Should loyalty promotions be focused on less frequent customers?
Why would a retailer want to waste money giving loyal customers a discount through a loyalty card? A question suggested by Joe LaCugna, Director of analytics at Starbucks, during his address to the recent Big Data Retail Forum in Chicago. Having analysed the data generated by approximately 6 million loyalty card holders his conclusion is that he should direct his promotions to those who only visit occasionally to encourage them to visit more often. When it comes to loyalists who visit several times a week “Why should we give them a discount?”
This raises an interesting if not fundamental question of who to target when growing revenue through loyalty schemes. Whilst the profile and definition of a “loyal customer” is slightly different for each type of retailer and there may well be good reason for Starbucks to think this way, there are some general points worth considering.
Questions of loyalty
Firstly, a completely 100% loyal customer is almost unheard of, so there is always potential to increase spend with those branded as “loyal customers”. Certainly taking them for granted and not continuing to invest in them is a very brave step indeed. This is especially true when you consider that loyal customers can account for a large proportion of sales and profitability. Therefore, increasing these customers’ spending by a small percentage will have a disproportionately high impact on overall sales and potentially far more than increasing infrequent purchasers.
Secondly, the likelihood of a retailer increasing spend with loyal customers tends to be much greater than those less frequent customers. So if you are looking to improve cross sell or impulse purchase to increase overall sales, loyal or frequent customers represent a much more effective target.
Dangers of focusing exclusively on infrequent customers
It is of course important to understand why some customers are less frequent than others and clearly data insights from this segment will enable some effective targeting or may lead to new business opportunities. However, it is also worth bearing in mind the inherent danger in changing or adapting products or services to specifically attract infrequent customers. A focus in this way can be at the expense of alienating loyal customers, resulting in an overall negative outcome.
On the other hand
A retailer’s loyalty programme very much depends on their particular market, the product category and the relative competitive pressures. So if a significant proportion of Starbucks sales are generated by infrequent customers then understanding how to motivate this large group to visit more often may well have a more positive impact than trying to up-sell to a small minority of loyals. One overriding issue however, is the location of stores and their typical customer profile. If for example, a Starbucks was located next to an office building where the potential number of customers was relatively low, concentrating on loyal customers in an attempt to increase frequency and spend is a useful strategy. Whereas, at an airport, where there are a large number of less frequent visitors, focusing on infrequent customers would be a more worthwhile investment.
Dominic Winchester of emnos comments: “At the end of the day the approach a retailer takes to rewarding or not their loyal customers is dependent on their particular circumstances. However, their choices should always be informed by using data efficiently to better understand what is going on within their customer base and adapting their business to different customers’ needs.”