The Loyalty Guide: Defining best customers

Through June 30, Wise Marketer subscribers can take advantage of a special discount offer: Purchase the Loyalty Guide 7 at just US $900 - that's a 56% savings off the $1,600 retail price! In this excerpt from the LOYALTY GUIDE 7, published by the Wise Marketer Group, we outline the defining characteristics of best customers. The key takeaway: a fundamental principle of loyalty marketeting is that some customers are more valuable than others - and are therefore more deserving of reward and recognition.

According to Brian Woolf, author of two seminal books on best customer marketing, president of the Retail Strategy centre [www.brianwoolf.com] in South Carolina, USA, and known widely as the 'Godfather of best customer marketing', having a best customer marketing strategy is common sense but not common practice.

He says that, as a general rule, best customers:

• Spend the most each year;
• Have the lowest defection rates;
• Visit the store most frequently each month;
• Buy items with a higher average price;
• Buy higher gross margin percentage items;
• Buy from more departments and categories;
• Have lower processing costs (larger order sizes, fewer questions about where to find items, and fewer losses from bad cheques).

Woolf says that investing in good customers makes sense because they are already favourably inclined to the business. Spending the same amount on trying to improve low value customers is less likely to succeed, because their behaviour needs to change significantly.

Woolf's work for many large retailers on several continents has led him to believe that best customers typically comprise 12% to 25% of customers and account for 40% to 65% of sales. He suggests that a best customer programme be kept simple: use total spending as a qualifier for the programme and offer a basic set of benefits and rewards, then give unannounced extra rewards and benefits that vary with the value and needs of the various best customer sub-segments.

What makes a Best Customer?
Clearly, anything that adds to profit defines a best customer. This includes:

Basket size
Best customers will tend to buy more at each visit. This means that, per item or per dollar spent, the costs of handling the transaction are usually less and the contribution to turnover is more.

Frequency
Best customers tend to visit more frequently. According to Woolf, frequency is the primary driver of sales, and he has found a positive correlation between frequency and spending. In one major US food retailer he found that, while the bottom quintile of customers visited on average only once every ten weeks, the top quintile of customers visited 1.5 times per week. Clearly, there is a difference in their level of spend on each visit (the top customers spending almost four times as much as the bottom ones) but, when frequency is taken into account, the average difference is enormous: the top quintile spends some 58 times as much as the bottom quintile in a year.

As frequency increases, so does the size of each purchase. Woolf estimates that between 70% and 80% of the total sales gain is due to the increase in frequency; the other 20% to 30% is due to the increase in transaction size. He says that he has yet to find a retailer anywhere in the world where a similar relationship doesn't hold. According to Woolf, the reason for this is simple: the more customers visit the store, the more they get to know what products are stocked and where they are, so can satisfy more of their needs there.

Recency
Clearly, the more recently a customer has visited, the more likely the relationship is to be still ongoing. Best customer marketing involves the use of win back programmes to identify when customers stop buying, to find out why, and to employ tactics to win their business back.

Profitability
Not all customers generate the same levels of profit. Some buy mainly high-profit, undiscounted goods. Others seek out and buy almost exclusively marked-down goods. Even if they spend as much as the first group, they will generate much less profit - possibly even a loss. The difference from top to bottom of the customer database can be quite remarkable (see Figure 7-D, above). Unfortunately, few businesses actually track and measure the cost of markdowns at an item and transaction level, so this "hole in the bucket" goes largely undetected.

A best customer is also loyal, and a loyal customer generates many times the profit of a new customer, for a number of reasons. A virtuous circle is the objective: the loyal customer builds a relationship, dealings with the business are smoother and more profitable and over a longer period of time, and the customer is rewarded at a higher level.

The Loyalty Guide, long regarded as the "bible" of the customer loyalty industry, explains every aspect of loyalty programmes, best practices, concepts, models and innovations, all backed up with case studies, original research, illustrations, charts, graphs, tables, and presentation material. Learn the principles, practicalities, metrics, analysis, and bottom-line effects of loyalty, and gain the expert guidance of dozens of loyalty and relationship marketing thought-leaders, worldwide.

The report's full executive summary, table of contents, downloadable samplers, and pricing/ordering are all available online - click here.

Copyright 2016 Customer Strategy Network / The Loyalty Guide / The Wise Marketer