programmes? There are 5 key ideas that we need to discuss:
Committing to a CDP: all customer data needs to be collected into a single customer data platform
Calculating CLV right: the right analytical models are needed to predict CLV to serve as the base for customer segmentation and experience differentiation
Crafting the Customer Experience: marketing creativity and technology platforms need to come together to create a magical experience for the Best Customers so they maximise their category spending with the brand
Creating a Continuous Learning system: use AI-ML (Artificial Intelligence and Machine Learning) to become better each day with the new data that streams in so changing customer behaviour and purchase patterns can be identified early
CEO prioritisation: none of this will happen without a clear vision and roadmap from the leader at the top – and a recognition that VRM-powered loyalty is not just a marketing program but the most important business imperative
We will discuss each of these 5 Cs in turn – CDP, CLV, CX (customer experience), CL (continuous learning) and CEO.
I recently signed up on an online clothes shopping platform. They had a loyalty program. So I registered for that. I got the base level of points. Later that day, I asked my wife (a frequent shopper on the same online platform) if she had joined the loyalty program. She replied in the negative. So, I signed her up. And guess what – both of us had the same base level of points! Her entire purchase history of many years had been discarded when it came to loyalty and she was on a level playing field with me! Of course, in the future, she will earn more points because of her higher spending – but for now, it was like both of us were starting afresh.
This reminded me of the movie “Fifty First Dates” – where the heroine has short-term memory loss. She wakes up each day with no idea of who she is or who her family members are. So, she has to be reminded each day of her life stage. A video each day reminds her of her past so she can enjoy the waking hours better.
Many brands suffer from the “Fifty First Dates” syndrome. They ignore the past – and some even ignore the present and future. They think that a half-baked loyalty program is all that they need to ensure customer loyalty. What they are not seeing are the significant benefits that a well-designed program with a forward-looking CLV can do for customer retention.
Let’s add one more dimension into this mix. There are two multiplexes near my house, and I tend to split movie watching between the two. None of them remember me from my previous visits so for me there is no real experience differentiation other than the show time and availability of good seats. If they were to look at my transaction history, they would think I am a reasonably loyal customer – watching a movie every few weeks. But what they will not see is that I am giving half my business to their competitor!
This is why I emphasised the need to look at the spending in a category. That is the revenue and profit pool that needs to be maximised, and most brands have no idea about the money they are leaving on the table. And that’s the reason existing approaches to customer loyalty are flawed and need a rethink. Velvet Rope Marketing is the big idea that can transform not just loyalty programs but customer loyalty itself. VRM is the key to opening the door to creating a “profi-poly” (profits monopoly).
Before we get to the “how” of rethinking customer loyalty, let us take a look at some of the metrics that have emerged over the years to measure customer loyalty:
Capillary offers a good summary of the many loyalty metrics:
Net Promoter Score: Gauge your customer loyalty with a Net Promoter Score, which asks one essential question: How likely are you to refer our service? Not only does this let you know how satisfied a customer is, but it also tests how likely they are to purchase again–without annoying them with a long list of questions.
Repurchase Ratio: The repurchase ratio gives you the number of customers who come back to your business repeatedly, divided by one-time purchasers.
Upsell Ratio: [This is] the ratio of customers who’ve bought more than one type of product to the customers who’ve bought only one.
Customer Lifetime Value: CLV is an understanding of the total revenue attributed by the entire relationship (including future purchases) with a customer.
Customer Loyalty Index: CLI takes into consideration multiple factors like NPS, upselling, and repurchasing. It accomplishes this through a questionnaire addressing these three essential points: “How likely are you to recommend us to your friends and family? How likely are you to buy from us again in the future? How likely are you to try our other products?”
Customer Engagement Score: [This] assigns every customer a score based on their individual activity and usage of your services.
All of these are good metrics. As I started thinking about customer loyalty, I thought about it differently. What would I as a business or brand want? A monopoly! Wouldn’t I love it if all my customers bought all their needs only from me? Each customer has a different threshold of spending. So, if I could figure out all that they were spending in that category and ensure they only buy from me, I could then ensure a competition-free business – which is the ultimate objective of a business and the path to supernormal profits. Of course, this never happens in reality. Customers have different needs and no business can cater to every one of their needs. Yet, some businesses come close. Google in Search and Microsoft in operating system software are two examples. Google’s Search gets our attention which is then monetised, while Microsoft gets our dollars for its near ubiquitous Windows and Office combo.
For a business, the key then is to identify the Best Customers in its category, and ensure it can get a maximum of them. Once they are acquired, the key would be to figure out what is their spending threshold in the category, and then aim to maximise wallet share of that spend. This approach can cut off the oxygen of revenue and profits from competitors. This needs fostering extreme customer loyalty. That is why I think we need to define customer loyalty differently: receiving more than 50% of the spending (attention or money) by a customer in the category.
To maxmimse profits, businesses need a new approach to thinking about loyalty and loyalty programs. This is where Velvet Rope Marketing comes in.