Cost Justifying a Loyalty Program – Part 1

Being in the loyalty marketing business for so many years, we have seen just about every reaction possible from CEO’s and CFO’s when we accompany the CMO to discuss the possibility of developing a program…especially one that includes “rewards”.   Usually, the CEO is open to the idea and the CFO is quite skeptical.  Sometimes the other way around.  Regardless, they always have the same question:  “How much money can we make from this?”  They’ll usually let the CMO run with the development and management of the program, but they want to know that it’s going to work…financially.

The CEO and CFO are looking for specific rationales for investing in a loyalty program.  After all, they are resource-intensive and high profile initiatives.

So, how do you provide the compelling case for a loyalty program and show how it will create an economic return for the business?  The answer depends on the type of business you have.

Here are a couple of examples.  We’ll follow-up with more in subsequent posts.

The Hockey Stick Effect

Some businesses have very high customer acquisition costs and low maintenance costs.  These guys literally live and die on customer retention.  Take the insurance industry for example.  There are considerable costs to establish the relationship, pay commission to an agent, set up the customer, fulfill all the materials for compliance, and much more.  It may take several years of premiums before that customer relationship becomes profitable.    This is a classic “hockey stick” business.  The customer must persist for several years before the relationship breaks even.    While there are opportunities to grow the customer relationship, (e.g. selling them additional insurance products) in Hockey Stick businesses the driver of profitability is customer tenure. There are lots of examples of ‘hockey stick’ businesses:  Insurance, credit cards, cable TV, wireless phones.

In hockey stick businesses, maintaining the customer relationship to the break-even point is likely the driver of the business case for loyalty.  Keeping switching costs high is important.  Rewards programs increase switching costs.  Rewards also provide a currency for maintaining retention in the face of customer service issues.  Dolling out points has overcome many service issues.

Playing Defense

Some businesses are very “top heavy”.  They have relatively few massively high value customers.   Airlines are a classic example.  Top end business travelers who travel every week and buy business class fares can spend close to $100K per year.  Moreover, for every “diamond” customer in a frequent flyer program there are scores of leisure travelers who fly once or twice per year.   These diamond members are truly the 1%; the ‘whales’ among the minnows.

In these businesses, the top 1% of customers may have an annual value of 10x to 20x more than an occasional customer.  Defense is the rationale here.  Even a small defection rate among these whales can make a considerable dent in the bottom line.  Hence, retaining these top customers is a huge driver of the business case for loyalty.  Providing high value rewards, especially increased service levels that have a high perceived value and low incremental cost, will help increase loyalty among elite customers.  Other example “whale businesses” are luxury hotels, casinos, fine dining, cosmetics, and fashion retail.

Here is an example of how to cost-justify a loyalty program for a business that is trying to defend its “whales”.


The business is suffering defection among its highest value customers and the loyalty program’s reason for being is retaining these whales.

Use Case/Business Case:

  • Our top decile of 40,000 customers are worth, on average, $12,000 per customer per year in revenue and $4,000 per year in margin. The annual defection rate among these customers is 30%.
  • Defection among the top 10% of customer is costing $144MM per year in revenue and $48MM in margin.
    • (40,000 customers x $12,000 revenue x 30% defection = $144MM lost revenue)
    • (40,000 x $4,000 margin x 30% defection – $48MM annual lost margin)
  • By implementing a loyalty program, we believe we can reduce the defection rate among these top customers from 30% to 25%. Reducing the annual defection among these top customers by 5 percentage points will deliver $24MM annually in incremental revenue and $8MM in incremental margin.
    • (40,000 customers x $12,000 revenue x 5% reduced defection = $24MM incremental revenue)
    • (40,000 x $4,000 margin x 5% reduced defection = $8MM annual lost margin)

For more on this and some tips on how to create the “reason for being” and the business case for developing a loyalty program, please download our white paper, 7 Sure-Fire Ways to Justify a Loyalty Marketing Program.

Customer Experience and Customer Engagement: Same, Different, or Just Other Terms for CRM?

