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Plus, here are 8 strategies to increase your average lifetime customer value.
Researchers are warning businesses that their customer-loyalty programs, which are designed to increase repeat business, may be causing more harm than good.
Even though “customer prioritization” is widely used by companies, the researchers warn they’re a double-edged sword and represent the dark side of customer loyalty programs.
As a result, businesspeople get stressed out after implementing customer-loyalty programs because they lose profits when they unknowingly and disproportionately increase service costs.
“This dark side results because prioritization signals to customers that they are very important to the firm, and this leads them to feel entitled to demand more from their exchange partners,” explains Alex Zablah, associate professor of marketing at George Mason University’s School of Management in Fairfax County, Virginia.
“Ultimately, entitlement-driven customer behaviors undercut profitability by increasing firms’ cost to service their relationships with customers,” he adds.
His co-authors are Hauke Wetzel and Maik Hammerschmidt from the University of Göttingen in Göttingen, Germany.
After conducting two studies in B2B sectors, which led to similar conclusions, they published a report: “Gratitude Versus Entitlement: A Dual Process Model of the Profitability Implications of Customer Prioritization.”
“Ultimately, entitlement-driven customer behaviors undercut profitability by increasing firms’ cost to service their relationships with customers.”
Tactics — dos and don’ts
The professors assert that certain types of tactics result in negative effects. “If firms focus their prioritization efforts on ensuring a good match between customers’ needs and the products they buy, then dark side effects are negligible,” says Professor Zablah.
However, he warns if companies focus on providing customers with symbolic benefits, like labeling them as “VIP,” the dark side tends to become more pronounced because customers are alerted to the fact that they are considered more important to the firm than other customers.
“Contrary to popular belief, sharing prioritization schemes with customers can backfire for firms,” he adds.
When customers learn of the prioritization program, they begin to feel a sense of entitlement — that they can get more than is reasonable.
Professor Zablah recommends such prioritization programs should used with great diligence. It’s important to show appreciation but not at the unreasonable expense of profits.
Indeed, added value is a good thing. But too-much service resulting in customers’ sense of entitlement can be a negative sales opportunity cost. Time is money, too.
Indeed, added value is a good thing. But too-much service resulting in customer’s sense of entitlement can be a negative sales opportunity cost. Time is money, too.
Achieve profits
Treat your program as a data-driven tool. You’ll increase lifetime customer value instead of giving a one-time discount for customers.
Here’s how:
1. Offer small rewards that customers like but cost very little such as appetizers or digital perks.
2. Leverage psychological motivation with a point structure requiring accumulation, or repeat purchases.
3. Offer non-monetary perks, such as early access to sales.
4. Balance your operational capacity by offering double points or special rewards on off-peak hours or traditionally slow days.
5. Entice large purchases and basket-sizes by setting reward thresholds above your average order value.
6. Be sure to account for any breakage by factoring in unredeemed points as a cushion for profits.
7. Track your key metrics by monitoring frequency of purchases and your redemption costs as opposed to your baseline revenue.
8. Personalize your offers based on transaction data.
Conclusion
At the minimum, remember three core principles to make your customer-loyalty program profitable: 1. Align the rewards with your high-margin items. 2. Use a system to earn a specific number of points to pass a checkpoint or to unlock a reward. 3. Focus on attracting repeat customers especially during slow periods.
Good luck!
From the Coach’s Corner, more profit tips:
Do You Know What Drives Your Profit? (There Are 4 Drivers) — For profits, entrepreneurs must learn how to manage their financials and performance, which are difficult tasks. Savvy business owners know who their ideal clients or customers are. Entrepreneurs realize financial benefits when their revenue from business exceeds their expenses and taxes.
For Stronger Profits, Avoid 11 Typical Pricing Mistakes — In general, how can you manage the sweet spot – between your price-optimization and costs? Dennis Brown of the consulting firm, Atenga (www.atenga.com), says many companies make 11 pricing mistakes.
8 Strategies When Sales Drop and Costs Cut into Your Profits — If your sales are down and costs are hurting your profits, you’re certainly not alone. This is still not a good economy for many sectors. The irony is you can do something about it.
Checklist — 10 Tips for Leadership in Business Profit — How your company can dominate competitors and create opportunities for growth.
For Profits, Manage Your Growth at the Right Pace — Entrepreneurs frequently try to rush their business growth. Certainly, growth is great but if you scale too fast, you’re looking for trouble. The key is to prepare.
”Nothing profits more than self-esteem, grounded on what is just and right.”
-John Milton
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