Dear Catalog CEOs:
A carefully crafted loyalty program can increase sales by somewhere around 10%, among customers who are deemed loyal.
And yet, for most of us, loyalty programs don't work.
At Nordstrom, good customers had an 85% chance of buying again in the next year, purchasing maybe ten times if the customer repurchases. That's 0.85*10 = 8.5 expected annual orders per loyal customer. If a loyalty program increases volume by 10%, then you achieve an incremental 8.5 * 0.10 = 0.85 orders per customer.
At your garden-variety catalog brand, good customers have a 45% chance of buying again in the next year, purchasing maybe two times if the customer repurchases. That's 0.45*2 = 0.9 expected annual orders per loyal customer. If a loyalty program increases volume by 10%, then you achieve an incremental 0.9 * 0.10 = 0.09 orders per customer.
Can you see the difference between the two business models?
It doesn't matter what the cataloger does ... a loyalty program is going to make no difference whatsoever.
It make all the difference in the world what Nordstrom does ... a loyalty program greatly increases sales and generates profit.
Trade journalists, bloggers, and many loyalty experts miss this subtlety in customer behavior.
Loyalty programs work in a high-frequency environment.
Loyalty programs cannot force infrequent buyers into frequent buying behavior.
A few days ago I told you a story from my time at Eddie Bauer. As the new Circulation Director, it didn't take long for the problems ...
Look at the first four rows of our life table (values of 0/1/2/3). These are the first 12-15 weeks after a customer buys for the firs...
You probably run Life Tables for your customer file, right? Right? They've been around forever ( click here for a reference f...
If you don't like geeky math, please skip this post, because I am about to show you how the sausage is made! I have eight variables in...