-- Chinese proverb
E-commerce pioneers used to think that the Internet would not lend itself to customer loyalty because it's so easy to jump from site to site in search of the lowest possible prices. As it turns out, online shoppers do play favorites. That's why cultivating loyal customers is a wise move, particularly now that the business climate no longer supports breathless expansion in place of profits. "The only way to sustain profitable growth is to make sure you know who your best customers are," says Chris Brahm, vice president of Bain & Company.
E-commerce sites that focus on acquiring new customers without working to retain existing customers are making a big mistake. Acquiring new e-commerce customers is expensive and it takes a long time to recoup the investment. According to a study last year from Bain & Company and Mindspring (now part of IBM), online apparel retailers don't break even on the average customer for 12 months, and online grocers don't break even on customers for 18 months.
That's why loyal customers are so important to the bottom line. Repeat e-commerce buyers spend more money, generate larger transactions, refer more customers, and buy a broader range of products than one-time shoppers, according to the Bain study.
Yet despite the importance of loyal customers to e-business, many companies are in the dark about how to direct their e-commerce efforts toward retaining them. Here are a few key rules to observe when constructing loyalty programs for your e-business.
Segment your customers. The first mistake many companies make is not segmenting their customers. In most cases, the 80-20 rule applies--80 percent of a site's revenue comes from 20 percent of the customers. Loyalty programs should reward the best customers while encouraging borderline customers to become more active. You can't do that unless you know who your customers are. E-commerce sites with well-constructed loyalty programs usually have clear profiles of their customers and have spent the time to truly understand how different types of customers behave.
Define and measure loyalty. A number of factors contribute to loyalty, most of which can be measured if your site is set up properly. According to a May report from Forrester Research, 74 percent of marketing executives use repeat sales as an indicator of loyalty. It's also important to measure the length of time a customer has been associated with the site and how recently the customer has made a purchase--statistics that indicate whether a shopper is losing interest in the site.
The amount of money customers spend is important as well, as is how much they spend on the site relative to the amount of money they have available for like purchases elsewhere (sometimes referred to as "share of wallet"). Other metrics could include customer referrals, site visits, site registration, and program membership. To evaluate how well your loyalty effort is proceeding, Brahm recommends creating a "dashboard" that provides an ongoing view of customer data compiled into the best metric indicators for your e-business.
Choose the right promotions. E-commerce sites use a variety of promotions to develop loyalty. Targeted e-mail promotions--well-understood by most e-commerce managers--are by far the most common tool. Points programs (the most familiar offline example being frequent-flyer miles) are also widely used, but they are often poorly implemented. "Points programs have become a crutch in many cases," says Shar VanBoskirk, an analyst with Forrester Research. "When faced with the need to build loyalty, many companies simply turn to a points program rather than looking at a broader strategy."
Points programs are now so common that customers no longer differentiate competitors on the basis of these programs. Worse, an April Forrester report found that only 14 percent of online consumers value points.
One problem is that many points programs reward pre-existing behavior rather than inducing customers to increase their involvement. One solution is to create benefit tiers that reward customers for increased participation. Another problem is that points simply don't work for products that are purchased infrequently, such as household appliances or automobiles, or those that have strong brand loyalty and where price is not a big consideration, such as fashion apparel. Points programs work best with commodity products, such as gasoline and groceries, and when they provide a strong economic incentive.
The most important advice to remember is that loyalty programs must be built into an overall business strategy--not just tacked on. To be effective, loyalty programs must have a firm foundation in a company's business model and customer behavior must be continually reassessed to understand how it relates to each company's specific competitive environment.
How do you keep your customers loyal? E-mail Adrian or Talk Back below.