There are a couple of buzz words in marketing these days that just seem confusing to most people: Customer Experience and Customer Engagement. What are these terms? What do they mean? Are they the same or are there differences?

Let’s discuss each of them and find out.

First, both of these concepts seem to have their roots in CRM: Customer Relationship Management. CRM has been around for a long time. This is a concept that first gained popularity in the early 2000’s. However it started, the concept was quickly claimed by marketing, sales and customer service. They each had their definitions, applications and tools.

CRM is a term that can be applied to any functional business area that deals with managing customer touch points and evaluating results. This can start at the lead or prospect level and work its way through the customer lifecycle. Agencies, consulting firms and brands began to tout their experience and expertise in CRM. It was (and still is) a big buzzword. Diagrams, charts, and many Power Point presentations espoused the brilliance of the presenter in the CRM concept.

Then, somewhere around 2010, two new terms seemed to spawn from CRM – Customer Engagement and Customer Experience. Again, sales, marketing, and customer service all flocked to these concepts and tried to claim them as their own.  Agencies were now branding themselves at “customer engagement” experts and brands were gushing about how they provided “unparalleled customer experience”.  To further complicate things, now we have two terms fighting for the same acronyms!

Wait. So what changed? Are the two really that different? Or did we just give CRM a paint job? Let’s compare these two concepts and see if there really is a uniqueness or this is just another concept shuffle to keep us from getting too comfortable.

Example interactions between Customer Engagement and Customer Experience.

Example interactions between Customer Engagement and Customer Experience.

Customer experience is about the feelings you invoke in your customers regarding your brand. These are driven by all of the touch points that customers have with your brand, including those that you control and those that are outside of your control. Customer experience is arguably the most important driver of loyalty because, as the old adage goes, perception is reality.

Customer Engagement refers to a marketing strategy for how to interact in a two-way communication ecosystem with your customers. It’s both a strategy and a suite of tactics that companies use to create positive customers experiences and long-term customer loyalty.

So, the basic difference between these two concepts is that marketers use customer engagement to impact customer experience.

A company that is focused on customer experience will have a very keen understanding of their customers using data gathered through observation, data collection, and research. They will employ customer engagement strategies and tactics to improve their customer experiences, measuring the outcomes through increases in behavior and/or attitude.

Bottom line…Customer Experience and Customer Engagement are indeed unique concepts. Like so much other jargon, they are often used incorrectly and interchangeably. So keep these distinctions in mind the next time you hear someone talk about Customer Experience and Customer Engagement.

Sarah Orlando

The JAY Group

Surprisingly Pleasant Service Experiences Highlight 4 Lessons in Loyalty

If there is one industry that takes a hit when it comes to customer service, it’s the telecom industry.  It’s hard to find someone who has not had a horror story experience with their phone company or wireless service provider.  However, a couple of recent experiences point out both an improvement and some important lessons in customer loyalty marketing.  Here are the stories…

Problems with my wireless billing and data usage plan led me to call my provider, Verizon Wireless.  Their website was actually easy to log into and navigate, as well as find a support number.  After an acceptable number of digits pressed, a friendly voice asked how she could help.  Because I was on my mobile phone, there was no need to ask me the same information I had just keyed in, and we got right to the heart of the issue.

The issue was relatively easy and was quickly solved.  There was one item that she was not sure about and she said she would investigate it and get back to me.  She then checked my usage and noticed that I could save $10 per month with a simple change.  As a customer, I felt like she went out of her way to help me, despite the fact that it lowers Verizon’s revenue by over $100 per year.  Now, what do you think would happen if the call was actually being “monitored for quality assurance”?  Would my friendly advocate get praised or scolded?

I like to think Verizon is enlightened enough to know that what she did was actually better for the company’s bottom line.

The end of the call was my favorite part.  She ask to make sure there were no other issues, said thanks for calling, and hung up.  No long, scripted speech about Verizon’s commitment and valued customers.  Are you listening, Comcast?

