Mr. McCall

Guest Service / Customer Experience Mgmt

Improving Loyalty Program Management by Effectively Segmenting Your Member Base

By Michael McCall, Professor of Marketing, Ithaca College

Co-authored by Clay M. Voorhees, Ph.D., Assistant Professor of Marketing, Michigan State University

There is little doubt that most managers both inside and outside the hospitality industry believe that they must have a loyalty program. Indeed, loyalty programs have grown exponentially since American Airlines launched AAdvantage in 1981. While the basic idea of any loyalty program has been to reward your best customers, managers continue to face challenges on how best to optimize these often expensive programs. Added to these questions are the challenges posed by a customer culture that has created an expectation of rewards in return for patronage. Consequently, managers are often faced with the question of trying to identify and reward the “right” customers.

In a recent review of the reward program literature we suggested that the key drivers of a successful reward program can be found in 3 buckets: The structure of the program; the structure of the rewards offered; and the degree to which the customer fits with the program. At that time we also suggested that it is important for program managers to begin thinking about how they might best differentiate their program from that of their competition. We argued that a critical feature of a successfully differentiated program rested in the need to properly segment your customers both within and across program tiers. In many ways these issues were captured by a hotel manager who commented that while he felt he needed a program because everyone else had one, he was not sure what his program actually accomplished. This manager’s quote was significant on a variety of levels.

First and perhaps foremost was that he had a program in place not for reasons of marketing strategy but because the competition has one. Unfortunately, a careful examination of the myriad of programs currently in existence suggests that they are often copycat programs. Yet while no marketer would introduce and promote a product that is “just like our competition,” reward programs do precisely that. An often tell tale sign of this “me-to” approach is found in the use and reliance upon three tiers of precious metals as program-customer categories.

In this article we attempt to discuss ways in which program managers might differentiate their programs from the competition through improved segmentation. While the primary orientation is directed at hotels, we believe that the basic ideas and recommendations would be useful both inside and outside the hospitality industry.

Segmentation Bases

An underlying theme for all reward programs is the categorization of customers into groups. Rooted in the notion of market segmentation, the basic assumption is that there are relatively homogenous groups of people who are stable in their consumptive usage and can be reached by manipulating various aspects of the marketing mix. A perusal of the literature reveals that there are 6 essential characteristics of proper segmentation. We suggest that when managers attend carefully to how these 6 characteristics apply to the customers in their loyalty program that they will move away from standard programs that resemble the competition and be able to differentiate their programs.

Identifiability

Can we identify those customers using our existing criteria? In other words can you pick your loyalty program members from the crowd? Within some hotels this means a special line for higher tier members other firms create status cards to help customers showcase their status. The advantages here are two-fold. For your better customers this specialized treatment offers a visible form of status. Perhaps more importantly for your front line staff this clearly identifies reward program members and allows them to deliver a high standard of service. Ultimately, by improving ways to signal status in a program allow customers to show off their achievements, which provides a free benefit for enrollment in the program, and also helps frontline works tailor their service for different customers.

Substantiality

This refers to the actual size of this particular group. Note again that size in this case could refer to the total number of customers that might be grouped within a tier or substantiality might be again passed on total spend. For instance, consider a customer that might patronize a luxury hotel, resort or even a casino. Their stay frequency is low; may only visit your property every few years, and they may be small in number. Nevertheless, when they do show up on site, their total spend is significantly higher than any other group of customers. Consequently, creating an additional group for this small albeit profitable customer has distinct advantages over a traditional 3 tier system. A related managerial issue that is often neglected and misunderstood is the optimal size of a program tier. When program tiers become too big they not only lose their identity but the customers within these groupings become difficult to serve. While it is beyond the scope of this paper to offer a formula for determining the precise size a tier should be capped at, it is clear that firms often have difficulty meeting the needs of their customers. As a broad rule of thumb a program’s membership should certainly represent a pyramid where the largest group of customers belongs to the base tier and tier sizes reduce as status increases. However, it is possible to optimize these tiers through cluster analysis and other techniques to ensure that each tier offers a substantial segment with respective to overall size and spending.

Accessibility

This refers to the ability of marketing managers to be able to reach the intended target group. Here it is critical that firms capture enough data from customers at the time of their enrollment to better deliver customized offers to customers both during and between stays. Access between stays is quite simple, but firms need to do a better job identifying preferred modes and frequency of contact during initial program applications. Different customers may have varying tolerances for the medium and frequency of contact with the rewards program, so managers must manage these connections carefully. In addition to intermittent access, firms can also leverage initial preferences to better connect with customers during their stays. A number of Hotels have well defined tracking systems that allow them to identify customer room preferences (and other frills such as pillows, bed size etc); they are also able to target the subgroups with promotions that specifically meet those preferences.

