As consumers we feel that customer clubs have always been around, but actually the idea of a customer club first came about in the late 1970’s in the United States. American Airlines was a pioneering company in the field of customer clubs when they launched their Frequent Flyer program (AAdvantage). The origins of the program were in the late 1970’s, when the government of the United States took steps to reduce obstacles to airlines caused by federal regulation (such as setting fares, routes and others) by passing the Airline Deregulation Act. As a direct result of deregulation, competition increased, and the airline companies sought for advancements that would enable them to increase their market share. During May 1981, American Airlines made the step that generated this major difference and launched its customer club which enables passengers to accumulate Miles and exchange them for airline tickets and other benefits. The program currently has more than 67 million members.
What is a Customer Club and why does managing a Customer Club Increase Sales?
A customer club is a program which offers benefits to a specific group of customers out of the company’s current customers, in exchange for the customer’s loyalty to the company (which is manifested in purchasing); it is not by mere chance that in the United States these programs are called Loyalty Programs. The benefits can be given as coupons, free products, benefits obtainable in other companies and more. A customer club would encourage your customers to keep purchasing from your business (whether it is a physical business or an e-commerce website).
Why setting up a customer club is good for your business? We get the simple answer if we analyze the statistics about returning customers.
Did you know that the cost of acquiring a new customer is 6/7 times higher than the cost of selling to an existing customer? What’s more, an existing customer will purchase by over 60% more than a new customer! Of course this data refers to the entirety of the company’s customers; when we talk about the customer club members the data is even better. An average business which succeeds in increasing the return ratio of its customers by 5% will enjoy an increase of up to 95% in profit.
Is your Business Suitable for Founding a Customer Club?
When we check the numbers, it is clear that setting up a customer club is a positive and profitable endeavor; but is every business suitable for setting up a customer club?
There are cases where creating a customer club would not be effective, these are companies which their customers make their purchases irregularly and infrequently. In such cases, the company would not be able to make its customers return often enough, subsequently allowing it to give benefits which are worthwhile to the customers and to the company itself. Examples for businesses which are not suitable for setting up customer clubs are businesses in the area of house renovation, accident lawyers and others.
Initial Information Gathering and Customer Club Formation
An important stage in managing a successful customer club is the initial planning stage. It’s important to start gathering data about the buying habits of your current customers. The first step
is to find the 10%-20% of your most profitable customers, which according to statistics would make up 80% of your profits. If your business has implemented a CRM system, that would facilitate the initial research efforts. After you develop a profile of the type of customers who interest you, you should create a program fitting to their needs. For example, if a jewellery store finds that most of its best customers buy a certain diamond cut, then the customer club benefit should relate to that product.
It is recommended to use a simple and structured system of points. As soon as the customer accumulates a specified number of points, then they get a benefit which is defined by you. The more the system is simple to understand, the better it will work. You should give a lot of thought to what the customer will get in exchange for their loyalty to your business. A customer club which does not give its customers real value would not make them return and buy time and again.
Tip: it is recommended to form collaborations with other companies. Offer your customers a joint club that will allow them to use their points in a unified manner and receive benefits in other businesses. Indeed, it requires logistics and organization in advance, but the value for your customers will be great. Naturally, there is clear advantage in collaborating with companies which complement your product, for example, a car dealership joining with a gas station brand.
The Customer Must Know about the Customer Club and its Advantages
The customers knowing about the existence of the customer club and their understanding the high value that it gives them, is the basis for the customer club’s success. Supermarket and fashion chains, for example, instruct their cashiers to ask the buyers whether they are club members, and if they are not, the cashiers would try to persuade the buyer to join the customer club while giving an explanation about the advantages of the club.
Use all the tools that you have in your business to remind your customers that the customer club exists and is relevant for them. Some of the tools you can use: the company website, your distribution lists, your voicemail message and more.
Case Study: Accrued Benefit Card
Accrued benefit is a case in which after a certain number of purchases of the product, the customer receives the same product for free. For example, after purchasing five portions in a restaurant, the sixth portion is given for free. The two researchers, Prof. Joseph Nunes and Prof. Xavier Dreze, conducted an experiment aimed to examine how the customers’ feeling of progress affects their purchasing volume in instances of accrued benefit.
The experiment was conducted at a car wash facility during 2004. In the course of the experiment, 300 cards for accrued benefit were given randomly to the car wash customers. The idea behind the cards was simple – after the customer buys eight washes in that car wash facility, they get the ninth wash for free.
Half of the customers received a card with 8 empty slots:
And the remaining half of the customers received a card with 10 slots, announcing to those customers that due to a special benefit given on that day, the first two slots are already filled:
It is easy to see that in fact there is no difference between the cards; the benefit for the customers is exactly the same, after eight washes, the customer gets a wash for free.
The experiment results: out of 150 cards total, 80 cards were redeemed. Out of the 150 customers who received a card with 10 slots – 34% of cards were redeemed, compared to 19% for cards with 8 slots. Also in terms of the time it took the customer to take advantage of the benefit, customers of the 10 slots used their benefit faster.
The clear conclusion of the experiment is that as soon as the customer gets a feeling of progress (in one case a progress of 20% from the start compared to 0%), the chances that they would use the benefit increase significantly, in the experiment it was nearly twice as much. In order to reconstruct the experiment in your company, it is important to ensure that the customers receive a clear goal, and a simple and structured way to achieve that goal, otherwise the customers lose interest.
Learning Buying Habits and Improving Constantly
One of the clear advantages of the customer clubs, beyond the substantial value in direct increase of profits, is the large amounts of data accumulated regarding the buying habits of your best customers. This is a gold mine of information that will allow you to make business decisions that will bring results in the short term. You can see, for example, how supermarket chains use the information gathered about their customers by sending personalized coupons to their most valued group of customers.
After setting up a customer club in your company, it is important to keep learning the buying habits of your customers, and constantly devote time for routine optimization.
In Israel there are a few companies specializing in solutions for setting up customer clubs, such as, SIMPLYCLUB, Valuecard, and ShoppingCard.
Have you recently established a customer club and encountered some difficulties? Do you have questions regarding the right strategy for managing a customer club? Let’s talk about it in the comments!