What happened next surprised me even more.

A couple of days later I got a call from the same rep.  She was following up on the one unresolved item and letting me know the outcome.  She was also checking to make sure everything was now OK.  No sales pitch.  No speeches.  Just a friendly follow-up by the SAME rep.

The second experience came a few weeks later.  One of our employees was going to Europe for a couple of weeks.  She has a company-owned phone, so I asked her to call Verizon to get international calling enabled.  She did so, but they needed my authority as the main contact.  As I was walking to work I got a call from Verizon.  It was a service agent who mentioned that he had our employee on the other line and needed me to approve the additional service.  I said yes, he thanked me, and that was it.  The entire conversation took about 30 seconds, just long enough to wait for the light and cross Orleans St.

So those are my stories.  Let’s go back and pull them apart. There are some really great loyalty lessons in there that almost any organization can apply.

Understanding Customer Lifetime Value

Verizon is a data-rich organization.  They have a wealth of information on all individuals and organizations and have developed strong models to understand both past and predicted value of each customer.  They also understand that the most important factor for improving lifetime value is keeping me as a customer.  Infinitely more important than any upgrades or cross-sells they could possibly hook me into.

Verizon clearly understands the importance of retention and these service experiences provided some proof:

  1. Value my time. We are all busy, and the last thing we want to be doing is dealing with the phone company.  By focusing on user experience both on their site and one the phone, Verizon shows that they value my time.  By limiting or forgoing the standard closing statement, Verizon again shows that they value my time.  Telling me how they value me as a customer and repeating their latest slogan does nothing.  Demonstrating it is what matters.
  2. Be my advocate. This is a strategy that the best performers all understand and use effectively.  Saving me $10/month on a bill that averages over $300 makes financial sense.  It makes me feel valued.  It creates an emotional bond, which improves REAL loyalty.  If that tactic results in an increase in customer retention by just a few days, Verizon comes out ahead.  And I have no doubt that is does.
  3. Follow up. Part of being an advocate is following up when necessary to ensure satisfaction.  Verizon did not go overboard with this.  A simple, quick touch point is all it takes to instill positive emotional loyalty.  This was a lesson I learned many years ago when we made follow-up calls to first-time progressive lens (no line bifocals) buyers for an optical chain client.  That simple call produced a verified ROI of close to 700%.
  4. Understand the critical path. Verizon needed my approval to add the international package.  Traditionally, they would have told my colleague to have me call in, get routed through 3 agents, explain the situation (as if I was an expert) to each one, then go through a myriad of security checks to verify my identity so they can push a button and charge me more money.  That creates multiple unnecessary touch points, eats up valuable time, and causes negative emotions.  Instead, Verizon understood that there is a quicker, easier path to completion.  Just call the person from whom you need approval.  They may actually answer.  And when they do, get to the point.

Finally, I don’t know whether these experiences were exceptions or the norm.  Regardless, positive examples are always welcome.  It is especially refreshing to see this in a large, complex, regulated organization like Verizon.  I feel for the loyalty marketers at these large companies who are blocked and frustrated daily by financial and legal overseers.  These cannot be easy policies to implement.

So think about your customers and their experience.  How can you better value their time through your interactions?  Remember the critical path and always try to keep to it.  Understand lifetime value and that lowering revenue in the present only hurts if you don’t increase retention.  And how can you follow-up just to make sure everything is OK?  There are plenty of ways to automate this, and the payback will surely outweigh the effort.

Why You? Find Your Emotional Discriminator to Create REAL Loyalty

Loyalty marketers spend the bulk of our time trying to satisfy customers and create real loyalty.  The kind of loyalty that goes beyond discounts and deals.

One way to do this is to understand what business you are in.  Seems pretty simple, but it’s not.  Notice that I didn’t say “industry.”  I said “business.”

Let’s begin with a quick story.  This is from Mark McCormack’s classic book, What They Don’t Teach You at Harvard Business School (Bantam, 1986).