Stability

Stability focuses on the extent to which the characteristics of a segment of customers will remain constant over time. Stability is critical as reward programs need to be developed on a platform for long-run growth. Such a platform requires segmentation criteria to be set based on broader consumer behaviors rather than simple, short-term actions. An example of this would be segmenting consumers broadly on their level of engagement with the brand, where highly engaged customers may end up in unique program tiers versus disengaged customers. If these segmentation criteria were defined too narrowly (e.g., simply making number of Foursquare Check-Ins a lone segmentation base), then it would be impossible to develop stable segments over time. Rather, by broadly focusing on the broader behaviors of customers, the specific actions used to operationalize the segments can evolve over time and segments will become more stable.

Responsiveness

Not all customers react the same way to a firm’s primary offerings and the same is true for rewards. Firms must carefully examine customers at all tiers of their program and determine what types of benefits differentially appeal to each group. Likely, the desires of entry-level tier customers will vary substantially from the elite customers and firms need to better capitalize on these differences. To do so, managers should consider customizing rewards criteria and the rewards themselves at different tiers within a program. For example, lower-tier programs may simply be value-driven and a simple frequency offering may be mandated to get them over the hurdle and into the rewards program. While these frequency-based rewards can lead to value-seeking, it proves the firm with a chance to connect with the customer and start winning their loyalty. Then, as consumer progress through the program rewards may need to shift to become more status-oriented, which provides a great basis for differentiation. Regardless, failure to account for the differential responses of consumers in a rewards program can result in both poor positioning against the competition and under performance in the absence of clear competitors.

Actionability

Managers must have enough information about their targeted groups that they can make decisions and direct promotions towards the target. This requires that programs establish a data-based backbone to assist managers in making decisions with respect to reward programs. Through the application process to a program, firms have a critical chance to gather important customer information that if used effectively can be used to target a customer immediately following enrollment and through their membership in the program. Too often firms gather this data and never use it, which is even more fatal than not gathering data at all as they are incurring costs, but seeing no benefit. More program managers need to collaborate with consumer insights divisions to determine how they can gather more primary data on their reward base and then leverage this information to optimize their programs.

We began this report by suggesting that many of the customer loyalty programs currently in place look very similar to each other. They often segment customers into a relatively simplistic 3-tier precious metal system and offer rewards accordingly. We believe that this structure actually limits a firms’ ability to develop that deeper connection with their customers. Managers have indicated that they are unclear what their programs accomplish. In this paper we have suggested 6 segmentation bases that are intended to help managers look beyond their current program and consider how they might redesign their existing programs by properly segmenting their customers both across and within tiers.

This article was co-authored by Dr. Clay Voorhees. Dr. Voorhees is an Assistant Professor of Marketing at Michigan State University. Clay received his Ph.D. from Florida State University. His research has been published or is forthcoming in the Journal of Marketing, Strategic Management Journal, Cornell Hospitality Quarterly, Journal of the Academy of Marketing Science, Journal of Retailing, Journal of Service Research, and the Journal of Services Marketing. He teaches a range of courses at both the graduate and undergraduate level focused on innovating and launching new goods and services, consumer decision making, marketing principles, and marketing strategy. The theoretical focus of Clay’s research is on the explanation and management of the dynamics of social exchange and social influence (attitude change and behavior change). Within this theoretical umbrella, he works on projects in a number of primary areas, including: (1) Customer Loyalty Program Design, Assessment, and Optimization, (2) Customer Loyalty Models and Dashboards, (3) Customer Experience Management, (4) Return on Marketing Investments, and (5) Advanced Approaches for Customer Segmentation. Clay’s research has been featured in media outlets as: USA Today, National Public Radio, Associated Press, CNBC, and numerous other domestic and international periodicals. In addition to his academic work, Clay has worked with a number of domestic and multinational firms and government agencies on issues related to loyalty program assessment and ROI, marketing and consumer research, brand strategy, development of loyalty scorecards, new product development, product portfolio decisions, pricing analysis, and general marketing strategy.

Dr. Michael McCall, a Professor of Marketing at Ithaca College, is a Visiting Scholar in the School of Hotel Administration, and a Research Fellow of the Cornell Center for Hospitality Research. He earned his Ph.D. in experimental and applied social psychology from Arizona State University and has published over 40 academic articles. His primary research program focuses on the role of customer reward programs in creating customer loyalty, rebate programs, and perceptions of value among competing hospitality and service products. Mr. McCall can be contacted at 607-274-3501 or mm114@cornell.edu Extended Bio...

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