September 17, 2012

Forecasting 2013: Customer Loyalty

Below, we can see the forecast for our business, for the next five years.

As you can see, there's nothing to be proud about, is there?

This business is stuck.

When I meet with folks, there is a natural instinct for folks to ask "why is this business stuck?"

I'll start to explain the reason on two fronts. First, this business has customers who have a 33% chance of buying again in the next twelve months.

At this point, somebody raises a hand.

"Are you telling me that only 33% of last year's customers purchase again next year?"

After I acknowledge the query, the room begins to murmur.

"We can fix this.  Imagine if 63% of last year's customers purchased again this year?  We just need a loyalty program.  Let's get busy creating a loyalty program."

Let's try something.  Let's say that you could invent a loyalty program that worked (never mind the obvious fact that if you could do that, you should have been doing it all along, so why the heck haven't you already initiated a loyalty program that works wonders?).  And let's say that you implement the program among existing buyers with long-standing buying history.  And let's say that you increase annual repurchase rates among this audience by a whopping 10% (which, by the way, is VERY hard to do ... if it were easy to do, everybody would already be doing it).

What impact would this have on the business?

Take a look.

You invest all of this effort, all of this money, on your handy-dandy loyalty program.

For a year, there's a difference.  Sales increase from $77,000,000 to $79,000,000. Then sales plateau at $80,000,000.

This is the fundamental problem with customer loyalty programs.  They don't fundamentally change the trajectory of a business.

In order for loyalty programs to work, you need customers with at least a 60% chance of repurchasing in the next year, customers who will purchase 5-6 times per year.  In these situations, loyalty programs tend to perform better, because you are pushing a customer who is likely to buy, and buys 5-6 times a year, toward a scenario where the customer buys 6-7 times a year.

But for the rest of us, we have customers with a 25% to 45% chance of buying again in the next year.  Pushing this customer to repurchase again is very hard.  And even if somebody figures out how to do this, business performance only improves by maybe 5%, on an annual basis.  Considering how much you have to spend to make this happen, the end result may not yield a profitable outcome.

When you have access to the right data, you can quickly see that loyalty marketing is a challenge.  Better to find new customers, than to scream at existing customers to get them to buy again.

Speaking of new customers, tomorrow, we'll look at what happens when you focus instead on new customers.

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