A guy asked the Chairman of Rolex, Andre Heiniger, “So, how’s the watch business?” Heiniger said, “I have no idea”. The guy said, “What are you talkin’ about? You’re the chairman of Rolex.” Heiniger responded: “Rolex is not in the watch business. Rolex is in the LUXURY business.”

Mr. Heiniger knew that his customers did not buy watches.  They bought status.

While most marketers understand this, the problem is that many think it applies to only a select group of brands or industries.  In fact, it’s true of every business.  Here’s a marketing rule to remember:

What you sell and what you deliver are not the same.

Think about your company.  It does not matter whether it’s a service business or a product business.  When someone asks you what business you’re in, you tell them what you deliver.  You tell them, “I’m a lawyer,” or “We’re in the food business”.  And you’re right…in a way.  Those are the services and products you deliver.  It’s also easily understood by most people.

What you actually sell is something more basic.  The truth is that people buy emotions.  Now, you may have noticed that the period before this sentence is bolded.  That was not a typo.  It was for emphasis.  So in case that slipped by, let’s try it again.

People buy emotions…PERIOD

Customer loyalty is about continually delivering on the emotional benefit you’re selling.  It’s really not much more complicated than that.  It’s not easy to pinpoint and it’s definitely not easy to accomplish, but the concept is pretty straightforward.

Look up emotional buying triggers and you will find the same few words over and over in most of the articles:  Love, fear, greed, pride, guilt, envy, altruism, vanity.  These are all valid and correct.  But loyalty is about discriminators for your company, not your category.  People buy luxury for an image of success, but why do they choose Rolex?

To really take advantage of emotional marketing, we need to go beyond the triggers and identify the emotional discriminators that your company provides.  If you have them, can define them, and continually perform to them, real loyalty is sure to follow.

Beyond price, what do you offer that your competitors cannot match?  If your customers buy your category based on altruism, why do they choose you over the many other altruistic choices they have?

Southwest Airlines (SWA) understands their emotional discriminator very well, and that’s the connection between employee and customer that creates the comfort and satisfaction that consistently ranks them near the top of national customer satisfaction polls*.  Many people choose SWA time and again because of the emotional connection their employees foster.  They simply make flying more enjoyable.  So SWA makes employee satisfaction their #1 priority.  Their success is reflected in the 90+% employee retention rate and their high customer satisfaction ratings.

Rolex continues to succeed because they make a high quality products, but also because they relentlessly guard their brand and their emotional discriminators.  Rolex is a well-known brand.  The company continues to advertise in luxurious settings and endorses the top athletes and celebrities.  When someone wears a Rolex, most people immediately recognize the brand.  Customers understand this and that gives Rolex an emotional discriminator over, say, Bvlgari, Hoblot, or Piaget.  Buy a Rolex and most people you meet will recognize your success.

At The JAY Group, we understood that we sell peace of mind, but needed to find our emotional discriminator.  Our research told us that we stood out because we let our clients be the heroes.  Bingo!  Now we know our emotional discriminator and it’s embedded in everything we do.

To help improve loyalty, first determine the emotional triggers for your category.  Note that these may be different for unique customer segments.  Not everyone buys from you for the same reason.  Then figure out your emotional discriminators.  Think about your customers/clients.  Do they depend on you?   Do you provide something they are not getting elsewhere?  Remember, the most important question you can ask your customers is why they choose you over their competitors.  Analyze those answers.  Read between the lines.  Your emotional discriminator is in there, and your success depends on it.

– Jay Weinberg

* Source: J.D. Power 2014 North America Airline Satisfaction Study (

Create loyal customers by solving your competitors’ problems

Jay here.  At dinner recently, a friend talked about a service experience he had with his home theater system.  He ended the story by stating that he would “never buy anywhere else”.

Now this is one of those statements that makes a loyalty marketer perk up.  So I probed deeper and looked for the driving reasons that any company can use to improve loyalty.  Here’s the story…

About 10 years ago, my friend had purchased a home theater system at a larger retailer in the Chicago area.  That company subsequently went out of business.  He bought more components at a high end subsidiary of a big box retailer.  Let’s call them “Maverick”.  Everything was fine.

