Targeting Customers (1/6) Customer Behaviour Tar- geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives Targeting Customers (1/6) Programme targets guide the value delivered by the products and services Target customers Best practice companies develop an understanding of the ‘value exchange’ that links target customers to them and how they must position their products, service and marketing communications to … increase the number of target customers purchasing their products … sell more products to existing target customers … substitute high-margin products for low-margin products … keep target customers longer … all at lower cost per customer Best practice companies target customers based upon a detailed understanding of … customer segment needs and the economics of fulfilling them … its own capabilities to meet these needs … the abilities of competitors to meet customers’ needs, particularly when competitors have a cost advantage In competitive industries, the loyalty programme must be developed in a way that it provides the company with a sustainable competitive advantage

Targeting Customers (2/6) Customer Behaviour Tar- geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives Targeting Customers (2/6) Basically there are two targeting approaches Statistics and data mining often help targeting the right customers Best practice companies target their loyalty programmes for several customer segments. Basically, there are two ways for a sequential targeting (see left chart below): Bottom up approach: Starting with a broad customer penetration. Targeting takes place in a second step and is based on more information about each individual. Top down approach: A loyalty programme tries to target only on the most profitable customer segment from the beginning. This approach is possible when already owning the customer profile and profitability. The example below shows a typical customer structure in a Telco. A possible target group might be the group with more than 250.- turnover (5% of the customers making 24% of the total turnover). 500.- + 300 - 500.- 250 - 300.- 200 - 250.- 150 - 200.- 100 - 150.- 0 - 100.- Percentage Turnover Percentage of customers Legend: Turnover Percentage Percentage per month Customers Turnover 0 - 100.- 72% 40% 100 - 150.- 14% 18% 150 - 200.- 6% 11% 200 - 250.- 3% 7% 250 - 300.- 2% 5% 300 - 500.- 2% 8% 500.- + 1% 11% Band of turnover in US $ Example: 14% of the customers between 100 and 150 US$ generate 18% of the overall turnover. Figures have changed in this example 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Source: Price Waterhouse, 1998

Targeting Customers (3/6) Customer Behaviour Tar- geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives Targeting Customers (3/6) Performance measurement is a key success factor To keep track of progress towards their goals, companies must develop a suite of performance measures based around … growth in customer lifetime value ... growth in customer share of wallet ... penetration of the loyalty programme in the target segment An example of a balanced scorecard for a loyalty programme is shown below: Overall measures 1. Net profit 2. Net profit per club member 3. Customer satisfaction Customer structure 4. Amount of club members 5. Change in the amount of club members 6. Average turnover per club member 7. Change of the points collected but not redeemed 8. Club penetration 9. Future cross-selling potential in each target segment Loyalty programme profit 10. Decrease of churn/ defection due to the club 11. Overall gross profit 12. Securing the turnover of not defected customers 13. Cross selling effects 14. Cost reduction due to less win-back costs Cost oriented measures 15. Total costs 16. Operating costs 17. Communication costs 18. Costs for point redemption 19. Costs for rebates Process oriented measures 20. Amount of club members per FTE 21. Time from first contact to welcome package received 22. Average length of a customer call 23. Response; cost per mail; costs per order for the different actions 24. Amount of questions per telephone, internet and/ or e-mail 25. Amount of faults 26. Amount of address changes

Best Practice in Targeting Customers (4/6) Customer Behaviour Tar- geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives Best Practice in Targeting Customers (4/6) British Airways uses a version of the strategic staircase to map the behaviours of customers through their relationship cycle. The objectives for each step and target group are listed below as well. Value-based Relationship Commitment/Trust Based Relationship Understand what target customers need and give it to them develop predictive behaviour models driven by data mining personal promotions proactive service to pre-empt problems share value created through personalised rewards Build a value-based relationship Mutual Interest Relationship Leverage information to personalise the service that the target customer receives personal promotions superior service in comparison to new competitors rewards and recognition Leverage the relationship ‘Ready for Service’ Use information about customer segments to exceed their overall expectations targeted promotions responsive service desirable, achievable rewards Exceed the promise Position the loyalty programme in the mind of target customers reliable partner fair and trustworthy Make the promise

Best Practice in Targeting Customers (5/6) Customer Behaviour Tar- geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives Best Practice in Targeting Customers (5/6) Winning new customers at AT&T Winning back defecting customers at AT&T AT&T redesigned how markets to segments based upon segment economics it identifies underserved segments it buys in market data and develops predictive models to identify target segments and the value exchanges that would produce the optimum results it identifies the most likely prospects from competitors and then identifies potential reasons for not signing-on it then develops and tests hundreds of market offers to win target customers from competitors Its results have been impressive: in 1995 it attracted 700% more customers than in 1990, with 50% of marketing spend being directly trackable to closure compared to 5% in 1990 Customers defecting from AT&T are contacted up to seven times to win them back, each contact offering a better incentive to return. The incremental offers are based upon an understanding of the customer’s value to AT&T, what they can afford to give away to win them back and what has worked for other customers with similar profiles

Best Practice in Targeting Customers (6/6) Customer Behaviour Tar- geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives Best Practice in Targeting Customers (6/6) Hilton hotels has developed a number of loyalty pro- grammes targeted at different customer segments Hilton HHonors programme for frequent stayers offers ‘double dipping’ where members can collect points from airline partners as well as HHonors points Hilton Business Privilege programme for very frequent stayers costs GBP 30 to join but offers an extended range of services to members It has also developed a programme for hotel agents and secretaries to reward them for placing congresses with Hilton hotels rather than with competitors Target group simulator as a supporting tool A target group simulator was developed with this metholodogy to specify the behaviour and benefits of certain (micro) segments. Based on the current customer behaviour, the company can estimate the impact and benefits of certain offers in a loyalty programme for each target group.