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Loyalty segmentation: a step-by-step guide

Supercharge customer loyalty with our walk-through guide to segmentation. Increase engagement, sales, and personalization in just a few steps.

Loyalty segmentation: a step-by-step guide

Monika Motus
Monika Motus
Loyalty Expert (formerly Starbucks, iSpot, and Douglas)
Paweł Dziadkowiec
Paweł Dziadkowiec
Loyalty Strategy Consultant
loyalty segmentation guide cover picture

Boosting brand advocacy is key for companies seeking to grow in an increasingly competitive market. But, alarmingly, the one-size-fits-all approach to customer engagement has become obsolete.

To truly maximize the potential of your program, you must delve deeper into understanding your client base and realize that not all existing loyal customers are the same.

This realization sparks the beginning of customer loyalty segmentation, a strategic framework that allows any company to tailor its initiatives to different tastes and needs.

Buckle up because, in this guide, we'll take you step by step through implementing loyalty groups, empowering you to forge stronger connections, foster brand advocacy, and ultimately drive sustainable business growth.

To make sure you are equipped with the best knowledge to put all steps into action, we’ll explain the four most common approaches, such as behavioral segmentation and attitudinal segmentation.

Lastly, we cover the most common challenges and ethical considerations faced while implementing programs. Let’s start!

What is loyalty segmentation?

Loyalty segmentation is part of a marketing strategy that divides a company's customer base into distinct groups based on loyalty behaviors, spending habits, attitudes, and transactions to promote marketing and business goals.

This segmentation approach aims to identify and understand different types of customers in terms of their loyalty levels and preferences. Loyalty grouping typically involves analyzing:

  • Product/service usage
  • Purchase frequency
  • Spending patterns
  • Brand advocacy
  • Feedback

Then you can use the information gathered to tailor marketing efforts and loyalty schemes and to categorize people into groups to engage and retain them in different ways.

Key steps in loyalty segmentation

As a loyalty manager, you may face the challenging task of implementing a loyalty segmentation process. It might seem overwhelming but only if you don't know where to start, so fear not! We put together a comprehensive step-by-step list to guide you through the process.

These steps will equip you with the knowledge and tools to group and effectively engage your target audience. Let's dive into the details.

1. Define the objective

Clearly articulate the specific goal of the loyalty segmentation process, such as: 

  • Improve planning and execution of commercial activities across loyalty, sales, and marketing teams.
  • Have a better insight into the drivers of loyalty, value, and migration to design specific initiatives based on the customer lifecycle stage.
  • Streamline the acquisition process and accelerate value creation for new customers.
  • Identify opportunities to acquire new clients.
  • Improve contact strategies based on customer potential and future behavior.
  • Improve the effectiveness of targeted campaigns across channels.

Consider the desired outcomes, timeframe, and alignment with overall business objectives.

Collaborate with relevant stakeholders to ensure alignment and buy-in.

Expert remarks and best practices

Clearly articulate the purpose of implementing loyalty segmentation in your case. Determine what specific insights or outcomes you want to achieve through this process, such as increasing retention, identifying high-value clients, or personalizing marketing efforts.

"Loyalty segmentation aims to enhance customer loyalty and maximize customer lifetime value. In addition to the primary objective, it also has secondary goals, including optimizing resource allocation, discovering valuable insights through data analysis, and fostering involvement and gratification. You can create a comprehensive framework for long-term success by addressing the primary and secondary objectives."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

2. Gather customer data

Identify the relevant data sources, including first-party data, second-party data, and third-party data from external vendors. Examples of what these mean:

  • Zero-party data: preferences and interests (user's likes, dislikes, hobbies, and personal preferences), purchase intent (wishlist items, items added to a shopping cart, or inquiries about pricing or availability), survey responses, personalization information (the preferred communication channels, content preferences, or specific interests), reviews, ratings, comments, email subscriptions, event registrations (information provided by users when registering for events, webinars, conferences, or workshops), location data (address details or preferences for localized content or offers).
  • First-party data: customer registration information (name, email, address), purchase history, website analytics (page views, click-through rates), app usage data, social media interactions, email and newsletter subscriptions, customer service interactions, loyalty program data, offline interactions (in-store purchases, event attendance).
  • Second-party data: data-sharing agreements, co-branding initiatives, business data exchanges, joint research or surveys, offline data partnerships, publisher/advertiser data sharing, and social media collaborations.
  • Third-party data from external vendors: demographic data (age, gender, income), psychographic data (attitudes, interests, lifestyle), behavioral data (online activities, purchase behavior), geolocation data (physical location, travel patterns), social media data (profiles, connections, posts), consumer purchase data (purchase history), market research data (surveys, industry analysis), data aggregators (collect data from various sources).

Determine the data collection methods, such as surveys, online forms, data scraping, or API integrations.

Ensure compliance with data privacy regulations and obtain necessary permissions.

Explore data enrichment options to augment existing data with additional insights from external sources.

Expert remarks and best practices

Data is a prerequisite — there's no point in starting segmentation until you have enough input. You must have a solid set of information to have a basis for building a reliable segmentation, which means transactional, behavioral, and declarative data.

Where to start?

Start by gathering essential customer data, such as their first name and any other necessary personal information. If you have an online store or a mobile loyalty app, you can easily track customer IDs, which provide valuable insights into user behavior. By doing so, you'll gain comprehensive knowledge about each customer's actions, preferences, navigation patterns, and interests in specific product categories.

Behavioral data is a must for an online business. It provides valuable insights into customer expectations, purchase preferences, and browsing behavior, such as products added to the shopping cart but not purchased for a reason — these motives could range from financial constraints to waiting for discounts or promotional offers. Understanding this data is essential for creating targeted offers for distinctive customer groups.

Regarding data analysis, managers recognize and embrace the importance of utilizing multiple data sources. They understand that relying solely on data from the loyalty program, especially if it has recently been launched, may not provide a comprehensive understanding of their business and customers.

Instead, managers can leverage existing information from various sources, such as CRM (Customer Relationship Management) systems, BI (Business Intelligence) systems, and more, and map the data. By incorporating both structured and unstructured inputs from available sources, supervisors can gain a more holistic view of their operations and customer behavior, empowering them with valuable insights.

The effectiveness of data analysis relies on the freshness and relevance of the chosen data sources for segmentation. Outdated data can lead to inaccurate insights and misguided decision-making. Consequently, managers prioritize regularly updating the data sources to ensure they reflect the current state of the business. 

Equally important is the careful selection of data sources for segmentation. Managers understand that not all sources are equally informative or relevant to the specific analysis at hand. That's why they critically evaluate the most suitable data sources that align with their objectives. By selecting diverse and complementary data sources, managers can uncover hidden patterns and make more informed decisions, fostering improved outcomes.

What to do and what to avoid

Also, managers remain mindful of avoiding redundancy in their data sources. They understand that redundant data sources can introduce unnecessary duplication and confusion during analysis. Supervisors streamline their analysis efforts by focusing on unique and distinct data sources and concentrating on the most pertinent information. 

If you're at the initial stage of designing your loyalty scheme's functionality, you can determine what insights you want to gain about your audience. Take the time to carefully outline the specific data you wish to collect and the events you want to track using analytics or loyalty tools.

Also, a loyalty manager must consider various touchpoints before creating customer groups. Think ahead not only about the types of data you need but also the sources from which you'll collect insights. Doing so will ensure seamless information integration within the segmentation framework in the following steps.

Be mindful of zero-party data, which refers to the information directly provided by users themselves. You can collect these details through brief and engaging surveys similar to Sephora's or the Jeebit example below. Take a look at how effortless and quick they are for users to complete!

Sephora survey example.
Jeebit survey example.

The time it takes to collect enough data to segment a specific user varies widely by industry. In high-growth sectors such as FMCG (Fast-Moving Consumer Goods), compiling a significant purchase history is possible within a month. Kaufland, for example, managed to acquire one million users and their transaction data within just one month of launching its loyalty scheme in Poland (source in Polish). However, in industries such as airlines, where the frequency of purchases is typically several times a year (unless business travel is involved), a more extended timeframe is needed to collect enough insights.

"Consider consulting with your loyalty, sales, and marketing teams to identify data essential to the company and the program. Remember that not all data will be relevant or valuable. For example, historical data from a year ago becomes less relevant over time and may not provide an accurate picture of your current performance. By proactively identifying the required insights, you can minimize their use and focus on collecting only the information necessary for smooth operations."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

3. Define segmentation variables

  • Brainstorm and select the most relevant variables or criteria for grouping customers based on the objective and available data. Examples of segmentation variables can include demographic information (age, gender, income), geographic location, purchase behavior (frequency, recency, monetary value), product preferences, psychographic factors (lifestyle, interests, values), and interactions (website visits, support requests).
  • Conduct exploratory data analysis to identify correlations and patterns.
  • Prioritize variables that have the most significant impact on user behavior and business outcomes.

Expert remarks and best practices

"You can have multiple client groups, depending on what purposes you want to use them for. These groups can be long-term segments that you use regularly or temporary ones specifically for events like winter holidays or Valentine's Day."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

Flexibly add or remove variables based on the desired results. For example, you can identify customers who purchased last month or shoppers who bought products three months ago but are now at risk of leaving the brand (because they used to shop twice a month). 

4. Evaluate and segment the data

  • Cleanse and preprocess the collected insights to remove duplicates, inconsistencies, and missing values.
  • Normalize and standardize the data to ensure comparability across variables.
  • Apply appropriate data analysis techniques, such as clustering algorithms (k-means, hierarchical clustering), decision trees, or regression analysis, to group the information.
  • Validate the segmentation approach using statistical measures or techniques such as silhouette analysis or cross-validation.
  • Use visualization tools (such as scatter plots and heatmaps) to explore and understand your grouping results.

Expert remarks and best practices

Let's say you determined what data you want to obtain from your users. How do you verify it and assess whether the information you've gathered benefits your business?

First of all, all sales data is a sure-fire thing. Take purchase history as an example –this includes details such as where the user buys, what they buy, and in what quantity. Everything is handed to you on a silver platter!

"I strongly advocate programs whose cornerstone and standard mechanism is to reward the customer for each purchase behavior. This incentivizes the consumer to identify themselves as a loyalty program member with each transaction, as it brings them closer to the reward or other promised benefit. In turn, the brand gains the user's entire purchase history, which allows for more accurate segmentation. Keep in mind, however, that any spontaneous or selective benefit (e.g., giving discounts or loyalty points only on a narrow product line-up) leads to a situation where the user only shows their loyalty card when it pays off for them. As a result, your data may be falsified and lead to erroneous conclusions, making it extra important to segment smartly."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

5. Define customer segment profiles

  • Develop detailed profiles for each customer group based on their characteristics and behaviors.
  • Describe each segment's demographics, such as age ranges, gender distribution, income levels, and household composition.
  • Identify each group's shared preferences, needs, motivations, and purchase patterns.
  • Consider using personas or customer archetypes to bring the segments to life and facilitate understanding across the organization.
  • Incorporate qualitative research methods like interviews or focus groups to gather deeper insights into motivations and behaviors.

Expert remarks and best practices

To drive customer loyalty and properly work on customer retention, you should always have two segmentations in hand:

  1. Fixed customer segmentation, which you define permanently. These groups should be immutable, so you can analyze them over selected historical periods.
  2. Leap customer segmentation, which you use to prepare groups for certain activities, such as campaigns for Women's Day, Children's Day, Halloween, you name it.

