Reward your best customers

Joanna L. Krotz writes about small-business marketing and management issues. She is the co-author of the "Microsoft Small Business Kit" and runs Muse2Muse Productions, a New York City-based custom publisher.

By Joanna L. Krotz

The strategy is simple: Give high-paying customers an incentive, and they'll come back and buy more.

That way, you boost sales, find new customers through referrals and lower your costs of marketing and customer acquisition.

So how do you accomplish this? By figuring out who your best customers are and what motivates them to buy. Once you know that, you can add incentives to make it worth their while to buy more.

Here's how to build your business by rewarding loyal customers.

What's loyalty got to do with it?

Marketing programs that reward customers for their patronage are not new. Long before airlines established frequent flier clubs and credit card point rewards, there was the Sperry & Hutchison Green Stamps program. Sperry & Hutchison, the distributor of the stamps, launched the program in 1896. At its height in the mid-1960s, with 80% of U.S. households collecting stamps and 800 redemption centers nationwide, S&H was overseeing an $825 million market.

There's no question consumers love to participate when the loyalty program is right. It's also clear that such programs can enhance profits. Recent research conducted across industries by consultant Bain & Company indicates that increasing a customer retention rate by only 5% can boost the average customer net present value by an astonishing 35% to 95%.

But today, the challenge is how to engender that loyalty. Competition is fierce, price often drives decisions, and consumers can pick and choose among dozens of options and outlets, whether it's healthcare or hamburgers.

Three steps to rewards

TThese three steps can help you set up the right loyalty programs for your business and keep customers loyal.

Step 1: Identify best customers

The key first step is to define your target by understanding the characteristics of your best customers. You may be surprised to find that the customer you talk to most, the one whose family saga you've now memorized, is so demanding and buys so little that he's actually costing you money. And a customer you've never heard of, one who buys online once every quarter, is really your biggest spender.

Neither frequency nor volume will define a best customer. You want to identify customers who provide the most profit. Only a thorough analysis of your customer database can yield such insights. The discovery of the online buyer, for instance, might lead to special e-mail offers.

If you're using Microsoft Outlook Business Contact Manager, included with Microsoft Office Small Business Management Edition, to keep track of your customer information, you can use the pre-formatted reports, including several that are focused on current customers (Accounts) and others focused on sales leads (Opportunities) that will keep you informed. You can:

Next, find out what those customers most like about your products and what offers or improvements are appealing. Start by casually asking questions of customers each time they call. Then, when you've formed some ideas, mail a postcard survey to get detailed answers. To create a mailing list:

Make sure you have enough responses to figure out what really moves customers to buy. You may have to send out a few mailings.

Step 2: Divide and reward

Armed with the information, classify your customers into four target groups, from highest to lowest spenders. Then categorize which products and services get the most attention or sales.

The resulting list will highlight the customers to spend your time and marketing on. You'll also know how to allocate your resources among the other groups and, perhaps, the profile of new customers you can tap for growth. Remember, the goal is to get the best customers to return and spend more or buy more frequently.

There are dozens of ways to reward customers, including the well-known frequent buyer clubs, buy-several-get-one-free offers and time-sensitive promotions and discounts made available only to loyal customers.

Such ideas are tried and true. But you don't have to start big. Loyalty programs — and the marketing materials you create to promote them — can be very affordable. Some ideas:

Step 3: Stay up to speed

Both markets and customers have a way of evolving. Don't simply set up a loyalty program and walk away. Keep track of any changes in customer or prospect information and make sure the list and the information is regularly updated.