444 CHAPTER 13 DIRECT MARKETINGThe fundamental importance of relationship marketing is related to the principle that
customer satisfaction, loyalty and profitability are correlated. Lifetime value of a customer, or
the net present value of the profits a company will generate from a customer over a period of
time (usually 4–5 years), is an important concept for the direct marketer involved with rela-
tionship or retention marketing. By computing the average lifetime value of its customers, the
company will be able to determine how much it can invest in attracting and making loyal
potential new customers. Not all customers should be made loyal.^67 It makes no sense to build
up a loyal but unprofitable relationship. With the Pareto principle in mind, 80% of time and
promotional efforts should be allocated to 20% of customers. To identify these customers the
information assembled about their past behaviour will help the direct marketer select the
right customers for further loyalty development. Apart from traditional socio-demographic
and psychographic segmentations, customer portfolio segments can be measured in terms of
number of customers, number of purchases (frequency of purchase), recency of purchases
and contribution to sales and profits (monetary value).^68
During a relationship, customers can progress from being a prospect to being a customer,
client, supporter and, at the top of the loyalty ladder, an advocate. The latter are so involved
with the organisation that they are very loyal and influence others by positive word of mouth
(WOM), which is of high value for a brand knowing that WOM is one of the main credible
information sources for consumers today. The relationship direct marketer wants to encourage
customers as far up the loyalty ladder as possible.
Customer loyalty will be won by being better than competitors (offering superior products
and services) or by loyalty strategies. There are two strategies to stimulate customer loyalty: a
rewarding strategy and a relationship strategy. The former implies rewarding loyal behaviour
by giving ‘hard’ advantages to reinforce and maintain customer loyalty. Examples are frequent
flyer programmes, gifts, prizes or money. Rewarding strategies are targeted at rational calcu-
lating customers. But, as these rewards are easy to copy or exceed by competitors, they are
rarely the best strategy when they are not used in combination with a relationship strategy.
The latter consists of creating tight relations with customers by gathering information about
each individual customer and using it intelligently by providing soft, personalised and cus-
tomised advantages. Examples are sending targeted and relevant messages, special events for
customers, etc. These relationship strategies are targeted at affective-oriented customers. For
instance, someone calls a local florist and orders a bouquet for their mother’s birthday; the
next year they get a postcard from the florist three weeks before their mother’s birthday,
which reflects the number and type of flowers ordered last year, accompanied by the message
that it only takes one phone call to send her flowers again. Which of the strategies should a
direct marketer choose? Rewarding programmes are effective to use as a first step in the pro-
cess of building a close relationship. They will bring customers into the programme. However,
this will not be enough to keep customers loyal.
A marketer introducing a loyalty programme should consider the following strategic points
involved in sharing value with customers.^69 To profit from loyal customers, marketers should
offer the best value to the best customers: those clients creating most profit should benefit from
this situation, which will make them even more loyal and profitable. For instance, a company could
consider offering lower prices to its loyal customers. Unfortunately, most companies forget this
and deliver products or services of the same quality to all customers. The value created by a
customer loyalty programme should lead to higher returns than costs. A reward programme may
never be a cost and should not attract price- or promotion-sensitive customers of competitors
instead of rewarding loyal clients. Rewards should concentrate on stimulating desired behaviour
(loyalty, WOM) and discourage unwanted, unprofitable behaviour (customer defection). Loyalty
programmes are long-term actions and not short-term promotions, and long-term advantages
should be communicated rather than promoting switching behaviour. Loyalty programmes
should attract valuable customer segments and discourage less valuable segments by being self-
selective and individually correcting. For example, MCI’s Friends and Family loyalty programme
offered 20% to 50% discount on calls to a specified network of friends and family. The pro-
position is most attractive to heavy users of long-distance calls, a core segment for MCI.M13_PELS3221_05_SE_C13.indd 444 6/5/13 2:56 PM