When creating segments, generate unique offers just for them from your product pool. By doing so, you significantly increase the likelihood of making a purchase. For instance, if a user prefers Adidas and browses this eCommerce category, you can easily target them with Adidas Originals ads by analyzing their activities in your loyalty app. Note that each loyalty manager operates with their definitions of groups or profiles.

6. Evaluate customer segment attractiveness

  • Assess each group's potential value and attractiveness to prioritize resource allocation and strategic focus.
  • Analyze the size of each segment in terms of customer count or revenue contribution.
  • Evaluate the growth potential by considering market trends, client acquisition opportunities, and emerging recipients' needs.
  • Estimate the profitability of each group by analyzing margins, average order value, customer lifetime value, and cost-to-serve metrics.
  • Consider the competitive landscape and segment alignment with the company's capabilities and value proposition.

Expert remarks and best practices

To assess the viability and effectiveness of the created loyalty segments, think of a few key parameters and analyze their dynamics.

One crucial aspect to examine is the potential monetary value associated with each segment. This involves determining whether the clients in a particular group align with the predetermined economic values set by management.

To measure this, consider the average transaction value, purchase frequency, and overall spending patterns. By comparing these metrics against the predefined benchmarks, you can determine if the group meets the expected monetary standards.

In addition to financial considerations, it's essential to observe the behavior and engagement of clients within each loyalty segment. Look at customer satisfaction levels, participation in the loyalty program, and response rates to targeted marketing efforts. These factors provide valuable insights into how effective the client group is in fostering affinity.

"Evaluate the segment's growth potential, especially for the most attractive and profitable segments. Analyze whether the segment is thriving and evaluate the factors affecting its trajectory. A growing group indicates its vitality and potential for further expansion, while a declining group may require adjustments or targeted interventions to prevent attrition."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

You may ask: "Which customer groups are most attractive to me?" It primarily depends on the business strategy employed, but most visitors tend to be light or medium users.

If we consider 100% of all users, then about 20% would fall into the VIP category, 15% would be new users, and the remaining majority would be light and medium users (look at the 80/20 rule in segmentation). As a result, even a slight increase in frequency among the last two groups, for example, by 1%, can significantly affect the overall results!

"Imagine a premium retailer: If a customer visits the store once every six months, doubling the frequency of visits to twice in the same period is relatively easier than increasing VIP visits to ten times a month. This is because the light or medium users constitute a larger share of the customer base, making any incremental change in this segment more significant to overall business performance."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

7. Develop segment-specific strategies

  • Based on the profiles, design tailored marketing and communication strategies.
  • Identify the most effective channels, messaging, and promotional tactics to engage and resonate with each group.
  • Create personalized offers, incentives, and loyalty schemes that align with the unique preferences and needs of each segment.
  • Consider the customer journey and touchpoints to deliver a consistent and cohesive experience across all interactions.
  • Collaborate with cross-functional teams (for example, marketing, sales, or support) to ensure alignment.

Expert remarks and best practices

Nurture your relationships with VIPs and keep them engaged to ensure brand stickiness. One practical approach to fostering loyalty is to provide unique experiences aligned with your brand rather than simply relying on discounts. Exclusive benefits, personalized recommendations, and special events create a sense of recognition and value for customers.

Demonstrating genuine care is essential. Small gestures and going the extra mile can make a significant impact. By analyzing customer data, you can gain insights into individual preferences and tailor offers and communications accordingly. For example, a clothing retailer can use data to send personalized recommendations or early access to the new collection based on a customer's style and preferences. You can also partner with other organizations that align with your offerings to provide unique and memorable impressions for these valued shoppers.

For other users, think about something proven in the industry, such as discounts that are a popular incentive to attract the largest group of customers in various segments. Offer appealing deals on selected products/services and create a sense of exclusivity and urgency, prompting customers to make repeat purchases. 

Keep in mind, though, that discounts alone may not be enough to retain customers and improve their overall journey. This is where cross-selling and upselling come into play. Cross-selling involves suggesting complementary products or services that are a good fit for the customer's initial purchase. By making suitable recommendations, you not only increase the average order value but also provide audiences with a more comprehensive shopping experience.

Lastly, prepare a dedicated strategy for a specific group of customers known as "red-priced" users or bargain hunters. These individuals tend to make purchases only when there's a discount available. Treating them as a distinct category with a dedicated campaign and strategy is necessary to capture their attention and encourage their return. Include promoting discounted products, presenting exclusive offers, or creating limited-time offers that cater to this segment. Applying the tactics outlined will certainly encourage "red-priced" users to keep coming back for more and reinforce their sense of value.

8. Implement and measure results

  • Execute segment-specific strategies across relevant marketing channels and touchpoints.
  • Deploy marketing campaigns, communications, and loyalty initiatives targeted at each group.
  • Monitor and measure the performance and effectiveness of the strategies by tracking key performance indicators (KPIs) such as user engagement, conversion rates, satisfaction scores, revenue growth, and retention rates.
  • Utilize analytics tools and dashboards to gather real-time insights and make data-driven adjustments.
  • Implement A/B testing or controlled experiments to evaluate the impact of segment-specific strategies compared to a control group.

Expert remarks and best practices

"You can optimize loyalty grouping efforts and drive better customer churn, retention, and engagement rates by tailoring marketing approaches, using preferred channels, and measuring key performance indicators."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

Regularly analyze insights, make data-driven adjustments, and optimize your customer segmentation strategy for an effective loyalty program.

9. Communicate and operationalize

  • Share the profiles, strategies, and insights with relevant organizational stakeholders, such as marketing, sales, and support representatives.
  • Conduct workshops, presentations, or training sessions to ensure a thorough understanding of the grouping approach and its implications for different departments.
  • Foster collaboration and alignment among teams to ensure consistent messaging and coordinated efforts across touchpoints.
  • Create internal documentation or knowledge repositories to serve as a reference for employees involved in end-user interactions.
  • Incorporate the segmentation approach into key business processes, such as product development, pricing strategies, and support protocols.
  • Establish clear metrics and targets for each group, and regularly communicate progress and achievements to keep teams motivated and focused.

Expert remarks and best practices

To ensure effective communication and implementation of the loyalty campaign, inform the entire team about its details and objectives. You can do this by using available channels and trusted strategies.

Firstly, ensure that all team members clearly understand the loyalty program's rules and how it works. Encourage clients to contact customer care, reach out on social media, or speak to the sales team to inquire about the program and understand it comprehensively.

To ensure that frontline customer service representatives are well-informed about the program, share campaign information with the entire team. One effective way to do this is by using a shared information hub where employees can access relevant materials and resources. You can also use regular business newsletters or marketing communications to provide updates and reminders about the ongoing loyalty campaign. In addition, consider placing a promotional display window in the store window to remind customers of the program and attract their attention visually.

Provide each team with a guidebook outlining the scheme's operating rules for smooth implementation. Also, give them access to a calendar of marketing activities for a specific period and provide instructions on effectively communicating them.

"The manager in charge of the program should ensure the calendar contains up-to-date information on running segmented campaigns. And the team will have full knowledge and understanding of the available offers and answer customers' questions. This approach can effectively increase team member engagement and improve the customer experience!"

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

To enhance the consistency and preparedness of team members when dealing with customers, the loyalty manager can provide employees with pre-approved responses. These pre-prepared answers ensure that everyone's appropriately equipped and avoid spontaneous or inconsistent responses. Ultimately, this approach helps maintain coherent brand communication and increases customer satisfaction.

10. Refine and iterate

  • Establish a separate Data and Research team to find your most valuable customers by continuously analyzing and refining your customer segmentation strategies.
  • Assess the effectiveness of the grouping strategies and make necessary adjustments to optimize results.
  • Actively use customer feedback, insights, and performance data.
  • Conduct further analysis to identify additional variables or refine existing ones based on their predictive power and relevance.
  • Stay updated on customer behaviors, market trends, and competitive landscape changes to ensure the division remains relevant and effective over time.
  • Conduct periodic segmentation refreshes to account for evolving customer preferences and market dynamics.
  • Foster a culture of experimentation and learning to drive ongoing improvement in grouping and personalization efforts.

Expert remarks and best practices

"The frequency of analyzing and updating segmentation analytics dashboards can vary from industry to industry. Yet this activity is essential when developing a loyalty campaign."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

First, divide your customer base into smaller groups and conduct targeted segmentation campaigns for each of them that will last several months. Keep customers informed of your activities and provide them with promotional coupons.

Be sure to send a well-designed and attention-grabbing follow-up message after a maximum of two weeks from the start of the campaign. Then, send a "final reminder" two days before the campaign ends, emphasizing that the coupon will soon expire.

After each segmentation campaign, evaluate its impact by recalculating the generated profits. By adjusting the variables over time, you can freely relaunch the campaign with increased confidence in its effectiveness.

Common loyalty segmentation approaches

Let's explore approaches to creating standard customer segments, including the simplest RFM segmentation, behavioral, attitudinal, and hybrid models, to help your business enhance brand affinity and drive growth.

RFM segmentation

RFM (Recency, Frequency, Monetary) analysis categorizes customers based on their past purchase behavior. This model involves evaluating three key factors:

  • Recency — how recently a client made a purchase.
  • Frequency — how often a client makes purchases.
  • Monetary value — the amount of money spent by a client.

Practical example

Suppose you run an online clothing store. Through RFM analysis, you may discover that your audience group consists of those who buy very frequently (a few times a week) and spend significant amounts of money. You can target these high-value customers with exclusive offers or rewards to further nurture their loyalty. 

Behavioral segmentation

Use behavioral patterns to identify distinct groups by looking at parameters such as product preferences, browsing habits, or engagement with marketing materials.

Practical example

Let's say you operate a streaming service. Through behavioral patterns segmentation, you may discover users who frequently watch action movies, share recommendations on social media, and actively participate in surveys. You can then customize promotions or recommend similar content to enhance their engagement.

Attitudinal segmentation

This involves categorizing recipients based on their attitudes, preferences, and opinions toward a brand or product. This approach delves into understanding people's motivations and perceptions.

Practical example

Suppose you have a skincare brand. By conducting surveys or analyzing feedback and opinions, you might identify people who prioritize organic and sustainable products. Tailoring your messaging and product offerings to align with their values can strengthen their dedication and differentiate your brand.

Hybrid segmentation model

Some businesses prefer a combination of different approaches, known as a hybrid model. These models integrate, for example, RFM or other methods but with similar guidelines for segmentation, behavior patterns, and attitude segmentation to better understand loyalty.

Practical example

For instance, if you had a hotel chain, you could use:

  • RFM analysis to identify your most frequent and high-spending guests.
  • Behavioral patterns to understand preferences like room preferences or dining choices.
  • Attitudinal segmentation to uncover the most loyal customers who value personalized service and luxury experiences.
"In a hybrid model, you may want to consider additional options that deepen segmentation toward communication optimization. This includes dividing customers based on their preferences for graphics, text, and communication methods (such as email, push notifications, MMS, or WhatsApp). It also involves adjusting the frequency and intensity of messages, the color scheme, and the ratio of images to text to align with each group's preferences."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

By blending these approaches, you can design loyalty programs and experiences that cater to different needs.

