choosing a loyalty strategy

7/30/2019 Choosing a Loyalty Strategy

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CRM___

Choosing a loyalty STRATEGY

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Drawbacks of R.F.M.

RFM stands for

Recency - How recently did the customer

purchase? Frequency - How often do they purchase?

Monetary Value - How much do they spend?

Ignores the pacing of a customer's interactions,the time between each purchase

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Event history modeling

Based on past data

Formula: t^n

n=no of purchases

t=fraction ofthe period represented by the time

between his first purchase and his last one.

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Mr. Smith

Makes purchases in 2nd,6th& 8thmonth thus buyson an average every 2.3

months.

n=4

t=8/12=0.6667

Probability of being active=(0.667)^4=.198=20%

20%

Ms.Jones

Makes purchases after 7months

n=2

T=8/12=.6667

Probability of being active=(0.667)^2=0.44=45%

45%

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Example: Mr. Smith & Ms. Jones

This approach predicts how quickly a customer'spurchasing activity willdrop off, as the probability oftheir being active in the future drops steeply

with time


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Drawback 2

Monetary-value component is almost alwaysbased on revenue rather than profitability.

Per-period profitability -Multiply customers

average periodic profit figure by the

probability that the customer will still be active

at the end of that period.

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An example: Adam Incorporated & Eve Limited

Adam Incorporated

Average profit of$5,500

per quarter over the last

two years

Adam Incorporated willremain active is 85% in

the first quarter, 60% in

the second, 35% in the

third, and only 22% in thefourth

Profit generated: $11,110

Eve Limited

Average profit of$1,000

per quarter over the last

two years

Eve Limited are onlyslightly lower, starting at

80% in the first quarter

and declining to 50%,

27%, and 15% in thesubsequent quarters

Profit generated: $1,720

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Given that a visit by the full sales team costs the company $5,000 and a single

salesperson's visit costs $2,000, it's clear shows that Adam Incorporated merits thefull treatment


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Strangers Butterflies

True friends Barnacles

No loyalty, no Profits

Lowest profit potential

Little fit b/w company'sofferings and customers'needs

Profitable but disloyal

High profit potential

Good fit b/w company'sofferings & customers' needs

Profitable & likely to be loyal

Highest profit potential

Good fit between company'sofferings and customers' needs

Highly loyal but not veryprofitable

Low profit potential

Limited fit b/w company'sofferings & customers' needs


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True Friends

Communicate consistently but not too often

Build both attitudinal and behavioral loyalty

Delight these customers to nurture, defend,and retain them

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Butterflies

Aim to achieve transactional satisfaction, notattitudinal loyalty

Milk the accounts only as long as they areactive

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Barnacles

Measure both the size and share of wallet

if share of wallet is low, focus on up- and

cross-selling

if size of wallet is small, impose strict cost

controls

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Strangers

Make no investment in these relationships

Make profit on every transaction

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Conclusion

No company should ever take for granted the

idea that managing customersfor loyaltyis thesame as managing them for profits.

The only way to strengthen the link between profitsand loyalty is to manage both at the same time.

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choosing a loyalty strategy

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