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  • Writer's pictureAjay Row

Why most loyalty programs do not work

And why they cannot work - through no fault of the loyalty team.

For almost all companies, ranking their customers from the most margin earned per customer to the least, will result in curve that looks like the one in Fig A.

Very few customers are extremely valuable, the bulk are worth little. This analysis can be done in percentiles, vigintiles or deciles, use revenue instead of margin, consider a three year time-frame rather than a single year. But whichever way it is done, for most companies, very few customers are extremely valuable, most are insignificant.

We have all heard of the Pareto principle, the 80/20 rule but most company databases suggest Pareto just wasn't extreme enough. This curve is especially true in the case of what we call "top-box" companies i.e. companies with the potential for high value customer relationships. Think airlines. How many people fly up-front frequently? Precious few. Most fly 1-2 a year on vacation. Equally, think of hotels, jewellery, grocery retail, mobile phone services, spas, payment cards. Most customers spend rarely, and spend little. But the phenomena goes beyond the top box. It also holds true (if not as extreme) for companies selling aerated beverages, instant noodles, automotive, all manner of durables and even phones. Meanwhile, most loyalty programs swap value for value. Customer gives company money, company gives customer points or miles. Simple enough. And this is the rub, why loyalty programs frequently falter: for most customers, the program is irrelevant. They just don't give the company enough revenue to earn enough points to redeem for anything meaningful.

Have a look at Fig B. Like Goldilocks and the three bowls of porridge, there is only a small set of customers for whom loyalty works. Most customers are the Papa Bear or Baby Bear porridge bowls -- they earn too many points or too little. For very few is it just right.

What do you think? Could this be a problem for your loyalty program? If so, hang in there. Over the next few articles we will bounce some ideas around that may be of help.

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