Challenges in implementing loyalty segmentation

Communication noise

Implementing loyalty grouping requires effective communication to inform customers and stakeholders about the program and its benefits. However, one of the challenges is dealing with communication noise. With the abundance of marketing messages and promotions, clients may overlook or ignore the loyalty scheme information, considering it as just another marketing tactic. 

Conversely, some employees have different responsibilities and don't always keep on track of company news. Overcoming this challenge requires adopting innovative and targeted messaging strategies that capture employees' attention and clearly communicate the unique benefits of the loyalty program.

Tackling communication noise

As mentioned in the step “Communicate and operationalize”, as the program manager, you should inform the entire team about its details and objectives. You can do this by using available channels and trusted strategies.

Collecting the right amount and quality of data

To effectively implement loyalty grouping, you must first access relevant information sets. However, collecting high-quality data can be tricky as this involves identifying key variables and indicators to categorize valuable customers based on their behavior and loyalty preferences.

Gathering these insights also requires integrating information from various sources while ensuring data accuracy, privacy, and compliance. Then what's left is to analyze and interpret the collected data to derive useful insights, which can be demanding even for an experienced manager.

Finding a balance

At this point, you know that segmentation involves dividing the customer base into distinct groups based on specific characteristics or behaviors. And another challenge here is to find the right balance in grouping depth. 

Going into too much detail and creating too many profiles can degrade results — loyalty managers may find it difficult to allocate resources and provide personalized experiences effectively.

On the other hand, having too few groups may result in inadequate personalization, reducing the impact of loyalty initiatives. Striking the optimal balance requires careful analysis and consideration of each segment's potential benefits and costs.

Overcoming the dilemma of loyalty program effectiveness

Loyalty managers can sometimes feel lost when faced with the question, "How many segments should I create for optimal results?" Of course, this dilemma stems from the desire to maximize program impact while avoiding unnecessary complexity.

Ideally, loyalty managers should strive to create as few groups as possible while pointing out their validity. This involves identifying the correct number of segments and effectively capturing preferences, behaviors, and potential value. Overcoming the challenge of maintaining "data balance" requires a comprehensive understanding of the customer base, careful data analysis, and informed decision-making.

Ethical considerations in loyalty segmentation

Privacy and data protection

Ethical issues related to privacy and data protection are central themes in customer grouping. Your Privacy and Data Protection department will undoubtedly raise questions about the purpose of data collection, which requires you to take a thoughtful approach. Also, different regions have different privacy laws and agencies. That said, according to the EU-observed and internationally known General Data Protection Regulation (GDPR), you must define the scope of data use to ensure compliance.

One important aspect is to gather only the minimum data necessary for the successful operation of your business and loyalty program. For example, obtaining a customer's full date of birth to deliver a birthday card is unnecessary. Instead, the day and month are sufficient for this purpose.

Another issue is the question of gender, which has become increasingly nuanced recently. In some cases, the  Privacy and Data Protection department may refuse to include a gender field on a registration form because it might be incompatible with the purpose of data collection or inconsistent with brand values. Just so you know, there are brands that pride themselves on openness and don't prioritize gender aspects. 

It's worth noting, however, that gender may be relevant to language issues. In languages such as Czech or Polish, verb conjugations often depend on gender. As a result, if linguistic accuracy is a priority, it becomes necessary to ask about gender. This issue becomes particularly important when localizing a loyalty application in different regions.

Similarly, pronouns can serve as substitutes and solid arguments for the legal department to consider language aspects when implementing a loyalty program. Considering these factors, you can ensure inclusivity and respect for diverse linguistic preferences.

In summary, ethical considerations in loyalty segmentation, particularly concerning privacy and data protection, require careful thought and adherence to regulations. Defining the purpose of data collection, minimizing the data collected, and addressing gender-related language considerations are vital steps in creating an ethical and inclusive loyalty program.

Transparency and consent

Organizations are expected to comply with regulations such as the well-known RODO, emphasizing the importance of transparency and consent. However, effectively implementing these principles and ensuring that recipients fully understand the risks associated with sharing their data is a major hurdle.

"When it comes to personalized communications as part of a loyalty program, obtaining adequate consent for such communication is essential. Also, a visible unsubscribe button for marketing communications is key to respecting customers' preferences."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

Use marketing automation tools to streamline the compliance process and quickly assess user engagement levels. Determine the amount of content your recipients are willing to accept based on metrics such as open rate (OR) and click-through rate (CTR). Thanks to that, you can avoid overwhelming them with excessive messages. 

On top of that, when a recipient decides to unsubscribe, suggest options to specify news they no longer want to receive, such as product information, sales updates, or business announcements. This approach will help you retain users by tailoring messages accordingly.

Note that unsubscribing from marketing emails doesn't necessarily mean that you should exclude customers from receiving messages related to your loyalty program. On the contrary!

Chances are that they're still interested in messages related to transactional activities, such as earned points, levels, or badges. Accordingly, proper differentiation of consent ensures that users remain engaged with your loyalty program while avoiding unwanted marketing messaging.

An example of expanded consent in a newsletter, from TechCrunch.

When designing consent forms, intuitiveness and ease of use are a priority. Balancing the regulatory requirements of GDPR with user experience (UX) principles are binding for successful campaigns. By creating clear and concise consent forms, you can ensure that customers understand the purpose of data collection and that you care about their rights.

In summary, ethical considerations in creating customer segments require companies to prioritize transparency and consent. You can adhere to ethical standards while maintaining a positive relationship with customers by effectively communicating the risks of data sharing, offering clear unsubscribe options, and designing intuitive consent forms. These measures can help build trust and ensure recipients feel respected and in control of their personal information.

Fairness, equity, and conscious consumerism 

Recognize and respect diversity among individuals, as everyone celebrates different occasions and has unique perspectives. For example, when planning marketing campaigns around specific events such as Mother's Day or Christmas, it's essential to show empathy and recognize that not everyone has a mother or celebrates Christian holidays. 

In such cases, it becomes necessary to take a more inclusive approach. Instead of using specific references such as "Christmas sales," it'd be more appropriate to communicate it more broadly, such as "winter sales." This approach allows for a diversity of customer backgrounds and beliefs while avoiding the potential exclusion or alienation of specific segments of the population.

Moreover, ethical grouping goes beyond mere inclusivity in marketing campaigns. It includes considering the more general implications of your strategies and making sure they don't perpetuate unfair advantage or inequality among customers. Examine whether your practices disproportionately favor certain groups or lead to unequal treatment.

Another element — conscious consumerism — emphasizes the importance of ethical decision-making and responsible consumption. Your grouping process should align with the values and preferences of conscious shoppers, offering options that reflect sustainable, socially responsible, and environmentally friendly practices.

For example, companies can reward users who consistently choose environmentally friendly products or demonstrate ethical behavior in their purchasing decisions. Incorporating conscious consumerism into segmentation can strengthen a sense of shared values with consumers, leading to stronger brand loyalty and positive social impact. One such segment is millennials and Generation Z, who prioritize environmental and ethical issues. By aligning with their values, companies can establish a strong connection with these younger demographics, fostering brand loyalty and driving positive social impact. 

Socially responsible consumers prioritize ethical considerations such as fair trade and labor conditions and respond well to conscious consumerism. By emphasizing your commitment to social responsibility and offering incentives that reinforce these values, you can engage and build loyalty among this segment. Additionally, targeting health-conscious consumers through conscious consumerism is a practical approach. By emphasizing the health benefits and sustainability aspects of products, companies can capture the attention of these consumers and strengthen their brand positioning.

Lastly, niche markets like vegan or vegetarian consumers have specific ethical or environmental considerations. Segmenting and targeting these markets with tailored messaging and rewards can effectively engage and satisfy their unique needs, leading to dedicated customer bases and a reputation as a trusted product provider that aligns with their ethical choices.

An example of conscious consumerism in loyalty programs.

Summary

The foundation of effective loyalty segmentation lies in a comprehensive understanding of your customer base. By leveraging data analytics and customer insights, you can uncover valuable patterns and trends to help you identify distinct segments and their specific characteristics. This knowledge will empower you to deliver personalized experiences and relevant offers that resonate with each group, ultimately deepening their loyalty to your brand.

Continuously monitor and evaluate the effectiveness of your grouping strategy. Regularly assess the performance of your marketing campaigns, analyze feedback, and measure key metrics to identify areas for improvement and refine your approach to customer loyalty over time. Adaptability and agility will be critical in an ever-evolving marketplace, so be prepared to iterate and optimize.

Implementing customer segments can be pretty challenging, but the potential rewards are well worth the effort. So, take the first step today. Dive into your customer data, identify meaningful groups, and start crafting targeted strategies to differentiate your brand and create loyal advocates.

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Loyalty segmentation: a step-by-step guide

Contributors
Monika Motus
Loyalty Expert (formerly Starbucks, iSpot, and Douglas)
Paweł Dziadkowiec
Loyalty Strategy Consultant
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Boosting brand advocacy is key for companies seeking to grow in an increasingly competitive market. But, alarmingly, the one-size-fits-all approach to customer engagement has become obsolete.

To truly maximize the potential of your program, you must delve deeper into understanding your client base and realize that not all existing loyal customers are the same.

This realization sparks the beginning of customer loyalty segmentation, a strategic framework that allows any company to tailor its initiatives to different tastes and needs.

Buckle up because, in this guide, we'll take you step by step through implementing loyalty groups, empowering you to forge stronger connections, foster brand advocacy, and ultimately drive sustainable business growth.

To make sure you are equipped with the best knowledge to put all steps into action, we’ll explain the four most common approaches, such as behavioral segmentation and attitudinal segmentation.

Lastly, we cover the most common challenges and ethical considerations faced while implementing programs. Let’s start!

What is loyalty segmentation?

Loyalty segmentation is part of a marketing strategy that divides a company's customer base into distinct groups based on loyalty behaviors, spending habits, attitudes, and transactions to promote marketing and business goals.

This segmentation approach aims to identify and understand different types of customers in terms of their loyalty levels and preferences. Loyalty grouping typically involves analyzing:

  • Product/service usage
  • Purchase frequency
  • Spending patterns
  • Brand advocacy
  • Feedback

Then you can use the information gathered to tailor marketing efforts and loyalty schemes and to categorize people into groups to engage and retain them in different ways.

Key steps in loyalty segmentation

As a loyalty manager, you may face the challenging task of implementing a loyalty segmentation process. It might seem overwhelming but only if you don't know where to start, so fear not! We put together a comprehensive step-by-step list to guide you through the process.

These steps will equip you with the knowledge and tools to group and effectively engage your target audience. Let's dive into the details.

1. Define the objective

Clearly articulate the specific goal of the loyalty segmentation process, such as: 

  • Improve planning and execution of commercial activities across loyalty, sales, and marketing teams.
  • Have a better insight into the drivers of loyalty, value, and migration to design specific initiatives based on the customer lifecycle stage.
  • Streamline the acquisition process and accelerate value creation for new customers.
  • Identify opportunities to acquire new clients.
  • Improve contact strategies based on customer potential and future behavior.
  • Improve the effectiveness of targeted campaigns across channels.

Consider the desired outcomes, timeframe, and alignment with overall business objectives.

