The Customer Loyalty Solution : What Works (and What Doesnt) in Customer Loyalty Programs

Thank you for making this journey with me. We have had some laughs, and, I hope, we have learned something that will be useful for our jobs. What have we learned?

Database Marketing Works

After two decades, database marketing is alive and well. It is being used by thousands of companies throughout America, and to a certain extent throughout the developed world. It is highly accountable and can be measured. You can prove that what you are doing is working, making customers happy and making profits for your company. Here are some of the lessons that have emerged from 14 chapters of theory and 40 case studies:

• Database marketing is not the same thing as CRM. You can call it CRM, but that is rather like calling a terrorist a freedom fighter. CRM is aimed at making the right offer to the right person at the right time, based on massive amounts of data accumulated in a warehouse. No warehouse can hold the amount of data on the behavior of an individual that is needed if CRM is to deliver profits. The warehouse would need to know what the customer is thinking, what his values are, what he did yesterday, and what he wants to do right now. CRM is a nice idea that does not work in practice and wastes millions of dollars on an impossible quest. What does work is database marketing, which is essentially aimed at divining the behavior of customer segments and designing marketing programs for those segments. This process is economically possible and can be highly successful.

• The Web is not a selling medium; it is an ordering medium. An entire industry based on Web advertising and sales was created, wasted hundreds of billions of dollars, and then died within 5 years. What did we learn from this? The Web is a passive medium, not an active one like TV, radio, telemarketing, direct mail, or retail stores. It is not a very powerful advertising medium. People will buy products and services over the Web, but they first have to be stimulated by something else: catalogs, direct mail, or mass marketing. As an ordering medium, the Web can be superb. It cuts the cost of a customer contact by more than $3. It can be tied to a database so that each customer sees something different, customized for her, when she clicks on a site. But she is unlikely to click on that site without some outside stimulus.

• People like communications. The heart of database marketing is not the database but the customized and personalized communications with customers that are created using the database. Communications work. They keep customers from defecting. They make people happy (and angry as well). They help to sell goods and to increase loyalty, referrals, cross sales, order frequency, and order size. Without an active and creative communications program, the database is worthless.

• Database marketing is not about discounts. Discounts are used in mass marketing campaigns, and they work. They don’t work in database marketing. Why not? Because the basic idea in database marketing is to build a close personal relationship with each customer that is based on quality, service, friendship, loyalty, and communications. You would not give a neighbor $5 for helping you carry a chest of drawers up your stairs. It would be an insult. Instead, you offer your neighbor a cup of coffee or a beer and 15 minutes of chat around the kitchen table. That is the kind of relationship that database marketing creates. Discounts send the wrong message: We are cheap guys whose basic product is overpriced. We want to buy your loyalty. We don’t care about you. We care about your money.

• Customers should not all be treated alike. Some of your customers are Gold. They deliver huge amounts of sales and profits. Many customers of many companies are actually unprofitable. Why should you work to retain the loyalty and sales of an unprofitable customer? What should you do? First, create customer segments and learn who your Gold customers are. Create special programs and services just for them in order to retain them. Study the segment just below Gold. Create programs that will get them to move up. Study your bottom segment—the worthless people. Figure out how to either reprice the services you are giving them so that they are profitable or get rid of them altogether. If you treat all customers alike, your service budget will be stretched so thin that you will be unable to use it to modify customer behavior.

• Most successful database marketers outsource the construction of their database. Why? Because it is cheaper and faster, and the product is better. To take a ridiculous example, it would be possible to go to auto parts suppliers and assemble a company truck from spare parts. Since no one in your company has ever done this before, it would take a year or more and be quite expensive, and the result certainly would not perform as well as a production model bought from GM, Ford, or Chrysler. But it would have the advantage that, as a result, your staff would now know how to build a truck from spare parts. The problem with this approach is that most companies are not in the truck manufacturing business. They are in some other line of work. Building a truck would be a costly diversion from their core business. And, during that year, the company could not use the truck to make deliveries.

  The same principle applies to building a marketing database from spare parts. No one in most companies (including the IT department) has done this before. It takes a long time, since there is a learning curve associated with each process. It takes time to study the available software packages (there are scores of them) and to install and learn to use the ones chosen. When the database is finished, it will not work as well as one that was built by an experienced service bureau that has already built dozens of them and has a trained technical staff whose only job is building and maintaining marketing databases. Finally, you cannot get any benefit from the home-grown database during the year or more that is needed to build it. You get the benefit only after it is up and running.

  Once your database is up and running, it can be migrated to in-house maintenance at any time. In fact, however, if the database is built correctly, your marketers will be so happy with the results of using it that they will forget about wanting to maintain it. When you are driving a new BMW down the interstate at 75 mph, who wants to stop and become a garage mechanic?

• Caller ID and cookies have become essential database marketing tools. Caller ID is used by customer service reps to recognize customers, call them by name, and see their history with the company on the screen before they even answer the phone. This type of recognition builds relationships and loyalty. Cookies are used the same way on the Web. Web sites are configured differently for each repeat visitor, based on that visitor’s expressed preferences on the previous visit. Cookies build relationships and loyalty.

• Many customers will gladly give you their profiles over the Web. What is a nuisance on paper or over the phone becomes a fun exercise over the Web. The marketer can use the profiles to learn more about customers and provide them with what they want (as opposed to what the company wants to sell them). Profiles open up an entirely new and productive channel for customer contact.

• Marketing databases today are stored in a relational format on a server accessed by marketers over the Web. Many different marketers can access the company customer database simultaneously, using IDs and passwords so that they see only the data that they need. Because of the Web, the database can be used by remote offices, salespeople on the road, and even overseas branches of the company. Another advantage of the Web as an access tool for marketers is that all the marketer needs to have is a browser. She does not need to have any database software on her PC.

• Becoming customer-centric is seldom an achievable goal. For the last decade, marketers have talked about shifting their company from being product- and brand-centric to being customer-centric. “Don’t sell products. Find out what customers want to buy and sell them that.” This is a wonderful idea, but few companies are doing it. If we were really to become customer-centric, we would segment our customers and create a manager for each segment. We would give these managers greater authority than that given to brand or product managers. In most cases, this does not work. The compensation system within a company is very difficult to arrange. If the Silver Segment manager does a good job, many of his customers will become Gold, and he will lose them. How do you give him an incentive to do that? Before you mouth platitudes about becoming customer-centric, think it through. See if you can make it work on paper. It won’t. Forget it, and do a good job of database marketing within your current organization.