Often times, loyalty programs are called “best customer programs” and sometimes that is the right strategy. However, focusing on best customers isn’t always the best loyalty strategy.
Fundamental to developing and managing a loyalty program is to understand which customers offer the best opportunity to drive incremental economic value. Should we be directing our loyalty efforts retaining a few big fish or garnering a little bit more from all the multitudes of minnows?
Airlines are a very familiar and oft imitated paradigm for a loyalty program. Loyalty programs have worked very well in the airline and the hotel businesses. These businesses are classic “whale” businesses. At the top of an airlines’ customer pyramid are the “Road Warriors” who fly a couple times a week and buy business class tickets. For every Road Warrior there are dozens of occasional business travellers who fly 5 to 10 times a year and hundreds of leisure travellers who fly once or twice a year. Airlines are a classic example of a whale business. If one plots a distribution of an airline’s customers by spending, it looks something like this.
Figure 1: Customer distribution for an airline
In a highly stratified business with a few big whales, and lots of little minnows, the big driver of economic value for the Loyalty program is retaining, and growing these super high value customers.
Now consider a business like a mid scale restaurant. At the top of the customer base are very loyal customers, who may dine with you once or twice a week. On the other end of the distribution are new customers who just happened by.
Figure 2: Customer distribution for a restaurant
This mid-scale restaurant is much more of a “minnows” business. The restaurant’s the customer distribution is far less steep than the airline’s customer distribution. Whale customers at the restaurant may be 50x more valuable than new customers and 5x more valuable than occasional customers. While that’s a big difference, it is nothing compared to the difference between the whales and minnows at an airline.
For a business with a flatter and smoother customer value distribution, growing customer in the middle of the customer base drives the business case for loyalty. In a business that is more egalitarian, loyalty programs should be is less about retaining top customers and more about driving frequency and increasing spend broadly across the membership base.
|It’s also important to consider the customer distribution not just in terms of revenue but also in terms of margin. For an airline, high value customers tend to be a lot more profitable because they are price inelastic and will pay 3, 4 even more 10X as much for a seat on the flight as the leisure traveler in the back of the plane. However, at a restaurant and many other businesses, the customers in the middle of the distribution often have higher margins as new customers and highly frequent customers are often buying on deal. Here again, it’s the “minnows” who present the greatest opportunity.||Figure 3: Whale and Minnow Customer and Margin Distribution
Whale businesses often have three characteristics:
- A huge gap in the number of transactions in the category in general. g. a business traveller may travel 75 times a year versus once or twice for a leisure traveller. This behavior plays itself out in other spaces as well. For example, at a drug store the customer comes in every two weeks for vitamins and nutritional supplements may have 20 to 30 times the number of transactions as the customer who stops in 3 or 4 times a year to buy over the counter cold remedies.
- A huge gap in the average transaction value. That business traveller may pay $1000 for their flight, where the leisure traveller may pay $300. Similarly the drugstore customer who is buying the vitamins and nutritional supplements may have an average basket of $100 versus the $20 for customer who just buy over the counter cold remedies
- Price inelasticity. Often price / demand elasticity is distorted in whale businesses because the customer is spending someone else’s money. The business traveller is the classic example. Pharma and health care is another space where customers are less sensitive to price because they are spending someone else’s money. Fashion, beauty, and luxury items are also spaces where relative price in elasticity occurs
Common characteristics of minnow businesses:
- A product that is a relative commodity. In minnow businesses customers are often share splitters because there is little differentiation between competitors. Customers can shift easily between competitors. Gas stations or grocers are examples of commodity businesses. Gas is gas, whether you buy it at BP or Shell. Apples are apples, whether you buy them at Safeway or Kroger.
- Most customers have relatively the same basic level of demand. For an airline the level of demand between the business traveller and the leisure traveller is vastly different. At a fashion retailer a top customer may have the need and capacity to spend several thousand or tens of thousands annually on their wardrobe, whereas the typical customer may buy a few pieces each season. Minnow businesses like gas stations, grocers, and fast casual restaurants cater to a far less stratified customer base.
- Price based promotions. Minnow businesses are often highly dependent on discounting to drive business. They often inadvertently condition their customers to wait for the deal and never pay full price
Implications for Loyalty program design
Whether the program is directed at Whales or Minnows should be a key consideration in terms of the structure and the benefits of the loyalty program.
|Rewards: Very high value customers are capable of earning high value aspirational rewards. The business traveller who routinely flies internationally is capable of earning the 200,000 miles it takes for the “Around the World” reward. Minnows on the other hand, may see that “around the world trip” as interesting but will quickly realize that that it will take them years to reach that reward.If all the good benefits in the program take the average customer forever to earn; even if lots of people sign up for the program, few will be motivated by it. For customers in the middle of the distribution, fast rewards work better than big rewards.
Personalization: If the program is designed to appeal to the Whales then creating highly personalized and highly differentiated customer experiences make sense. Perhaps the restaurant has a private menu that only VIPs are offered. Perhaps the sommelier keeps track of the wine selections VIPs make, and offers occasional tasting to discern their preferences and uses that to make personalized recommendations. These treatments will serve to lock in the loyalty of those customers who receive it. However these examples are difficult to scale and operationally and financially beyond a very limited number of VIPs.
With Minnows differentiating the experience presents challenges. There are fewer data points to draw upon to create a differentiated experience. Secondly, there are operational and financial challenges with creating physical and tangible differentiation for every customer regardless of their value. Across a broad swath of the customer base, it is far easier for loyalty programs to differentiate and personalize marketing and digital experiences than deliver personalized physical experiences.
Recognition: For super high value customers, the intent of the program is to make them feel special, appreciated, and important. Special treatment is often visible so the customer is not only treated like a VIP, but also feels recognized as a VIP. A conundrum associated with treating customers like VIPs is that if you treat everyone like a VIP, then no one feels like a VIP. Secondly, from a practical standpoint it’s not economically or operationally feasible to provide every customer platinum treatment. An airline can’t upgrade every frequent flyer, the restaurant can’t give guaranteed availability or the every the best table to every member of their frequent diner program.
One approach to recognizing mid-value customers, is to employ “surprise and delights”, rather than published perks. Rather than having a published benefit that a mid-value customer receives on a “when available basis”, programs employ unpublished benefits that are provided in an unexpected fashion.