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TJ Tedesco

View from Mount Olympus

By TJ Tedesco

About TJ

T.J. is team leader of Grow Sales, Inc., a marketing and social media services company operating at the intersection of compelling content, clear vision and quality communication practices. In this blog, fire is a metaphor for print. Hang on, this ride will be weird...

Prometheus crept into Mt. Olympus, stole fire, returned to the lowlands, ran from house to house distributing it, got caught, was chained to a rock, lost his liver to a huge ugly bird and was rescued by Hercules. Leveraging his fame, Prometheus started Fire Enterprises Inc.  (FEI). Since fire was the hottest technology of the time, company success came fast and furious. Two generations later, fire isn't such an easy sale. Now led by Prometheus' grandson Org, FEI's growth is non-existent, competitors are pounding and prices are in the toilet.
 

How Effective Is Your Customer-Loyalty Program?

 
Last week, FEI marketing whiz Marka told savvy salesperson Zoot about the advantages of a Customer Loyalty Program. This week, Marka shows Zoot how to calculate how effective FEI’s loyalty program is. Remember, fire = print.

Zoot and Marka sat at a table at GrapeLeaf Yogurt. They observed a happy customer at the register, getting a free froyo because he’d punched the tenth box on his rewards card.

“He sure looks happy,” Zoot said.

“True,” Marka agreed. “Obviously, making customers happy is a key goal of any customer-loyalty program. But there are more scientific ways to measure customer happiness and loyalty than just smiles. Here are a some common metrics we might want to employ to measure whether FEI’s loyalty program is actually, well, making customers loyal.” [Marka began writing on her napkin.]

• Customer-Retention Rate

“This metric indicates how long customers stay with FEI,” Marka explained. “And it’s an important one. A study by Olympus Consultants has shown that a 5 percent increase in customer retention can lead to a 25-100 percent increase in profit.”

“How do we measure it?” Zoot asked.

“Easy,” Marka said. “Retention Rate = (1 – Attrition rate).”

“That’s it?” Zoot asked.

“Yep,” Marka said. “If our loyalty program is successful, this number should increase over time, as the number of loyalty program members grows.”

“How will we know for sure if customers are staying with FEI because of the program, or something else?” Zoot asked.

“Good question,” Marka replied. “Why don’t we run an A/B test against program members and non-program customers to determine the overall effectiveness of our program?”

“All right, whatcha got next?” Zoot inquired.

[Marka scribbled more on her napkin.]

• Negative Churn

“Churn is the rate at which customers leave our company,” Marka continued. “Negative churn is a measurement of customers who do the opposite—upgrade, purchase additional services, or buy more of what they’re already buying. Calculating negative churn among customers in our loyalty program can give us a good idea of how well the program is working. And it’s an easy calculation to make.” [Back to the napkin she went.]

(Customer spend post-program “X” – Customer spend pre-program “X”) / Total pre- and post-program spend = Negative Churn Rate

“An effective loyalty program will help to offset the natural churn that most businesses experience,” Marka noted.

“Speaking of churn,” Zoot said. “I’m going back up for seconds of some fresh-churned froyo.”

Today’s FIRE! Point
Customer-retention rate and negative churn are two key metrics you can use to measure if your customer loyalty program’s actually moving the spending dial. A 5 percent increase in customer retention can lead to a 25-100 percent increase in profit.

FIRE! in Action: Veritude Uses Surveys to Double Customer Satisfaction Rates
Sometimes just asking customers for feedback can improve their loyalty. The outsource staffing and consulting service used a series of surveys to double the amount of customers that were satisfied with the company.

Next week: Marka gives Zoot a tip for calculating the effectiveness of a Customer Rewards Program.

 

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