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 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.