For a customer loyalty program, is it right to choose customers on the basis of their total sales, total visits, etc., or is it better to choose customers based on their trends? In other words, who is more likely to be loyal: a customer who makes one or two big purchases infrequently or one who makes medium purchases frequently?
And the idea is that this form wants to set up some sort of loyalty program to keep the good purchase decisions going.
The reason why this question might cause the strategically inclined to wonder a little bit is because both sets of customers seem to be telling you that they are loyal to the firm's products. When you have a customer who chooses your firm with a high probability already, what do you hope to accomplish with a loyalty program?
One way to think about it is with a simple logistic probability structure.
Right. So, this is pretty simple -- a two-dimensional representation of probability. We might think of X being the loyalty of the customer, with higher loyalty making it more likely that customers will purchase from your company. (These numerical values are arbitrary).
Like everything in economics, the decision is made by comparing the marginal (incremental) affect of the proposed pollicy with the marginal cost. So, suppose we have some program that we figure will increase the loyalty score by a unit, from 25 to 26, 35 to 36, or whatever. Well, if we institute the program on people with loyalty scores of 35, the increase in probability is really small: you are already capturing nearly every purchase decision from those loyal customers to begin with.
Same thing is true on the lowest end of the loyalty scale: there just isn't much to be gained by bumping up these low-loyalty customers by a unit or two.
Clearly, the greatest response comes from increasing the loyalty of that bunch in the middle: the slope of the graph is highest for these cusomers. Which means that the investment in loyalty pays off best there.
So, in an important way, the discussion question misses the point. Who cares whether frequent purchases of small value imply greater loyalty than occasional purchases of large value? Both these groups are probably out on the right hand of the loyalty scale anyway and that means we probably are more interested in a way to exclude them from whatever loyalty program we'd want to inaugurate.
I think, following a really interesting article in Marketing Science by Musalem and Joshi, that we want to focus on three attributes of our customers: intrinsic preference for our company (intrinsic loyalty), margin (or lifetime value or something similar), and responsiveness to retention and acquisition efforts. Not only that, but an effective CRM program should consider the strategic interactions between competing firms through time.
And those subjects are going to be discussed next.