One day he found that he had problems with his TV.  He called Maverick and explained his issue.  He got “the runaround”.  We’ve all experienced it.  No one took “ownership” of his issue and no one made him feel confident in their advice.  It was days before he could get anyone competent on the phone.  They suggested he replace the TV because it was ten years old.  The back and forth went on for weeks.

My friend finally asked to have a technician come out to look at it, and they wanted to charge $150 for the visit and scheduling was not convenient.  He had enough.  So he called another local electronics retailer, Abt Electronics.  They are a family-owned one location business that is very popular in the Chicago area.  Abt answered the phone quickly and listened to his issue.  My friend can’t remember if they asked whether he had purchased the items at Abt, but felt that it didn’t matter to them.  They simply wanted to solve his problem.

After trying to solve it over the phone, Abt sent out two very qualified home theater technicians.  The visit charge was much lower than the $150 Maverick wanted to charge.  They poked around and found a wire that had come loose behind the TV.   Boom.  Done.  Problem solved.

Now, we have all heard and experienced these stories and I won’t waste your time telling you what you already know about how Maverick can improve.  I’m interested in loyalty and how specific strategies and practices can attract and retain customers.  Here’s what this story reinforces about customer loyalty:

  1. Customer service is an investment, not a cost. Most companies look at post-sale service as a necessary evil.  Smart companies understand it’s an opportunity.  What better way to be the hero?  Loyalty marketers know the old saying that “a customer is more likely to remain loyal after you fix a problem than if they did not have a problem at all.”  However, servicing prospects who bought from competitors – even if it means an hour on the phone and no revenue – may be even more valuable.  Not only do you create REAL loyalty, but you steal a customer from your competition.  Plus, you create positive word of mouth impressions.
  2. Transparency sells. For most products and just about all services, the biggest fear consumers have is that they are getting ripped off.  (Sorry, I know that’s a broad term, but it’s the best I could come up with.)  If you want someone to like you (i.e. convert and remain loyal), be honest and show that you have nothing to hide.  My friend described the experience with Abt as being “very clean”.  He said they spoke clearly and in words he understood.  They explained things.  They were patient and asked questions that made sense.  They showed through their actions that they were trying to help him.
  3. Align your interests. One of the best ways a service person can alleviate the “rip off” fear is to show the customer that your interests are aligned.  In the story above, Maverick quickly suggested my friend buy a new TV.  If that’s what my friend wanted, he would have called sales, not service.  He wanted his current TV to work.  He felt the interests of Maverick were different.  They wanted him to either buy something or go away.  Abt didn’t want to sell him anything.  They wanted to solve his problem.  They understood that if they were aligned with him on this service interest, he would align with them for future purchases.
  4. Be consistent. The three observations above must be ingrained in the culture of an organization.  For these to have any affect, they need to be universal, not part of the genetic makeup of a few enlightened employees.  Training is paramount.  This philosophy needs to be conscious and embraced throughout the company.  And be patient.  Like all forms of real loyalty, this strategy take time to pay off.  But it will.
  5. Hire right. No further explanation needed.  Seriously, you just need to have the right people.  You will know one when you see one.  When you do, get out the cloning tools.

So…the next time someone calls you for help with a product or service they didn’t purchase from you, what are you going to do?

Jay Weinberg (

For more info about customer loyalty, check out our resource center.

FYI…Abt’s Yelp page:


Guess who’s starting to make some serious money?  Well, at least they are starting to SPEND some serious money.  The Millennial generation.  Those born between the early 1980’s and early 2000’s are starting to reflect their parents’ values and spending as much, if not more, than they are making.

So what does this mean for loyalty?  While it seems to be an overall boon for businesses the jury on customer loyalty is still out.

