Kevin Hillstrom: MineThatData

Loyalty: Red Lobster Nation

We talked about loyalty programs this week. I talked about the feebleness of points and percentages off. Here's Red Lobster Nation.

Earn points, get dollars off your meal.

A question.

Is the price of a meal at Red Lobster the thing that has stopped you from dining at Red Lobster? Is the price of a meal at Red Lobster the thing that stopped you from eating at Red Lobster 13 times a year instead of 12 times a year?

A loyalty program should be designed to solve a problem. What is the core problem that Red Lobster has?

Is it that restaurants need to be renovated? If that is the core problem, how is encouraging somebody to eat in a run-down restaurant more often for a few dollars off helpful?
Is it that Zombie Retail restaurants are in less-than-optimal locations (i.e. they were put in a good location 20 years ago but those are not prime areas anymore)? A loyalty program won't solve this problem.
Is it that the food is too expensive? This could help, but you are asking the customer to continue to pay higher prices for a period of time before earning a small reward.
Is it that the service is poor? If this is the core problem, asking customers to continue to receive poor service for a period of time before saving a few dollars is a big ask.
Is it that Marketing is out of ideas? If this is the core problem, this could be a solution.
Is a Management Consultant involved? If this is the core problem, we all know the appropriate course of action.

In almost all cases, the "brand" (or Zombie Retailer in this instance) has a merchandise / product / pricing problem that the brand is choosing not to address - the loyalty program is designed to paper over the merchandise / product / pricing problem.

The Two Best Ways To Grow Your Loyal Customer Base

I've run the numbers more times than I care to mention. Tables, queries, simulations, you name it. All methods tell the same story.

The best loyalty programs have MANY customers, not few customers. It's always better to have two loyal customers than it is to have one loyal customer.

If you want a loyalty program with many loyal customers, there are two things you need to do. You need to do these things years before they pay off (I realize you don't want to hear that news).

You must acquire high-quality new customers. S-Tier or A-Tier new customers. It's mandatory. That new customer you paid Facebook for that bought one lousy item at $29.99? Garbage. Facebook makes money, you don't.
You must convert as many first-time buyers to a second purchase within three months of a first order. If you don't get them early, the probability of the customer becoming loyal greatly diminishes.

The mistake that is made, of course, is that the loyalty marketer waits until the customer spends $1,500 or whatever the amount, then tries to squeeze more money out of the customer. How many customers ever get to the $1,500 level? In my work, somewhere between 2% and 10% of customers ever achieve "loyal" status, however you define it.

Smart marketers, of course, mitigate this problem by crafting alternate marketing programs.

They don't say "no" to the garbage name acquired via Facebook, but they work overtime to acquire the first-time buyer who purchases three items on a first order in two different merchandise categories. Whether algorithmically or (often) via their own programs, they generate attention/awareness that leads to new customers that are S-Tier or A-Tier.
They have well-developed Welcome Programs that convert customers to a second purchase quickly. This results in a significant increase in loyal buyers 18-36 months later. The Loyalty Professional is dependent upon a Smart Marketer.

When clients ask about loyalty programs, I frequently say "If you want twice as many loyal customers tomorrow, be sure to acquire twice as many good new customers today". That's the point where professionals (i.e. some of you) get frustrated.

There are no shortcuts. There is a Standard that needs to be met.

Regardless, that's what the data shows. Accept facts and thrive!

The Problem With Loyalty Programs

Three problems with loyalty programs:

Wrong Incentives. Points and Discounts. Is that what the customer truly "wants"?
Wrong Customers. The wrong customers are selected to be included ... sometimes it is almost every customer that is included. That's not a loyalty program, it's not special if everybody is included.
Wrong Outcome. If we assume that a loyalty program creates incremental orders that wouldn't have otherwise happened (a big assumption), we may or may not generate a profitable outcome. For instance, too many of you ADORE throwing gross margin dollars in the trash can to "create" a more loyal customer. Why are you giving everybody an additional 20% off? Would they have purchased without the discount? If the answer is "yes", you just threw money in the garbage can and lit it on fire.

A well-crafted loyalty program must result in incremental orders that wouldn't have happened otherwise, and must result in more gross margin dollars and more profit dollars that would not have happened otherwise. Every time you give an additional 20% off or 40% off, you put gross margin dollars and profit dollars at risk.

Also, you don't solve the core problem. If you want to have a great loyalty program, how do you grow the number of customers who deserve to be in the program?

P.S.: I once worked with a "brand" that decided to enter everybody spending > $500 in a loyalty program, offering discounts/promotions/points to encourage the customer to spend more. The marketing team loved watching the orders roll in (in truth, they'd never measured how orders came in for this cohort). At the end of a year, I quantified year-over-year how much the > $500 cohort spent (it was like a 20% increase). Everybody celebrated. Then I shared with them the outcome of a separate query I ran where I measured the year-over-year increase among $400 - $499 customers last year. They didn't spend 20% more ... but they spent 15% more.

The incremental increase of 5% was wildly unprofitable. The company simply burned money.
Nobody appreciated the answer. I wasn't invited back to continue analyzing the issue.

Define a "Loyal" Customer Please

When I describe what I define as a "loyal" customer, I see sour faces. The kind of face one makes when accidentally biting into an onion that was mistaken for an apple.

My definition (get ready to make the face):

A customer is "loyal" when the customer has a 60% or greater chance of purchasing again in the next year.

I see your face.

Here's the thing ... it doesn't matter how you define a loyal customer, do it however you like. But come up with a consistent definition and stick with it. Maybe it is "Spending 'x' or more dollars across 'y' years". That's fine.

In nearly forty years in this "industry", I've learned that customer behavior and financial gain changes when the customer has a 60% chance or better of buying again next year. You might have three customers with different characteristics, but all three have the same chance of buying again next year.

Purchased 4 times in the past four years, AOV = $100.
Purchased 2 times in the past four years, AOV = $200.
Purchased 3 times in the past four years, multi-category buyer, purchases full priced merchandise, uses proprietary credit.

Those are three different customers, all equally valuable in the future.

Regardless, create your own definition. There is no right/wrong answer. But stick with your definition once you define it.

Loyal Customers

This is what happens if you don't give AI a copy of what our friend, The Lemonhead, looks like. It leverages creative expression to do whatever the heck it wants.

I mean, technically that is a lemonhead ...

I have no idea why there is an airplane in the image.

Anyway, this week we'll talk a bit about loyal customers. There is a secret to developing a loyal customer base, and the secret is likely to annoy you, because it has little to do with anything you've been taught.