Big data's impact on retail customer loyalty

March 7, 2012

By Rob Bauder, dunnhumbyUSA

For decades, business growth within the retail industry has traditionally focused on the acquisition of new customers with customer loyalty as its trusted promotional sidekick to increase store traffic and brand sales with one fell swoop. Before shopper loyalty card data, focusing on customer acquisition was not necessarily a poor strategy. In fact, with performance measured almost exclusively based on sales data, the resources and insights available were often not granular enough to identify specific household behavior over time in a statistically large enough sample size. Thus, business growth was virtually synonymous with customer acquisition.

However, as the data resources available to a business continue to evolve, the approach to customer loyalty has not. With granular information about the preferences and behavior of customers, many brands and retailers still cling to a business strategy based on the age-old acquisition model. Even as "customer-centricity" has entered the daily marketing lexicon of retailers and brands around the world, many companies still invest 80 percent of their resources on customer acquisition and only 20 percent on current customers.

Measuring overall success against customer acquisition is a difficult habit to break. For consumer package goods companies, for example, customer loyalty is defined and driven by a long-held brand management philosophy: increased market share is a priority and that comes from customer acquisition. For many brands, a customer is "acquired" through a product purchase cycle of awareness, interest, trial and conversion. After a customer is acquired, many believe that the customer will often stay loyal to the brand. This fuels a brand's marketing strategy to focus on new consumer acquisition as the key to growth, and counteracts arguments for fostering the loyalty of those customers currently buying their brand products.

But the plethora of data-enabled tools with which brands can understand consumers may provide a more convincing argument to embrace customer-centricity. Through loyalty card data, digital solutions and other sources, companies can see the customer continuum of purchasing day-to-day, week-to-week, month-to-month. They can understand how varying types (segments) of customers respond differently to changes in product assortment, pricing, promotion and in- and out-of-store marketing communications. The size, granularity and continuous view of individual customers have enabled both brands and retailers to see and begin to understand what "true" customer loyalty is.

Findings from this data have shown that growing true customer loyalty starts with a mindset that is directionally 180 degrees from the conventional industry wisdom of customer acquisition. In fact, customer purchase behavioral data has been critical in teaching us new things about the customer, dispelling some myths and expanding existing beliefs:

Replacing a loyal customer is expensive. Typically, a loyal customer is 10-20 times more valuable to your brand than an uncommitted customer. Our analyses have shown that 25 percent to 40 percent of customers that purchase a brand in year one, don't buy it in year two. In fact, it is a smaller percentage of loyal customers (20-35 percent) that are responsible for 60-80 percent of total sales for a brand.

loyal customers vs non loyal customers

Sustainable growth does not come from gaining new customers. Winning greater customer spend requires that brands become more loyal to their customers. If a company struggles to successfully build a loyal and sustainable customer base, Stuart Aitken, Chief Executive Officer of dunnhumbyUSA, often describes this issue as an organization challenge, stemming from how that organization defines customer loyalty. "Brands and retailers need to stop asking the wrong questions," notes Aitken. "Rather than asking, 'Why are my customers not loyal to me?' the business should ask, 'How can I be loyal to my customers? How can I reward them and thank them for their loyalty?'" And retailers and brands need to "reward" or incentivize them to continue to keep them loyal. Loyalty, therefore, is something earned — one more item, one more basket, one more visit. If a loyal customer visits your store every week and an uncommitted customer visits every other month, who is more likely to add one more visit? If a loyal customer chooses your brand for one-third of their category purchases and a non-loyal customer purchases you on one in every 15 category purchases, how much more would it cost you to get the non-loyal customer to add one more brand purchase compared to a brand loyal?

Customers are not exclusive. True for even a retailer's or brand's most loyal customers, customers do not give one brand 100 percent of their spend in the categories in which it competes. The additional brand or retailer spend potentially attainable for an individual customer that is not captured is called "customer headroom." It is a vital opportunity for growth. Many brands assume customer migration may be the result of "holes in the data" or customers that left the retailer and now purchase the brand from another retailer. The trouble with this assumption is that through individual customer purchase behavior data, we see many of these lost brand buyers were still purchasing products in the same category, just no longer the brand.

Relevance works. With the help of granular data, we can deliver the right message on the right product at the right time to the right customer. Leveraging household-level customer behavioral data, delivering relevant content based on a customer's needs and lifestyle can be an effective method to reward customers and deliver a uniquely tailored brand experience that separates one brand message from another. Within a CRM program for example, those customers that appreciate convenience should be exposed to messages that focus around that need: information regarding convenient product options, tips on using digital coupons, quick meal ideas, suggestions outside of the category that also focus on convenience, etc. Similarly, those customers that prefer to redeem print coupons and cook their meals from scratch are more likely to engage with a brand that delivers solutions relevant to that lifestyle. By being relevant to customers, brands and retailers can use their deep customer understanding to show their appreciation for a customer's loyalty through personalized rewards and offers, and in return, customers reward them with more of their spend. Relevance is proven to deliver higher redemption rates and greater sales lifts, which optimize marketing spend since more of the investment is landing on the right people.

Data has helped us understand that customer loyalty has three dimensions:

  • Contribution: Value delivered by customers through their spend, which is a partial reflection of loyalty.
  • Commitment: Future income to be derived from a customer. The long-term value of a customer's commitment may exceed their current value.
  • Championing: Value generated by recommendation, active support and trust. Brand champions are open to relevant cross-selling and brand extension. Likely to recruit new customers.

Customers are already spending — just not with you. Rewarding those customers who have already demonstrated a high affinity to your store or brand and are predisposed to increase their spend with you offers a higher return on investment than attempting to attract new customers. Putting a brand's customers at the center of your strategies and action, whether the brand be a retailer or a CPG, results in more relevant product offerings, marketing communications, pricing and promotions such that you are better meeting loyal customer needs and they reward you with increased brand spend and growth. By fine-tuning your brand proposition for your loyal customers, you'll also be making it more attractive and compelling for future customers.

Rob Bauder is Vice President, Manufacturer Practice Client Leadership at dunnhumbyUSA, responsible for working collaboratively with dunnhumbyUSA's consumer packaged goods partners to provide recommendations on sustainable business growth strategies for their brands and at retail. (Photo by flaivoloka.)

Topics: Consumer Behavior , Loyalty Programs , Marketing , Omnichannel / Multichannel

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