How Loyalty Programs Help You Profit from the 80/20 Rule
Vilfredo Pareto was a 19th century economist and sociologist who observed that a relatively small number of causes are responsible for a large number of effects, typically at a ratio of 20% to 80%. Today, this rule he observed is called the Pareto Principle, or the 80/20 Rule.
In business, the 80/20 Rule says that 80% of your profits come from 20% of your customers. These customers are generally your most loyal customers – they are regulars who come back again and again and help to keep you in business.They are also less likely to go with one of your competitors and are more receptive to any promotional messages you send their way.
Loyalty programs are designed to help you profit from the 80/20 Rule, creating incentives for one-time customers to become return customers and rewarding your most profitable customers. Providing your best customers with rewards can increase the number of times they make a purchase, therefore increasing your revenues. According to a study by Total Research Corp. and Customer Marketing Corp., consumer spending is 6% higher for companies that offer loyalty card programs.
Focus on Customer Retention
Loyalty programs that focus on customer retention are based on the idea that it’s more profitable to keep existing customers than it is to find and recruit new customers. This is where the 80/20 Rule comes into play. Companies ought to rank customers based on their lifetime value and closely monitor promotional activities to ensure that high value customers are getting their fair share of promotional offers.
Establish rewards that will excite loyal customers. In order to determine what rewards would be of real value to your most profitable customers, you need to get as much information about them as you can, including where they live, where they’re from, their education level, etc. Reinforce their sense of worth on every occasion possible, such as in communications, when you deliver customer service or when you provide a service.
Many companies reward their most loyal members with a bigger discount, but this can be a problem. Instead, consider rewarding your best customers through other means besides discounts, such as special privileges, exclusive invites or virtual rewards, to name a few examples. Otherwise, your most loyal customers may end up becoming less profitable than your average customer.