Retaining loyal customers is critical to growing your business. In fact, according to loyalty guru Fred Reichheld, a 5 percent increase in customer retention can translate to a 25 to 50 percent jump in profits. You earn loyal customers by paying attention to the things that matter most to them.

Loyalty programs alone don't create loyal customers, but they can be effective. They don't need to be elaborate or expensive; they just need to provide value to the right customers. And the best way to ensure their effectiveness is to segment your customers by gathering and analyzing their data.

Here's what you need to know to obtain useful customer data and start focusing on loyalty marketing.

Start with the Data
First, develop one or more methods for gathering data about your customers--their buying patterns, demographic profiles, and what they like or dislike about your products or services. You can use this information to offer your customers products or services that best solve their business problems. Meeting a need is the number-one creator of customer loyalty.

For some small businesses, gathering data can be challenging. Customers interact with you in various ways, such as visiting your website, exchanging business cards with your representatives at trade shows, calling your company with questions and, of course, discussing the sale itself. Gathering data about customers in a consistent fashion, at every point of interaction, can seem daunting. In addition, you need to integrate the data gathered into one central location. This will provide the broadest possible perspective on your customers and give you a solid foundation for dividing them.

Fortunately, affordable solutions are available to help small businesses gather and analyze data. Here are some options:

Hosted CRM systems--Hosted CRM systems enable salespeople, customer service reps and other employees to input information about a customer gathered during an interaction. That information is then automatically available to others in the company for use in subsequent interactions with that customer, or for analysis and marketing purposes.

With a hosted CRM system, the provider maintains all the hardware and software necessary to deliver the CRM tools. Because these systems are often accessed through your web browser, all you need is an internet-connected computer. Some hosted CRM solutions, particularly those aimed at retailers, also provide tools for creating customer loyalty programs.

CRM software--Another option is to license CRM software for one or multiple users. CRM software provides many of the tools that hosted web solutions offer. But CRM software can be accessed without an internet connection, such as when you're using a laptop on a plane. In some cases, you can also synchronize and carry CRM software data on handheld devices, such as a PDA or smart phone, which could be convenient when visiting customers on site.

For more details on CRM, see "Tech Solutions That Help Keep Customers Satisfied."

Customer surveys--One of the best ways to gather relevant data about customers is to ask questions in a brief survey. Your overall goal is to find out how satisfied your customers are and whether they would recommend you to others. This information can be obtained by various means, such as a paper form, a website survey or an e-mail. Try to minimize survey questions to get the best possible participation. Consider providing an incentive for answering a survey--for instance, the chance to win one of your products. Have a plan for aggregating the data collected so it can be sliced and diced in various ways and integrated into your customer database.

In his latest book, The Ultimate Question, Fred Reichheld says you can determine how loyal your customers are by asking just one question: How likely is it that you would recommend this company to a friend or colleague? If the answer is "not very likely," then you need to pay careful attention to the reasons and look for ways to fix them quickly. Companies such as General Electric and Intuit use this approach for both evaluating customer satisfaction and determining how to improve their products. In the case of Intuit, the results helped the company create a new product called SnapTax, targeting customers who found the TurboTax product too complex to use.

Recency frequency monetary value tools--RFM is a technique designed to help businesses determine who their best customers are. This is based on customers' recency (how recent their last order was), frequency (how often they buy from you), and monetary value (how much they spend). Some CRM solutions include RFM analysis tools. You can also buy RFM software.

Spreadsheets--Don't forget that the computer spreadsheet programs you probably already own offer data analysis tools, too. This might be the most valuable data you have.

Putting the Data to Use

Segment Your Customers
After compiling and analyzing relevant customer data, segment your customers so you can better understand their future behavior. This will help you develop targeted loyalty programs for one or more groups. You will probably find you have a mix of the following four types of customers:

  • Truly loyal--These customers buy your products or services frequently and highly recommend you to others. This is the customer base you want to maintain and grow the most, as they will be the backbone of your future business. Understand what makes them happy and provide them the most value with your loyalty programs.
  • Accessible--These customers like your products or services, but factors such as a better competitive offer may cause them to stray. Your goal should be to determine what prevents these customers from being completely satisfied and fix the situation before they leave.
  • Trapped--These people remain your customers because of certain product features, but only do so because the cost of switching is too high for their business. These customers aren't happy about doing business with you, and they're likely to jump ship at some point. You can convert them to loyal customers if you make the effort to find out what they need or what you could improve. These customers could easily turn into truly loyal customers with the right attention.
  • High-risk--This is the group that often purchases on price alone. If they find a better price, they'll leave. These customers aren't worth spending your limited marketing dollars on; price-conscious customers rarely turn into loyal customers. In creating loyalty programs, it's important to reward only the customers you want to retain. However, some of these customers are truly dissatisfied for a good reason. In that case, it's best to identify and resolve their issues before it's too late and you lose them for good.

Target Your Loyalty Programs
Once you've segmented your customers, you're ready to develop targeted loyalty programs designed for those segments. Here are some tips to keep in mind:

  • Align benefits with customer needs. To be successful, your loyalty programs should align the benefits they offer with the specific needs of the targeted customer segments. For example, one program's goal may be to reward the truly loyal with exclusive perks. Companies such as Dell, Microsoft and Office Depot are good examples of companies with segment-oriented loyalty programs.
  • Create programs that can evolve. As your business grows and changes, so will your customers. Make sure your loyalty programs can be easily adapted to future needs.
  • Create programs that you can afford. Make sure your loyalty programs don't hurt your bottom line. Rewards don't have to be monetary: They can help your customers save time or help them track their purchases with you. Some loyalty programs provide rewards in the form of peer recognition, information that will help them perform their jobs better, or guidance that leads to better use of your product. The key here is to provide something of value to your customers.
  • Develop programs that can generate more in-depth customer data. You can design your loyalty program in a way that requires participants to provide more data about themselves. That information will help you create better targeted programs for each customer segment.

Think Outside the Box
You don't have to be a large enterprise to offer a compelling loyalty program; you just need to think creatively and offer something your customers will value. Study the loyalty programs other companies offer. Consider collaborating with other small businesses. As always, discuss your ideas and business goals with your IT advisor--whether friend, colleague or consultant. By coordinating technology with your specific business goals, you'll save money and time and get the most out of your investment. Above all, try to design loyalty programs that make your customers feel like they're not just your customers, but valued partners.