Collaborate with relevant stakeholders to ensure alignment and buy-in.

Expert remarks and best practices

Clearly articulate the purpose of implementing loyalty segmentation in your case. Determine what specific insights or outcomes you want to achieve through this process, such as increasing retention, identifying high-value clients, or personalizing marketing efforts.

"Loyalty segmentation aims to enhance customer loyalty and maximize customer lifetime value. In addition to the primary objective, it also has secondary goals, including optimizing resource allocation, discovering valuable insights through data analysis, and fostering involvement and gratification. You can create a comprehensive framework for long-term success by addressing the primary and secondary objectives."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

2. Gather customer data

Identify the relevant data sources, including first-party data, second-party data, and third-party data from external vendors. Examples of what these mean:

  • Zero-party data: preferences and interests (user's likes, dislikes, hobbies, and personal preferences), purchase intent (wishlist items, items added to a shopping cart, or inquiries about pricing or availability), survey responses, personalization information (the preferred communication channels, content preferences, or specific interests), reviews, ratings, comments, email subscriptions, event registrations (information provided by users when registering for events, webinars, conferences, or workshops), location data (address details or preferences for localized content or offers).
  • First-party data: customer registration information (name, email, address), purchase history, website analytics (page views, click-through rates), app usage data, social media interactions, email and newsletter subscriptions, customer service interactions, loyalty program data, offline interactions (in-store purchases, event attendance).
  • Second-party data: data-sharing agreements, co-branding initiatives, business data exchanges, joint research or surveys, offline data partnerships, publisher/advertiser data sharing, and social media collaborations.
  • Third-party data from external vendors: demographic data (age, gender, income), psychographic data (attitudes, interests, lifestyle), behavioral data (online activities, purchase behavior), geolocation data (physical location, travel patterns), social media data (profiles, connections, posts), consumer purchase data (purchase history), market research data (surveys, industry analysis), data aggregators (collect data from various sources).

Determine the data collection methods, such as surveys, online forms, data scraping, or API integrations.

Ensure compliance with data privacy regulations and obtain necessary permissions.

Explore data enrichment options to augment existing data with additional insights from external sources.

Expert remarks and best practices

Data is a prerequisite — there's no point in starting segmentation until you have enough input. You must have a solid set of information to have a basis for building a reliable segmentation, which means transactional, behavioral, and declarative data.

Where to start?

Start by gathering essential customer data, such as their first name and any other necessary personal information. If you have an online store or a mobile loyalty app, you can easily track customer IDs, which provide valuable insights into user behavior. By doing so, you'll gain comprehensive knowledge about each customer's actions, preferences, navigation patterns, and interests in specific product categories.

Behavioral data is a must for an online business. It provides valuable insights into customer expectations, purchase preferences, and browsing behavior, such as products added to the shopping cart but not purchased for a reason — these motives could range from financial constraints to waiting for discounts or promotional offers. Understanding this data is essential for creating targeted offers for distinctive customer groups.

Regarding data analysis, managers recognize and embrace the importance of utilizing multiple data sources. They understand that relying solely on data from the loyalty program, especially if it has recently been launched, may not provide a comprehensive understanding of their business and customers.

Instead, managers can leverage existing information from various sources, such as CRM (Customer Relationship Management) systems, BI (Business Intelligence) systems, and more, and map the data. By incorporating both structured and unstructured inputs from available sources, supervisors can gain a more holistic view of their operations and customer behavior, empowering them with valuable insights.

The effectiveness of data analysis relies on the freshness and relevance of the chosen data sources for segmentation. Outdated data can lead to inaccurate insights and misguided decision-making. Consequently, managers prioritize regularly updating the data sources to ensure they reflect the current state of the business. 

Equally important is the careful selection of data sources for segmentation. Managers understand that not all sources are equally informative or relevant to the specific analysis at hand. That's why they critically evaluate the most suitable data sources that align with their objectives. By selecting diverse and complementary data sources, managers can uncover hidden patterns and make more informed decisions, fostering improved outcomes.

What to do and what to avoid

Also, managers remain mindful of avoiding redundancy in their data sources. They understand that redundant data sources can introduce unnecessary duplication and confusion during analysis. Supervisors streamline their analysis efforts by focusing on unique and distinct data sources and concentrating on the most pertinent information. 

If you're at the initial stage of designing your loyalty scheme's functionality, you can determine what insights you want to gain about your audience. Take the time to carefully outline the specific data you wish to collect and the events you want to track using analytics or loyalty tools.

Also, a loyalty manager must consider various touchpoints before creating customer groups. Think ahead not only about the types of data you need but also the sources from which you'll collect insights. Doing so will ensure seamless information integration within the segmentation framework in the following steps.

Be mindful of zero-party data, which refers to the information directly provided by users themselves. You can collect these details through brief and engaging surveys similar to Sephora's or the Jeebit example below. Take a look at how effortless and quick they are for users to complete!

Sephora survey example.
Jeebit survey example.

The time it takes to collect enough data to segment a specific user varies widely by industry. In high-growth sectors such as FMCG (Fast-Moving Consumer Goods), compiling a significant purchase history is possible within a month. Kaufland, for example, managed to acquire one million users and their transaction data within just one month of launching its loyalty scheme in Poland (source in Polish). However, in industries such as airlines, where the frequency of purchases is typically several times a year (unless business travel is involved), a more extended timeframe is needed to collect enough insights.

"Consider consulting with your loyalty, sales, and marketing teams to identify data essential to the company and the program. Remember that not all data will be relevant or valuable. For example, historical data from a year ago becomes less relevant over time and may not provide an accurate picture of your current performance. By proactively identifying the required insights, you can minimize their use and focus on collecting only the information necessary for smooth operations."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

3. Define segmentation variables

  • Brainstorm and select the most relevant variables or criteria for grouping customers based on the objective and available data. Examples of segmentation variables can include demographic information (age, gender, income), geographic location, purchase behavior (frequency, recency, monetary value), product preferences, psychographic factors (lifestyle, interests, values), and interactions (website visits, support requests).
  • Conduct exploratory data analysis to identify correlations and patterns.
  • Prioritize variables that have the most significant impact on user behavior and business outcomes.

Expert remarks and best practices

"You can have multiple client groups, depending on what purposes you want to use them for. These groups can be long-term segments that you use regularly or temporary ones specifically for events like winter holidays or Valentine's Day."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

Flexibly add or remove variables based on the desired results. For example, you can identify customers who purchased last month or shoppers who bought products three months ago but are now at risk of leaving the brand (because they used to shop twice a month). 

4. Evaluate and segment the data

  • Cleanse and preprocess the collected insights to remove duplicates, inconsistencies, and missing values.
  • Normalize and standardize the data to ensure comparability across variables.
  • Apply appropriate data analysis techniques, such as clustering algorithms (k-means, hierarchical clustering), decision trees, or regression analysis, to group the information.
  • Validate the segmentation approach using statistical measures or techniques such as silhouette analysis or cross-validation.
  • Use visualization tools (such as scatter plots and heatmaps) to explore and understand your grouping results.

Expert remarks and best practices

Let's say you determined what data you want to obtain from your users. How do you verify it and assess whether the information you've gathered benefits your business?

First of all, all sales data is a sure-fire thing. Take purchase history as an example –this includes details such as where the user buys, what they buy, and in what quantity. Everything is handed to you on a silver platter!

"I strongly advocate programs whose cornerstone and standard mechanism is to reward the customer for each purchase behavior. This incentivizes the consumer to identify themselves as a loyalty program member with each transaction, as it brings them closer to the reward or other promised benefit. In turn, the brand gains the user's entire purchase history, which allows for more accurate segmentation. Keep in mind, however, that any spontaneous or selective benefit (e.g., giving discounts or loyalty points only on a narrow product line-up) leads to a situation where the user only shows their loyalty card when it pays off for them. As a result, your data may be falsified and lead to erroneous conclusions, making it extra important to segment smartly."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

5. Define customer segment profiles

  • Develop detailed profiles for each customer group based on their characteristics and behaviors.
  • Describe each segment's demographics, such as age ranges, gender distribution, income levels, and household composition.
  • Identify each group's shared preferences, needs, motivations, and purchase patterns.
  • Consider using personas or customer archetypes to bring the segments to life and facilitate understanding across the organization.
  • Incorporate qualitative research methods like interviews or focus groups to gather deeper insights into motivations and behaviors.

Expert remarks and best practices

To drive customer loyalty and properly work on customer retention, you should always have two segmentations in hand:

  1. Fixed customer segmentation, which you define permanently. These groups should be immutable, so you can analyze them over selected historical periods.
  2. Leap customer segmentation, which you use to prepare groups for certain activities, such as campaigns for Women's Day, Children's Day, Halloween, you name it.

When creating segments, generate unique offers just for them from your product pool. By doing so, you significantly increase the likelihood of making a purchase. For instance, if a user prefers Adidas and browses this eCommerce category, you can easily target them with Adidas Originals ads by analyzing their activities in your loyalty app. Note that each loyalty manager operates with their definitions of groups or profiles.

6. Evaluate customer segment attractiveness

  • Assess each group's potential value and attractiveness to prioritize resource allocation and strategic focus.
  • Analyze the size of each segment in terms of customer count or revenue contribution.
  • Evaluate the growth potential by considering market trends, client acquisition opportunities, and emerging recipients' needs.
  • Estimate the profitability of each group by analyzing margins, average order value, customer lifetime value, and cost-to-serve metrics.
  • Consider the competitive landscape and segment alignment with the company's capabilities and value proposition.

Expert remarks and best practices

To assess the viability and effectiveness of the created loyalty segments, think of a few key parameters and analyze their dynamics.

One crucial aspect to examine is the potential monetary value associated with each segment. This involves determining whether the clients in a particular group align with the predetermined economic values set by management.

To measure this, consider the average transaction value, purchase frequency, and overall spending patterns. By comparing these metrics against the predefined benchmarks, you can determine if the group meets the expected monetary standards.

In addition to financial considerations, it's essential to observe the behavior and engagement of clients within each loyalty segment. Look at customer satisfaction levels, participation in the loyalty program, and response rates to targeted marketing efforts. These factors provide valuable insights into how effective the client group is in fostering affinity.

"Evaluate the segment's growth potential, especially for the most attractive and profitable segments. Analyze whether the segment is thriving and evaluate the factors affecting its trajectory. A growing group indicates its vitality and potential for further expansion, while a declining group may require adjustments or targeted interventions to prevent attrition."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

You may ask: "Which customer groups are most attractive to me?" It primarily depends on the business strategy employed, but most visitors tend to be light or medium users.

If we consider 100% of all users, then about 20% would fall into the VIP category, 15% would be new users, and the remaining majority would be light and medium users (look at the 80/20 rule in segmentation). As a result, even a slight increase in frequency among the last two groups, for example, by 1%, can significantly affect the overall results!

"Imagine a premium retailer: If a customer visits the store once every six months, doubling the frequency of visits to twice in the same period is relatively easier than increasing VIP visits to ten times a month. This is because the light or medium users constitute a larger share of the customer base, making any incremental change in this segment more significant to overall business performance."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

7. Develop segment-specific strategies

  • Based on the profiles, design tailored marketing and communication strategies.
  • Identify the most effective channels, messaging, and promotional tactics to engage and resonate with each group.
  • Create personalized offers, incentives, and loyalty schemes that align with the unique preferences and needs of each segment.
  • Consider the customer journey and touchpoints to deliver a consistent and cohesive experience across all interactions.
  • Collaborate with cross-functional teams (for example, marketing, sales, or support) to ensure alignment.

