Quantifying Customer Loyalty

Customer loyalty is an important idea. Most business people know it costs more to acquire a new customer than to serve one already on the books. They also understand that loyalty is affected by product quality, customer service, price, and other brand values. But most business people continue to struggle with how to retain customers.

We feel that there is no way to devise a strategy for improving loyalty without a reliable way to measure loyalty behavior.

Loyalty Builders has developed new, proprietary mathematical models that for the first time enable any company with transaction data to measure customers' future purchase behavior – in other words, to quantify customer loyalty.

The Loyalty Builders methodology examines the totality of a customer's purchase behavior, ranks customers by loyalty score, and segments them into groups based on their behavior as customers.

These rankings reveal trends, uncover purchase patterns, and help predict customer revenue. Loyalty Builders data can also identify the customers whose loyalty is slipping and customers whose loyalty is growing. And, equally important, the data can help suggest the most effective way to serve the customer who shows up in your showroom, at your website, or your call center.

Behavior-based segmentation

The notion of personalization and 1:1 marketing has become very popular as the technology to support it has matured. It's no surprise that any customer appreciates being treated individually and likes the fact that you know her name and have a history of his purchases at hand. But while customers are each individual, they usually have common needs. In fact, if you're not able to segment your customer base in terms of characteristics they share, you have virtually no hope of creating a marketing plan you can afford and execute.
Segmentation has traditionally meant dividing a population into separate "buckets" based on demographics and attitudes.

Demographic segmentation works when customer needs are based on age, income, zip code, marital status, or other easy-to-obtain objective data. Attitudinal segmentation works only when people act on the intentions they express, which happens all too rarely.

In contrast, Loyalty Builders' methodology segments customers by behavior and generates quantitative measures of loyalty based on that behavior.

This approach has important advantages. First, it is based on actual purchases, rather than on age, zip code, gender, ethnicity or other demographic. Second, it is based on data that already exists in order entry or accounting systems, so results are available in real time. Third, every transaction adds to the data set so learning is continuous. Fourth, the parameters of loyalty in the Loyalty Builders model (size of purchase, frequency, recency, duration, product categories) create a holistic picture of the customer and produce segmentation that illuminates behavior patterns which may otherwise go unnoticed.

Common sense is not enough

The ideas that coalesced and became the Loyalty Builders model are the result of the many missteps we made as we used common sense and accepted wisdom in the search for loyalty measurement. As we began to measure customer behavior five surprising facts surfaced:

• Constructs like beauty and loyalty can indeed be measured.
• Loyalty measures, which had been expected to fall along the classic bell-shaped curve, instead fell into multi-modal "behavior buckets," which means the customer population can be segmented by behavior.
• No single loyalty parameter (amount of purchase, frequency, etc.) is a reliable measure of a particular customer's loyalty.
• Segmentation based on attitudes does not reflect or predict customer behavior
• Segmentation based on quantitative loyalty measurements reveals startling and previously unrecognized patterns of customer behavior, as well as uniquely useful information about the company as whole.

A tool for the new economy

Today, business rightly values relationship over product. It has never been more important, then, to understand customers and act accordingly. The new economy dictates that a company must market, measure, analyze, and adjust in an accelerated time frame. "Street smarts" certainly have a role in this volatile environment. But quantitative knowledge of customer behavior gives a company huge competitive advantage. Behavior-based loyalty measurement followed by behavior-based segmentation, and behavior-based marketing are the tools that make loyalty and CRM initiatives produce substantial results.