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Why you shouldn't just reward your best customers

One of the most common interests of small and medium businesses is about customer loyalty. How do you set up a loyalty program?

The concern usually comes from the right place – the fear of churn or a desire to drive repeat business. A common axiom in business is that it is five times easier to keep a customer than to find a new one. Another cliché that is often true is the 80/20 rule, where 80 per cent of a company's profits can be traced to 20 per cent of its customers. Encouraging repeat business is crucial, and loyalty is tied to repeat purchases and positive word of mouth.

But for most smaller operations it's a big leap from a plan to increase repeat purchases to a custom rewards program. There are many steps in between, and too many entrepreneurs skip them altogether or get them wrong. In fact, very few small businesses employ their own points systems, while many simply reward loyal customers through discounts and other more simple means.

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The misconception is that small businesses must reward their best customers. In fact, most business owners don't really know who their best customers are. In addition, focusing solely on what may turn out to be a small bucket of customers just isn't smart or profitable.

The example I always cite about rewarding the wrong customers concerns a paint company that a consultant of mine once worked with. Every year, the company would reward its 20 "best" customers with a trip to Hawaii. The problem was that "best" was narrowly defined as highest in gross sales. Analysis ultimately showed that after deep discounts, the numbers didn't look so good. Further analysis showed that after other costs, such as delivery and after-sales support, were taken into account, many of these customers were in fact unprofitable and candidates to be "fired."

Rewarding the best customers is a good idea, but rewarding all customers – to different degrees – is a better idea. Even if the paint company had sent the 20 most profitable customers to Hawaii, would the cost of that "program" have been justified? What about the hundreds of other customers who could potentially have been rewarded and in turn bought more paint or raved about the company?

Mark Healy, P.Eng, MBA, is a partner at Satov Consultants, a management consultancy with practice areas in corporate strategy, customer strategy and operations strategy.

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