Expert remarks and best practices

Nurture your relationships with VIPs and keep them engaged to ensure brand stickiness. One practical approach to fostering loyalty is to provide unique experiences aligned with your brand rather than simply relying on discounts. Exclusive benefits, personalized recommendations, and special events create a sense of recognition and value for customers.

Demonstrating genuine care is essential. Small gestures and going the extra mile can make a significant impact. By analyzing customer data, you can gain insights into individual preferences and tailor offers and communications accordingly. For example, a clothing retailer can use data to send personalized recommendations or early access to the new collection based on a customer's style and preferences. You can also partner with other organizations that align with your offerings to provide unique and memorable impressions for these valued shoppers.

For other users, think about something proven in the industry, such as discounts that are a popular incentive to attract the largest group of customers in various segments. Offer appealing deals on selected products/services and create a sense of exclusivity and urgency, prompting customers to make repeat purchases. 

Keep in mind, though, that discounts alone may not be enough to retain customers and improve their overall journey. This is where cross-selling and upselling come into play. Cross-selling involves suggesting complementary products or services that are a good fit for the customer's initial purchase. By making suitable recommendations, you not only increase the average order value but also provide audiences with a more comprehensive shopping experience.

Lastly, prepare a dedicated strategy for a specific group of customers known as "red-priced" users or bargain hunters. These individuals tend to make purchases only when there's a discount available. Treating them as a distinct category with a dedicated campaign and strategy is necessary to capture their attention and encourage their return. Include promoting discounted products, presenting exclusive offers, or creating limited-time offers that cater to this segment. Applying the tactics outlined will certainly encourage "red-priced" users to keep coming back for more and reinforce their sense of value.

8. Implement and measure results

  • Execute segment-specific strategies across relevant marketing channels and touchpoints.
  • Deploy marketing campaigns, communications, and loyalty initiatives targeted at each group.
  • Monitor and measure the performance and effectiveness of the strategies by tracking key performance indicators (KPIs) such as user engagement, conversion rates, satisfaction scores, revenue growth, and retention rates.
  • Utilize analytics tools and dashboards to gather real-time insights and make data-driven adjustments.
  • Implement A/B testing or controlled experiments to evaluate the impact of segment-specific strategies compared to a control group.

Expert remarks and best practices

"You can optimize loyalty grouping efforts and drive better customer churn, retention, and engagement rates by tailoring marketing approaches, using preferred channels, and measuring key performance indicators."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

Regularly analyze insights, make data-driven adjustments, and optimize your customer segmentation strategy for an effective loyalty program.

9. Communicate and operationalize

  • Share the profiles, strategies, and insights with relevant organizational stakeholders, such as marketing, sales, and support representatives.
  • Conduct workshops, presentations, or training sessions to ensure a thorough understanding of the grouping approach and its implications for different departments.
  • Foster collaboration and alignment among teams to ensure consistent messaging and coordinated efforts across touchpoints.
  • Create internal documentation or knowledge repositories to serve as a reference for employees involved in end-user interactions.
  • Incorporate the segmentation approach into key business processes, such as product development, pricing strategies, and support protocols.
  • Establish clear metrics and targets for each group, and regularly communicate progress and achievements to keep teams motivated and focused.

Expert remarks and best practices

To ensure effective communication and implementation of the loyalty campaign, inform the entire team about its details and objectives. You can do this by using available channels and trusted strategies.

Firstly, ensure that all team members clearly understand the loyalty program's rules and how it works. Encourage clients to contact customer care, reach out on social media, or speak to the sales team to inquire about the program and understand it comprehensively.

To ensure that frontline customer service representatives are well-informed about the program, share campaign information with the entire team. One effective way to do this is by using a shared information hub where employees can access relevant materials and resources. You can also use regular business newsletters or marketing communications to provide updates and reminders about the ongoing loyalty campaign. In addition, consider placing a promotional display window in the store window to remind customers of the program and attract their attention visually.

Provide each team with a guidebook outlining the scheme's operating rules for smooth implementation. Also, give them access to a calendar of marketing activities for a specific period and provide instructions on effectively communicating them.

"The manager in charge of the program should ensure the calendar contains up-to-date information on running segmented campaigns. And the team will have full knowledge and understanding of the available offers and answer customers' questions. This approach can effectively increase team member engagement and improve the customer experience!"

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

To enhance the consistency and preparedness of team members when dealing with customers, the loyalty manager can provide employees with pre-approved responses. These pre-prepared answers ensure that everyone's appropriately equipped and avoid spontaneous or inconsistent responses. Ultimately, this approach helps maintain coherent brand communication and increases customer satisfaction.

10. Refine and iterate

  • Establish a separate Data and Research team to find your most valuable customers by continuously analyzing and refining your customer segmentation strategies.
  • Assess the effectiveness of the grouping strategies and make necessary adjustments to optimize results.
  • Actively use customer feedback, insights, and performance data.
  • Conduct further analysis to identify additional variables or refine existing ones based on their predictive power and relevance.
  • Stay updated on customer behaviors, market trends, and competitive landscape changes to ensure the division remains relevant and effective over time.
  • Conduct periodic segmentation refreshes to account for evolving customer preferences and market dynamics.
  • Foster a culture of experimentation and learning to drive ongoing improvement in grouping and personalization efforts.

Expert remarks and best practices

"The frequency of analyzing and updating segmentation analytics dashboards can vary from industry to industry. Yet this activity is essential when developing a loyalty campaign."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

First, divide your customer base into smaller groups and conduct targeted segmentation campaigns for each of them that will last several months. Keep customers informed of your activities and provide them with promotional coupons.

Be sure to send a well-designed and attention-grabbing follow-up message after a maximum of two weeks from the start of the campaign. Then, send a "final reminder" two days before the campaign ends, emphasizing that the coupon will soon expire.

After each segmentation campaign, evaluate its impact by recalculating the generated profits. By adjusting the variables over time, you can freely relaunch the campaign with increased confidence in its effectiveness.

Common loyalty segmentation approaches

Let's explore approaches to creating standard customer segments, including the simplest RFM segmentation, behavioral, attitudinal, and hybrid models, to help your business enhance brand affinity and drive growth.

RFM segmentation

RFM (Recency, Frequency, Monetary) analysis categorizes customers based on their past purchase behavior. This model involves evaluating three key factors:

  • Recency — how recently a client made a purchase.
  • Frequency — how often a client makes purchases.
  • Monetary value — the amount of money spent by a client.

Practical example

Suppose you run an online clothing store. Through RFM analysis, you may discover that your audience group consists of those who buy very frequently (a few times a week) and spend significant amounts of money. You can target these high-value customers with exclusive offers or rewards to further nurture their loyalty. 

Behavioral segmentation

Use behavioral patterns to identify distinct groups by looking at parameters such as product preferences, browsing habits, or engagement with marketing materials.

Practical example

Let's say you operate a streaming service. Through behavioral patterns segmentation, you may discover users who frequently watch action movies, share recommendations on social media, and actively participate in surveys. You can then customize promotions or recommend similar content to enhance their engagement.

Attitudinal segmentation

This involves categorizing recipients based on their attitudes, preferences, and opinions toward a brand or product. This approach delves into understanding people's motivations and perceptions.

Practical example

Suppose you have a skincare brand. By conducting surveys or analyzing feedback and opinions, you might identify people who prioritize organic and sustainable products. Tailoring your messaging and product offerings to align with their values can strengthen their dedication and differentiate your brand.

Hybrid segmentation model

Some businesses prefer a combination of different approaches, known as a hybrid model. These models integrate, for example, RFM or other methods but with similar guidelines for segmentation, behavior patterns, and attitude segmentation to better understand loyalty.

Practical example

For instance, if you had a hotel chain, you could use:

  • RFM analysis to identify your most frequent and high-spending guests.
  • Behavioral patterns to understand preferences like room preferences or dining choices.
  • Attitudinal segmentation to uncover the most loyal customers who value personalized service and luxury experiences.
"In a hybrid model, you may want to consider additional options that deepen segmentation toward communication optimization. This includes dividing customers based on their preferences for graphics, text, and communication methods (such as email, push notifications, MMS, or WhatsApp). It also involves adjusting the frequency and intensity of messages, the color scheme, and the ratio of images to text to align with each group's preferences."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

By blending these approaches, you can design loyalty programs and experiences that cater to different needs.

Challenges in implementing loyalty segmentation

Communication noise

Implementing loyalty grouping requires effective communication to inform customers and stakeholders about the program and its benefits. However, one of the challenges is dealing with communication noise. With the abundance of marketing messages and promotions, clients may overlook or ignore the loyalty scheme information, considering it as just another marketing tactic. 

Conversely, some employees have different responsibilities and don't always keep on track of company news. Overcoming this challenge requires adopting innovative and targeted messaging strategies that capture employees' attention and clearly communicate the unique benefits of the loyalty program.

Tackling communication noise

As mentioned in the step “Communicate and operationalize”, as the program manager, you should inform the entire team about its details and objectives. You can do this by using available channels and trusted strategies.

Collecting the right amount and quality of data

To effectively implement loyalty grouping, you must first access relevant information sets. However, collecting high-quality data can be tricky as this involves identifying key variables and indicators to categorize valuable customers based on their behavior and loyalty preferences.

Gathering these insights also requires integrating information from various sources while ensuring data accuracy, privacy, and compliance. Then what's left is to analyze and interpret the collected data to derive useful insights, which can be demanding even for an experienced manager.

Finding a balance

At this point, you know that segmentation involves dividing the customer base into distinct groups based on specific characteristics or behaviors. And another challenge here is to find the right balance in grouping depth. 

Going into too much detail and creating too many profiles can degrade results — loyalty managers may find it difficult to allocate resources and provide personalized experiences effectively.

On the other hand, having too few groups may result in inadequate personalization, reducing the impact of loyalty initiatives. Striking the optimal balance requires careful analysis and consideration of each segment's potential benefits and costs.

Overcoming the dilemma of loyalty program effectiveness

Loyalty managers can sometimes feel lost when faced with the question, "How many segments should I create for optimal results?" Of course, this dilemma stems from the desire to maximize program impact while avoiding unnecessary complexity.

Ideally, loyalty managers should strive to create as few groups as possible while pointing out their validity. This involves identifying the correct number of segments and effectively capturing preferences, behaviors, and potential value. Overcoming the challenge of maintaining "data balance" requires a comprehensive understanding of the customer base, careful data analysis, and informed decision-making.

Ethical considerations in loyalty segmentation

Privacy and data protection

Ethical issues related to privacy and data protection are central themes in customer grouping. Your Privacy and Data Protection department will undoubtedly raise questions about the purpose of data collection, which requires you to take a thoughtful approach. Also, different regions have different privacy laws and agencies. That said, according to the EU-observed and internationally known General Data Protection Regulation (GDPR), you must define the scope of data use to ensure compliance.

One important aspect is to gather only the minimum data necessary for the successful operation of your business and loyalty program. For example, obtaining a customer's full date of birth to deliver a birthday card is unnecessary. Instead, the day and month are sufficient for this purpose.

