The idea that retaining a customer is more profitable than acquiring a new one has become a marketing cliché, and it has never been more true than it is right now. As competition intensifies, getting the attention of prospects and converting them into customers is an increasingly expensive proposition. In fact, best estimates suggest that it is six to seven times more expensive to acquire a new customer than it is to keep an existing one. Research has also shown that new prospects are more difficult to convert into buyers than are your existing customers. When considering a new purchase, customers who have bought from you before tend to convert into buyers 60 to 70 per cent of the time. In contrast, new prospect conversion rates are much lower, in the range of five to 20 per cent. And even once the decision is made to buy from you, an existing customer will spend approximately two-thirds more than a new customer. That is, existing customers are dramatically less expensive to convert into buyers and when they do buy, they spend substantially more than new customers. It should not be surprising, then, that on average a five per cent increase in customer retention rates can increase profitability by nearly 100 per cent. Customer loyalty has real, tangible value. It is not, however, as simple as a loyalty program. There are more than three billion loyalty program members in North America. That averages out to just under 30 programs per household. In Canada, many of those programs – including Cineplex’s Scene, Shoppers Drug Mart’s Optimum, Loblaw’s PC Points, Air Miles and Aeroplan – are world-class examples of loyalty cards that are valued by customers. Nevertheless, most of us have a pile of other cards that we have thrown into a purse, wallet or junk drawer, never to be seen or used again. The key to loyalty is not signing people up to a loyalty program. True loyalty comes from the overall value proposition. In 2013, I published The Retail Value Proposition, which provided a framework for creating value for Canadian customers. This summer, the second edition of the book will be released, focusing on the American market. From the research that went into both books, it became obvious to me that the future of competition was not in the location of your business or the products you put on the shelf, but in the ability of your company to use the information that was being made available through loyalty programs and other “big data” initiatives to better understand your customers. I am not the only one to have made this claim, but my research points to a different approach to marketing for many organizations. Specifically, most Canadian and Albertan businesses need to quickly become much better at data analytics. In Alberta, we clearly have the talent. As Canada’s Prime Minister talks about resourcefulness and the Government of Alberta looks to diversify our economy, we all too often forget about the world-class talent we have in marketing, analytics and consumer research. At the University of Alberta, we have some of the world’s leading researchers in consumer marketing and analytics and a history of sparking new ventures through advances in management science. One local example is Darkhorse Analytics, which was spun out of a research lab at the University of Alberta in 2008. At the cutting edge of using data to drive business decisions and visualize opportunities, Darkhorse has quickly made a name for itself with a client list that ranges from Enbridge to Finning to Procter & Gamble. Advanis, which celebrated its 25th anniversary last summer, is another example of a data analytics and research company with roots in Alberta. Even undergraduate students are getting in on the action and have formed their own research and consulting group (sorconsulting.com). Building on our historical strength in this area, the University of Alberta’s School of Retailing recently hosted its second annual Thought Leadership Conference. The event brought retailers and consumer marketing executives from across Canada together with local business people and university students. We spent the day talking about innovation in Canadian consumer marketing and, in particular, the ever-increasing importance of customer analytics. The audience heard from leaders like Bryan Pearson, CEO of LoyaltyOne, and Jan Kestle, CEO of Environics Analytics, who talked about the impact Canadian companies can have on a global stage. The practice of loyalty marketing is in the middle of a dramatic transformation driven by technology and the availability of big data. As Albertans and Canadians, we have an opportunity to play a leading role in this revolution by continuing to leverage our academic, analytic and entrepreneurial talent.
The Value of Customer Loyalty Programs Isn't Customer Loyalty
Takeaway: The future of competition is not in the location of your business or the products you put in your shelf, but in your ability to use the data collected through loyalty programs