It is incredible how different every generation is from its predecessor. Experience shapes behavior, and people have argued that the reason the millennial generation is spending more than they are making is because of the events that have taken part in their younger years. While some of these events were extremely catastrophic (9/11 and the “great recession”), others were beneficial, such as the innovation of the digital world & extreme social changes. Some sociologists argue that all of these events have imbedded the idea in millennials that “you never know what the future will bring”.  This sense of insecurity causes them to want to spend more money on themselves and believe that it’s OK to treat themselves whenever they want. Watching their parents exhibit this behavior certainly adds to this attitude.

MillennialsIt’s this attitude that causes millennials to want to experience new things. Older generations used to enjoy consistency – purchasing the same brands, eating at the same restaurants, or using the same services. Millennials have a contrasting point of view and want to experience new things, causing a lack of brand loyalty that businesses once had. The “double-whammy” of increased competition and a disposition that lacks loyalty has driven many companies to introduce rewards programs that help bolster customer loyalty. While this does help, it doesn’t necessarily build “true” loyalty. According to an article by Kate Kaye in, 37% of millennials said they would not be loyal to a brand without a program.  Another statistic, from the “2014 Loyalty Report” from Bond Brand Loyalty, shows that 60% of millennials who are members of a loyalty program would switch the brands they buy, and two-thirds would change when and where they shop, if it meant getting more benefits.

Now, the question remains, how does a business create a sense of “real loyalty” with millennials?  One way of doing this is by implementing a feeling of kinship in your business. This ultimately starts by training your employees to be as friendly and caring to the customers as possible. But there are other ways to make the customers feel like they are special. Give them rewards even if they’re not part of your loyalty program, or if you don’t have a loyalty program. Keep it simple. Random acts of kindness stick with customers and they will tell their friends about your good deed as well.  Taking a small loss means nothing if it assures a customer will come back again.

Another way to reach them…mobile.  Millennials are the first mobile native generation and if you are not reachable in that medium, forget it.  All studies show that by 2020 mobile payments will be over 13 gazillion dollars, and the millennials are leading the way.  Offer them information, payments, and communications this way.  Oh, and email?  Forget about it.  This generation wants nothing to do with email.  Expect open and engagement rates to fall even further.

Millennials are a complicated generation to understand fiscally, or in any way for that matter. But gaining their loyalty could be what sets your business apart from your competitors and could be a big advantage in the future.

Check out our resource center for more tips at:

– Luke Pustay

Classic Marketing Rules – RFM

Can you answer this (simple?) question:  Who are your best customers?

If so, bravo!  We can follow up with the question “why?” a bit later.  However, it’s amazing how many marketers with repeat customer bases can’t answer that basic question.  And it’s a really important one!  By knowing the value of your customers you can better optimize your communications budget, target prospects who share the traits of your best customers, and vary your messaging to appeal to various segments.

If you need a quick and easy way to value your customers, try this “old school” rule:  RFM.  RFM is an acronym for Recency, Frequency, Monetary Value.  These are the components of a formula that direct marketers have used for decades to measure the value of each customer.  To keep it simple, try this exercise:

  • Recency: This is most recent purchase date. Rank each customer by their most recent purchase date and decile them “i.e. break them into ten equal groups from top to bottom. The 10% most recent buyers get 10 points. The next 10% get 9 points, and so forth.
  • Do the same as above for Frequency (the total number of purchases) and Monetary Value (the total amount of money they have spent with you).
  • Now, add up the scores for each customers and there you have it…your own RFM customer analysis!

Use this to determine who and how often to market to various customer segments.  Dig a little deeper and see why people have a high score.  You will notice that some are driven by high frequency and others by one or two large purchases.  How would you message to each of these customers?  Probably a bit differently.

In sports, coaches are always telling players to “remember the fundamentals.”  Well, business is no different.  Remember RFM, play around with variations, add your own enhancements, and the next time someone asks if you know who your best customers are, give them a big grin and answer: “Abso-****ing-lutely!”

Oh, and check out RFM and more classic rules by downloading “Get Old Schooled” in our Resource Center.