Another issue is the question of gender, which has become increasingly nuanced recently. In some cases, the  Privacy and Data Protection department may refuse to include a gender field on a registration form because it might be incompatible with the purpose of data collection or inconsistent with brand values. Just so you know, there are brands that pride themselves on openness and don't prioritize gender aspects. 

It's worth noting, however, that gender may be relevant to language issues. In languages such as Czech or Polish, verb conjugations often depend on gender. As a result, if linguistic accuracy is a priority, it becomes necessary to ask about gender. This issue becomes particularly important when localizing a loyalty application in different regions.

Similarly, pronouns can serve as substitutes and solid arguments for the legal department to consider language aspects when implementing a loyalty program. Considering these factors, you can ensure inclusivity and respect for diverse linguistic preferences.

In summary, ethical considerations in loyalty segmentation, particularly concerning privacy and data protection, require careful thought and adherence to regulations. Defining the purpose of data collection, minimizing the data collected, and addressing gender-related language considerations are vital steps in creating an ethical and inclusive loyalty program.

Transparency and consent

Organizations are expected to comply with regulations such as the well-known RODO, emphasizing the importance of transparency and consent. However, effectively implementing these principles and ensuring that recipients fully understand the risks associated with sharing their data is a major hurdle.

"When it comes to personalized communications as part of a loyalty program, obtaining adequate consent for such communication is essential. Also, a visible unsubscribe button for marketing communications is key to respecting customers' preferences."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

Use marketing automation tools to streamline the compliance process and quickly assess user engagement levels. Determine the amount of content your recipients are willing to accept based on metrics such as open rate (OR) and click-through rate (CTR). Thanks to that, you can avoid overwhelming them with excessive messages. 

On top of that, when a recipient decides to unsubscribe, suggest options to specify news they no longer want to receive, such as product information, sales updates, or business announcements. This approach will help you retain users by tailoring messages accordingly.

Note that unsubscribing from marketing emails doesn't necessarily mean that you should exclude customers from receiving messages related to your loyalty program. On the contrary!

Chances are that they're still interested in messages related to transactional activities, such as earned points, levels, or badges. Accordingly, proper differentiation of consent ensures that users remain engaged with your loyalty program while avoiding unwanted marketing messaging.

An example of expanded consent in a newsletter, from TechCrunch.

When designing consent forms, intuitiveness and ease of use are a priority. Balancing the regulatory requirements of GDPR with user experience (UX) principles are binding for successful campaigns. By creating clear and concise consent forms, you can ensure that customers understand the purpose of data collection and that you care about their rights.

In summary, ethical considerations in creating customer segments require companies to prioritize transparency and consent. You can adhere to ethical standards while maintaining a positive relationship with customers by effectively communicating the risks of data sharing, offering clear unsubscribe options, and designing intuitive consent forms. These measures can help build trust and ensure recipients feel respected and in control of their personal information.

Fairness, equity, and conscious consumerism 

Recognize and respect diversity among individuals, as everyone celebrates different occasions and has unique perspectives. For example, when planning marketing campaigns around specific events such as Mother's Day or Christmas, it's essential to show empathy and recognize that not everyone has a mother or celebrates Christian holidays. 

In such cases, it becomes necessary to take a more inclusive approach. Instead of using specific references such as "Christmas sales," it'd be more appropriate to communicate it more broadly, such as "winter sales." This approach allows for a diversity of customer backgrounds and beliefs while avoiding the potential exclusion or alienation of specific segments of the population.

Moreover, ethical grouping goes beyond mere inclusivity in marketing campaigns. It includes considering the more general implications of your strategies and making sure they don't perpetuate unfair advantage or inequality among customers. Examine whether your practices disproportionately favor certain groups or lead to unequal treatment.

Another element — conscious consumerism — emphasizes the importance of ethical decision-making and responsible consumption. Your grouping process should align with the values and preferences of conscious shoppers, offering options that reflect sustainable, socially responsible, and environmentally friendly practices.

For example, companies can reward users who consistently choose environmentally friendly products or demonstrate ethical behavior in their purchasing decisions. Incorporating conscious consumerism into segmentation can strengthen a sense of shared values with consumers, leading to stronger brand loyalty and positive social impact. One such segment is millennials and Generation Z, who prioritize environmental and ethical issues. By aligning with their values, companies can establish a strong connection with these younger demographics, fostering brand loyalty and driving positive social impact. 

Socially responsible consumers prioritize ethical considerations such as fair trade and labor conditions and respond well to conscious consumerism. By emphasizing your commitment to social responsibility and offering incentives that reinforce these values, you can engage and build loyalty among this segment. Additionally, targeting health-conscious consumers through conscious consumerism is a practical approach. By emphasizing the health benefits and sustainability aspects of products, companies can capture the attention of these consumers and strengthen their brand positioning.

Lastly, niche markets like vegan or vegetarian consumers have specific ethical or environmental considerations. Segmenting and targeting these markets with tailored messaging and rewards can effectively engage and satisfy their unique needs, leading to dedicated customer bases and a reputation as a trusted product provider that aligns with their ethical choices.

An example of conscious consumerism in loyalty programs.

Summary

The foundation of effective loyalty segmentation lies in a comprehensive understanding of your customer base. By leveraging data analytics and customer insights, you can uncover valuable patterns and trends to help you identify distinct segments and their specific characteristics. This knowledge will empower you to deliver personalized experiences and relevant offers that resonate with each group, ultimately deepening their loyalty to your brand.

Continuously monitor and evaluate the effectiveness of your grouping strategy. Regularly assess the performance of your marketing campaigns, analyze feedback, and measure key metrics to identify areas for improvement and refine your approach to customer loyalty over time. Adaptability and agility will be critical in an ever-evolving marketplace, so be prepared to iterate and optimize.

Implementing customer segments can be pretty challenging, but the potential rewards are well worth the effort. So, take the first step today. Dive into your customer data, identify meaningful groups, and start crafting targeted strategies to differentiate your brand and create loyal advocates.

Loyalty segmentation: a step-by-step guide

Monika Motus
Monika Motus
Loyalty Expert (formerly Starbucks, iSpot, and Douglas)
Paweł Dziadkowiec
Paweł Dziadkowiec
Loyalty Strategy Consultant
loyalty segmentation guide cover picture

Boosting brand advocacy is key for companies seeking to grow in an increasingly competitive market. But, alarmingly, the one-size-fits-all approach to customer engagement has become obsolete.

To truly maximize the potential of your program, you must delve deeper into understanding your client base and realize that not all existing loyal customers are the same.

This realization sparks the beginning of customer loyalty segmentation, a strategic framework that allows any company to tailor its initiatives to different tastes and needs.

Buckle up because, in this guide, we'll take you step by step through implementing loyalty groups, empowering you to forge stronger connections, foster brand advocacy, and ultimately drive sustainable business growth.

To make sure you are equipped with the best knowledge to put all steps into action, we’ll explain the four most common approaches, such as behavioral segmentation and attitudinal segmentation.

Lastly, we cover the most common challenges and ethical considerations faced while implementing programs. Let’s start!

What is loyalty segmentation?

Loyalty segmentation is part of a marketing strategy that divides a company's customer base into distinct groups based on loyalty behaviors, spending habits, attitudes, and transactions to promote marketing and business goals.

This segmentation approach aims to identify and understand different types of customers in terms of their loyalty levels and preferences. Loyalty grouping typically involves analyzing:

  • Product/service usage
  • Purchase frequency
  • Spending patterns
  • Brand advocacy
  • Feedback

Then you can use the information gathered to tailor marketing efforts and loyalty schemes and to categorize people into groups to engage and retain them in different ways.

Key steps in loyalty segmentation

As a loyalty manager, you may face the challenging task of implementing a loyalty segmentation process. It might seem overwhelming but only if you don't know where to start, so fear not! We put together a comprehensive step-by-step list to guide you through the process.

These steps will equip you with the knowledge and tools to group and effectively engage your target audience. Let's dive into the details.

1. Define the objective

Clearly articulate the specific goal of the loyalty segmentation process, such as: 

  • Improve planning and execution of commercial activities across loyalty, sales, and marketing teams.
  • Have a better insight into the drivers of loyalty, value, and migration to design specific initiatives based on the customer lifecycle stage.
  • Streamline the acquisition process and accelerate value creation for new customers.
  • Identify opportunities to acquire new clients.
  • Improve contact strategies based on customer potential and future behavior.
  • Improve the effectiveness of targeted campaigns across channels.

Consider the desired outcomes, timeframe, and alignment with overall business objectives.

Collaborate with relevant stakeholders to ensure alignment and buy-in.

Expert remarks and best practices

Clearly articulate the purpose of implementing loyalty segmentation in your case. Determine what specific insights or outcomes you want to achieve through this process, such as increasing retention, identifying high-value clients, or personalizing marketing efforts.

"Loyalty segmentation aims to enhance customer loyalty and maximize customer lifetime value. In addition to the primary objective, it also has secondary goals, including optimizing resource allocation, discovering valuable insights through data analysis, and fostering involvement and gratification. You can create a comprehensive framework for long-term success by addressing the primary and secondary objectives."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

2. Gather customer data

Identify the relevant data sources, including first-party data, second-party data, and third-party data from external vendors. Examples of what these mean:

  • Zero-party data: preferences and interests (user's likes, dislikes, hobbies, and personal preferences), purchase intent (wishlist items, items added to a shopping cart, or inquiries about pricing or availability), survey responses, personalization information (the preferred communication channels, content preferences, or specific interests), reviews, ratings, comments, email subscriptions, event registrations (information provided by users when registering for events, webinars, conferences, or workshops), location data (address details or preferences for localized content or offers).
  • First-party data: customer registration information (name, email, address), purchase history, website analytics (page views, click-through rates), app usage data, social media interactions, email and newsletter subscriptions, customer service interactions, loyalty program data, offline interactions (in-store purchases, event attendance).
  • Second-party data: data-sharing agreements, co-branding initiatives, business data exchanges, joint research or surveys, offline data partnerships, publisher/advertiser data sharing, and social media collaborations.
  • Third-party data from external vendors: demographic data (age, gender, income), psychographic data (attitudes, interests, lifestyle), behavioral data (online activities, purchase behavior), geolocation data (physical location, travel patterns), social media data (profiles, connections, posts), consumer purchase data (purchase history), market research data (surveys, industry analysis), data aggregators (collect data from various sources).

Determine the data collection methods, such as surveys, online forms, data scraping, or API integrations.

Ensure compliance with data privacy regulations and obtain necessary permissions.

Explore data enrichment options to augment existing data with additional insights from external sources.

Expert remarks and best practices

Data is a prerequisite — there's no point in starting segmentation until you have enough input. You must have a solid set of information to have a basis for building a reliable segmentation, which means transactional, behavioral, and declarative data.

Where to start?

Start by gathering essential customer data, such as their first name and any other necessary personal information. If you have an online store or a mobile loyalty app, you can easily track customer IDs, which provide valuable insights into user behavior. By doing so, you'll gain comprehensive knowledge about each customer's actions, preferences, navigation patterns, and interests in specific product categories.

