The Wheel of Fortune Strategies to Maximize CLV:

Managing Loyalty and Profitability Simultaneously:

Often, managers fall into the trap of believing that loyalty is the true measure of customer profitability. As was explained in the previous chapters, the link between loyalty and profitability is a lot more complex and subtle. By directing all their marketing resources to achieve and maintain loyalty, managers are not only pursuing the wrong customers, but also ignoring customers with high-profit potential. This strategy clarifies the relationship between loyalty and profitability and provides managers with the required framework to manage loyalty and profitability at the same time. In implementing this strategy, the difference between behavioral and attitudinal loyalty is highlighted. Behavioral loyalty reflects the loyalty of customers as reflected through their immediate purchase behavior. Attitudinal loyalty refers to the higher-order, long-term relationship of the customer with the firm. Traditionally, firms relied solely on behavioral loyalty as a measure of a customer’s loyalty. But, as explained later in this book, this gives a skewed and often unreliable measure. This strategy explains how “true” loyalty could be measured and what role behavioral and attitudinal loyalty plays in attaining profitability.

The first step in implementing this strategy is to segment customers based on their loyalty and profitability to the firm. There are several measures of loyalty and profitability that can be used for this purpose. Customers are segmented into cells based on their loyalty and profitability levels and different strategies are employed towards each set of customers in order to maximize their loyalty and profitability.

Once the customers are segmented, the next step is to build a loyalty program that aims at maximizing the overall profitability of the firm. This strategy presents a framework that can be used to build such a loyalty program. The framework suggests several steps that can be used to build and sustain profitable customer loyalty.

All customers are not equally profitable. This should be remembered when putting a loyalty program in place. A firm’s loyalty program should be able to reward customers depending on their level of profitability. In implementing loyalty programs, a two-tiered approach is recommended. The tier-1 rewards are aimed at all customers based on their current and past purchase behavior. This tier-1 reward is a simple explicit way of rewarding customers and attracting new customers. Tier-2 rewards are aimed at influencing the future purchase behavior of customers. Tier-2 rewards are more selective and rewards customers to influence their behavioral and attitudinal loyalty.
Implementing this strategy will enable firms to build and sustain profitable customer loyalty. This chapter provides a comprehensive framework to approach this problem and suggests several steps that can be used to build a more robust and profitable loyalty program.