Behavioral data is a must for an online business. It provides valuable insights into customer expectations, purchase preferences, and browsing behavior, such as products added to the shopping cart but not purchased for a reason — these motives could range from financial constraints to waiting for discounts or promotional offers. Understanding this data is essential for creating targeted offers for distinctive customer groups.

Regarding data analysis, managers recognize and embrace the importance of utilizing multiple data sources. They understand that relying solely on data from the loyalty program, especially if it has recently been launched, may not provide a comprehensive understanding of their business and customers.

Instead, managers can leverage existing information from various sources, such as CRM (Customer Relationship Management) systems, BI (Business Intelligence) systems, and more, and map the data. By incorporating both structured and unstructured inputs from available sources, supervisors can gain a more holistic view of their operations and customer behavior, empowering them with valuable insights.

The effectiveness of data analysis relies on the freshness and relevance of the chosen data sources for segmentation. Outdated data can lead to inaccurate insights and misguided decision-making. Consequently, managers prioritize regularly updating the data sources to ensure they reflect the current state of the business. 

Equally important is the careful selection of data sources for segmentation. Managers understand that not all sources are equally informative or relevant to the specific analysis at hand. That's why they critically evaluate the most suitable data sources that align with their objectives. By selecting diverse and complementary data sources, managers can uncover hidden patterns and make more informed decisions, fostering improved outcomes.

What to do and what to avoid

Also, managers remain mindful of avoiding redundancy in their data sources. They understand that redundant data sources can introduce unnecessary duplication and confusion during analysis. Supervisors streamline their analysis efforts by focusing on unique and distinct data sources and concentrating on the most pertinent information. 

If you're at the initial stage of designing your loyalty scheme's functionality, you can determine what insights you want to gain about your audience. Take the time to carefully outline the specific data you wish to collect and the events you want to track using analytics or loyalty tools.

Also, a loyalty manager must consider various touchpoints before creating customer groups. Think ahead not only about the types of data you need but also the sources from which you'll collect insights. Doing so will ensure seamless information integration within the segmentation framework in the following steps.

Be mindful of zero-party data, which refers to the information directly provided by users themselves. You can collect these details through brief and engaging surveys similar to Sephora's or the Jeebit example below. Take a look at how effortless and quick they are for users to complete!

Sephora survey example.
Jeebit survey example.

The time it takes to collect enough data to segment a specific user varies widely by industry. In high-growth sectors such as FMCG (Fast-Moving Consumer Goods), compiling a significant purchase history is possible within a month. Kaufland, for example, managed to acquire one million users and their transaction data within just one month of launching its loyalty scheme in Poland (source in Polish). However, in industries such as airlines, where the frequency of purchases is typically several times a year (unless business travel is involved), a more extended timeframe is needed to collect enough insights.

"Consider consulting with your loyalty, sales, and marketing teams to identify data essential to the company and the program. Remember that not all data will be relevant or valuable. For example, historical data from a year ago becomes less relevant over time and may not provide an accurate picture of your current performance. By proactively identifying the required insights, you can minimize their use and focus on collecting only the information necessary for smooth operations."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

3. Define segmentation variables

  • Brainstorm and select the most relevant variables or criteria for grouping customers based on the objective and available data. Examples of segmentation variables can include demographic information (age, gender, income), geographic location, purchase behavior (frequency, recency, monetary value), product preferences, psychographic factors (lifestyle, interests, values), and interactions (website visits, support requests).
  • Conduct exploratory data analysis to identify correlations and patterns.
  • Prioritize variables that have the most significant impact on user behavior and business outcomes.

Expert remarks and best practices

"You can have multiple client groups, depending on what purposes you want to use them for. These groups can be long-term segments that you use regularly or temporary ones specifically for events like winter holidays or Valentine's Day."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

Flexibly add or remove variables based on the desired results. For example, you can identify customers who purchased last month or shoppers who bought products three months ago but are now at risk of leaving the brand (because they used to shop twice a month). 

4. Evaluate and segment the data

  • Cleanse and preprocess the collected insights to remove duplicates, inconsistencies, and missing values.
  • Normalize and standardize the data to ensure comparability across variables.
  • Apply appropriate data analysis techniques, such as clustering algorithms (k-means, hierarchical clustering), decision trees, or regression analysis, to group the information.
  • Validate the segmentation approach using statistical measures or techniques such as silhouette analysis or cross-validation.
  • Use visualization tools (such as scatter plots and heatmaps) to explore and understand your grouping results.

Expert remarks and best practices

Let's say you determined what data you want to obtain from your users. How do you verify it and assess whether the information you've gathered benefits your business?

First of all, all sales data is a sure-fire thing. Take purchase history as an example –this includes details such as where the user buys, what they buy, and in what quantity. Everything is handed to you on a silver platter!

"I strongly advocate programs whose cornerstone and standard mechanism is to reward the customer for each purchase behavior. This incentivizes the consumer to identify themselves as a loyalty program member with each transaction, as it brings them closer to the reward or other promised benefit. In turn, the brand gains the user's entire purchase history, which allows for more accurate segmentation. Keep in mind, however, that any spontaneous or selective benefit (e.g., giving discounts or loyalty points only on a narrow product line-up) leads to a situation where the user only shows their loyalty card when it pays off for them. As a result, your data may be falsified and lead to erroneous conclusions, making it extra important to segment smartly."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

5. Define customer segment profiles

  • Develop detailed profiles for each customer group based on their characteristics and behaviors.
  • Describe each segment's demographics, such as age ranges, gender distribution, income levels, and household composition.
  • Identify each group's shared preferences, needs, motivations, and purchase patterns.
  • Consider using personas or customer archetypes to bring the segments to life and facilitate understanding across the organization.
  • Incorporate qualitative research methods like interviews or focus groups to gather deeper insights into motivations and behaviors.

Expert remarks and best practices

To drive customer loyalty and properly work on customer retention, you should always have two segmentations in hand:

  1. Fixed customer segmentation, which you define permanently. These groups should be immutable, so you can analyze them over selected historical periods.
  2. Leap customer segmentation, which you use to prepare groups for certain activities, such as campaigns for Women's Day, Children's Day, Halloween, you name it.

When creating segments, generate unique offers just for them from your product pool. By doing so, you significantly increase the likelihood of making a purchase. For instance, if a user prefers Adidas and browses this eCommerce category, you can easily target them with Adidas Originals ads by analyzing their activities in your loyalty app. Note that each loyalty manager operates with their definitions of groups or profiles.

6. Evaluate customer segment attractiveness

  • Assess each group's potential value and attractiveness to prioritize resource allocation and strategic focus.
  • Analyze the size of each segment in terms of customer count or revenue contribution.
  • Evaluate the growth potential by considering market trends, client acquisition opportunities, and emerging recipients' needs.
  • Estimate the profitability of each group by analyzing margins, average order value, customer lifetime value, and cost-to-serve metrics.
  • Consider the competitive landscape and segment alignment with the company's capabilities and value proposition.

Expert remarks and best practices

To assess the viability and effectiveness of the created loyalty segments, think of a few key parameters and analyze their dynamics.

One crucial aspect to examine is the potential monetary value associated with each segment. This involves determining whether the clients in a particular group align with the predetermined economic values set by management.

To measure this, consider the average transaction value, purchase frequency, and overall spending patterns. By comparing these metrics against the predefined benchmarks, you can determine if the group meets the expected monetary standards.

In addition to financial considerations, it's essential to observe the behavior and engagement of clients within each loyalty segment. Look at customer satisfaction levels, participation in the loyalty program, and response rates to targeted marketing efforts. These factors provide valuable insights into how effective the client group is in fostering affinity.

"Evaluate the segment's growth potential, especially for the most attractive and profitable segments. Analyze whether the segment is thriving and evaluate the factors affecting its trajectory. A growing group indicates its vitality and potential for further expansion, while a declining group may require adjustments or targeted interventions to prevent attrition."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

You may ask: "Which customer groups are most attractive to me?" It primarily depends on the business strategy employed, but most visitors tend to be light or medium users.

If we consider 100% of all users, then about 20% would fall into the VIP category, 15% would be new users, and the remaining majority would be light and medium users (look at the 80/20 rule in segmentation). As a result, even a slight increase in frequency among the last two groups, for example, by 1%, can significantly affect the overall results!

"Imagine a premium retailer: If a customer visits the store once every six months, doubling the frequency of visits to twice in the same period is relatively easier than increasing VIP visits to ten times a month. This is because the light or medium users constitute a larger share of the customer base, making any incremental change in this segment more significant to overall business performance."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

7. Develop segment-specific strategies

  • Based on the profiles, design tailored marketing and communication strategies.
  • Identify the most effective channels, messaging, and promotional tactics to engage and resonate with each group.
  • Create personalized offers, incentives, and loyalty schemes that align with the unique preferences and needs of each segment.
  • Consider the customer journey and touchpoints to deliver a consistent and cohesive experience across all interactions.
  • Collaborate with cross-functional teams (for example, marketing, sales, or support) to ensure alignment.

Expert remarks and best practices

Nurture your relationships with VIPs and keep them engaged to ensure brand stickiness. One practical approach to fostering loyalty is to provide unique experiences aligned with your brand rather than simply relying on discounts. Exclusive benefits, personalized recommendations, and special events create a sense of recognition and value for customers.

Demonstrating genuine care is essential. Small gestures and going the extra mile can make a significant impact. By analyzing customer data, you can gain insights into individual preferences and tailor offers and communications accordingly. For example, a clothing retailer can use data to send personalized recommendations or early access to the new collection based on a customer's style and preferences. You can also partner with other organizations that align with your offerings to provide unique and memorable impressions for these valued shoppers.

For other users, think about something proven in the industry, such as discounts that are a popular incentive to attract the largest group of customers in various segments. Offer appealing deals on selected products/services and create a sense of exclusivity and urgency, prompting customers to make repeat purchases. 

Keep in mind, though, that discounts alone may not be enough to retain customers and improve their overall journey. This is where cross-selling and upselling come into play. Cross-selling involves suggesting complementary products or services that are a good fit for the customer's initial purchase. By making suitable recommendations, you not only increase the average order value but also provide audiences with a more comprehensive shopping experience.

Lastly, prepare a dedicated strategy for a specific group of customers known as "red-priced" users or bargain hunters. These individuals tend to make purchases only when there's a discount available. Treating them as a distinct category with a dedicated campaign and strategy is necessary to capture their attention and encourage their return. Include promoting discounted products, presenting exclusive offers, or creating limited-time offers that cater to this segment. Applying the tactics outlined will certainly encourage "red-priced" users to keep coming back for more and reinforce their sense of value.

8. Implement and measure results

  • Execute segment-specific strategies across relevant marketing channels and touchpoints.
  • Deploy marketing campaigns, communications, and loyalty initiatives targeted at each group.
  • Monitor and measure the performance and effectiveness of the strategies by tracking key performance indicators (KPIs) such as user engagement, conversion rates, satisfaction scores, revenue growth, and retention rates.
  • Utilize analytics tools and dashboards to gather real-time insights and make data-driven adjustments.
  • Implement A/B testing or controlled experiments to evaluate the impact of segment-specific strategies compared to a control group.

Expert remarks and best practices

"You can optimize loyalty grouping efforts and drive better customer churn, retention, and engagement rates by tailoring marketing approaches, using preferred channels, and measuring key performance indicators."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

Regularly analyze insights, make data-driven adjustments, and optimize your customer segmentation strategy for an effective loyalty program.

9. Communicate and operationalize

  • Share the profiles, strategies, and insights with relevant organizational stakeholders, such as marketing, sales, and support representatives.
  • Conduct workshops, presentations, or training sessions to ensure a thorough understanding of the grouping approach and its implications for different departments.
  • Foster collaboration and alignment among teams to ensure consistent messaging and coordinated efforts across touchpoints.
  • Create internal documentation or knowledge repositories to serve as a reference for employees involved in end-user interactions.
  • Incorporate the segmentation approach into key business processes, such as product development, pricing strategies, and support protocols.
  • Establish clear metrics and targets for each group, and regularly communicate progress and achievements to keep teams motivated and focused.

Expert remarks and best practices

To ensure effective communication and implementation of the loyalty campaign, inform the entire team about its details and objectives. You can do this by using available channels and trusted strategies.

Firstly, ensure that all team members clearly understand the loyalty program's rules and how it works. Encourage clients to contact customer care, reach out on social media, or speak to the sales team to inquire about the program and understand it comprehensively.

To ensure that frontline customer service representatives are well-informed about the program, share campaign information with the entire team. One effective way to do this is by using a shared information hub where employees can access relevant materials and resources. You can also use regular business newsletters or marketing communications to provide updates and reminders about the ongoing loyalty campaign. In addition, consider placing a promotional display window in the store window to remind customers of the program and attract their attention visually.

Provide each team with a guidebook outlining the scheme's operating rules for smooth implementation. Also, give them access to a calendar of marketing activities for a specific period and provide instructions on effectively communicating them.

"The manager in charge of the program should ensure the calendar contains up-to-date information on running segmented campaigns. And the team will have full knowledge and understanding of the available offers and answer customers' questions. This approach can effectively increase team member engagement and improve the customer experience!"

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

To enhance the consistency and preparedness of team members when dealing with customers, the loyalty manager can provide employees with pre-approved responses. These pre-prepared answers ensure that everyone's appropriately equipped and avoid spontaneous or inconsistent responses. Ultimately, this approach helps maintain coherent brand communication and increases customer satisfaction.

10. Refine and iterate

  • Establish a separate Data and Research team to find your most valuable customers by continuously analyzing and refining your customer segmentation strategies.
  • Assess the effectiveness of the grouping strategies and make necessary adjustments to optimize results.
  • Actively use customer feedback, insights, and performance data.
  • Conduct further analysis to identify additional variables or refine existing ones based on their predictive power and relevance.
  • Stay updated on customer behaviors, market trends, and competitive landscape changes to ensure the division remains relevant and effective over time.
  • Conduct periodic segmentation refreshes to account for evolving customer preferences and market dynamics.
  • Foster a culture of experimentation and learning to drive ongoing improvement in grouping and personalization efforts.

Expert remarks and best practices

"The frequency of analyzing and updating segmentation analytics dashboards can vary from industry to industry. Yet this activity is essential when developing a loyalty campaign."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

First, divide your customer base into smaller groups and conduct targeted segmentation campaigns for each of them that will last several months. Keep customers informed of your activities and provide them with promotional coupons.

Be sure to send a well-designed and attention-grabbing follow-up message after a maximum of two weeks from the start of the campaign. Then, send a "final reminder" two days before the campaign ends, emphasizing that the coupon will soon expire.

After each segmentation campaign, evaluate its impact by recalculating the generated profits. By adjusting the variables over time, you can freely relaunch the campaign with increased confidence in its effectiveness.

Common loyalty segmentation approaches

Let's explore approaches to creating standard customer segments, including the simplest RFM segmentation, behavioral, attitudinal, and hybrid models, to help your business enhance brand affinity and drive growth.

RFM segmentation

RFM (Recency, Frequency, Monetary) analysis categorizes customers based on their past purchase behavior. This model involves evaluating three key factors:

  • Recency — how recently a client made a purchase.
  • Frequency — how often a client makes purchases.
  • Monetary value — the amount of money spent by a client.

Practical example

Suppose you run an online clothing store. Through RFM analysis, you may discover that your audience group consists of those who buy very frequently (a few times a week) and spend significant amounts of money. You can target these high-value customers with exclusive offers or rewards to further nurture their loyalty. 

Behavioral segmentation

Use behavioral patterns to identify distinct groups by looking at parameters such as product preferences, browsing habits, or engagement with marketing materials.

Practical example

Let's say you operate a streaming service. Through behavioral patterns segmentation, you may discover users who frequently watch action movies, share recommendations on social media, and actively participate in surveys. You can then customize promotions or recommend similar content to enhance their engagement.

Attitudinal segmentation

This involves categorizing recipients based on their attitudes, preferences, and opinions toward a brand or product. This approach delves into understanding people's motivations and perceptions.

Practical example

Suppose you have a skincare brand. By conducting surveys or analyzing feedback and opinions, you might identify people who prioritize organic and sustainable products. Tailoring your messaging and product offerings to align with their values can strengthen their dedication and differentiate your brand.

Hybrid segmentation model

Some businesses prefer a combination of different approaches, known as a hybrid model. These models integrate, for example, RFM or other methods but with similar guidelines for segmentation, behavior patterns, and attitude segmentation to better understand loyalty.

Practical example

For instance, if you had a hotel chain, you could use:

  • RFM analysis to identify your most frequent and high-spending guests.
  • Behavioral patterns to understand preferences like room preferences or dining choices.
  • Attitudinal segmentation to uncover the most loyal customers who value personalized service and luxury experiences.
"In a hybrid model, you may want to consider additional options that deepen segmentation toward communication optimization. This includes dividing customers based on their preferences for graphics, text, and communication methods (such as email, push notifications, MMS, or WhatsApp). It also involves adjusting the frequency and intensity of messages, the color scheme, and the ratio of images to text to align with each group's preferences."

Paweł Dziadkowiec, Loyalty Strategy Consultant, ex-BP

By blending these approaches, you can design loyalty programs and experiences that cater to different needs.

Challenges in implementing loyalty segmentation

Communication noise

Implementing loyalty grouping requires effective communication to inform customers and stakeholders about the program and its benefits. However, one of the challenges is dealing with communication noise. With the abundance of marketing messages and promotions, clients may overlook or ignore the loyalty scheme information, considering it as just another marketing tactic. 

Conversely, some employees have different responsibilities and don't always keep on track of company news. Overcoming this challenge requires adopting innovative and targeted messaging strategies that capture employees' attention and clearly communicate the unique benefits of the loyalty program.

Tackling communication noise

As mentioned in the step “Communicate and operationalize”, as the program manager, you should inform the entire team about its details and objectives. You can do this by using available channels and trusted strategies.

Collecting the right amount and quality of data

To effectively implement loyalty grouping, you must first access relevant information sets. However, collecting high-quality data can be tricky as this involves identifying key variables and indicators to categorize valuable customers based on their behavior and loyalty preferences.

Gathering these insights also requires integrating information from various sources while ensuring data accuracy, privacy, and compliance. Then what's left is to analyze and interpret the collected data to derive useful insights, which can be demanding even for an experienced manager.

Finding a balance

At this point, you know that segmentation involves dividing the customer base into distinct groups based on specific characteristics or behaviors. And another challenge here is to find the right balance in grouping depth. 

Going into too much detail and creating too many profiles can degrade results — loyalty managers may find it difficult to allocate resources and provide personalized experiences effectively.

On the other hand, having too few groups may result in inadequate personalization, reducing the impact of loyalty initiatives. Striking the optimal balance requires careful analysis and consideration of each segment's potential benefits and costs.

Overcoming the dilemma of loyalty program effectiveness

Loyalty managers can sometimes feel lost when faced with the question, "How many segments should I create for optimal results?" Of course, this dilemma stems from the desire to maximize program impact while avoiding unnecessary complexity.

Ideally, loyalty managers should strive to create as few groups as possible while pointing out their validity. This involves identifying the correct number of segments and effectively capturing preferences, behaviors, and potential value. Overcoming the challenge of maintaining "data balance" requires a comprehensive understanding of the customer base, careful data analysis, and informed decision-making.

Ethical considerations in loyalty segmentation

Privacy and data protection

Ethical issues related to privacy and data protection are central themes in customer grouping. Your Privacy and Data Protection department will undoubtedly raise questions about the purpose of data collection, which requires you to take a thoughtful approach. Also, different regions have different privacy laws and agencies. That said, according to the EU-observed and internationally known General Data Protection Regulation (GDPR), you must define the scope of data use to ensure compliance.

One important aspect is to gather only the minimum data necessary for the successful operation of your business and loyalty program. For example, obtaining a customer's full date of birth to deliver a birthday card is unnecessary. Instead, the day and month are sufficient for this purpose.

Another issue is the question of gender, which has become increasingly nuanced recently. In some cases, the  Privacy and Data Protection department may refuse to include a gender field on a registration form because it might be incompatible with the purpose of data collection or inconsistent with brand values. Just so you know, there are brands that pride themselves on openness and don't prioritize gender aspects. 

It's worth noting, however, that gender may be relevant to language issues. In languages such as Czech or Polish, verb conjugations often depend on gender. As a result, if linguistic accuracy is a priority, it becomes necessary to ask about gender. This issue becomes particularly important when localizing a loyalty application in different regions.

Similarly, pronouns can serve as substitutes and solid arguments for the legal department to consider language aspects when implementing a loyalty program. Considering these factors, you can ensure inclusivity and respect for diverse linguistic preferences.

In summary, ethical considerations in loyalty segmentation, particularly concerning privacy and data protection, require careful thought and adherence to regulations. Defining the purpose of data collection, minimizing the data collected, and addressing gender-related language considerations are vital steps in creating an ethical and inclusive loyalty program.

Transparency and consent

Organizations are expected to comply with regulations such as the well-known RODO, emphasizing the importance of transparency and consent. However, effectively implementing these principles and ensuring that recipients fully understand the risks associated with sharing their data is a major hurdle.

"When it comes to personalized communications as part of a loyalty program, obtaining adequate consent for such communication is essential. Also, a visible unsubscribe button for marketing communications is key to respecting customers' preferences."

Monika Motus, Loyalty Expert, ex-Starbucks, ex-iSpot, ex-Douglas

Use marketing automation tools to streamline the compliance process and quickly assess user engagement levels. Determine the amount of content your recipients are willing to accept based on metrics such as open rate (OR) and click-through rate (CTR). Thanks to that, you can avoid overwhelming them with excessive messages. 

On top of that, when a recipient decides to unsubscribe, suggest options to specify news they no longer want to receive, such as product information, sales updates, or business announcements. This approach will help you retain users by tailoring messages accordingly.

Note that unsubscribing from marketing emails doesn't necessarily mean that you should exclude customers from receiving messages related to your loyalty program. On the contrary!

Chances are that they're still interested in messages related to transactional activities, such as earned points, levels, or badges. Accordingly, proper differentiation of consent ensures that users remain engaged with your loyalty program while avoiding unwanted marketing messaging.

An example of expanded consent in a newsletter, from TechCrunch.

When designing consent forms, intuitiveness and ease of use are a priority. Balancing the regulatory requirements of GDPR with user experience (UX) principles are binding for successful campaigns. By creating clear and concise consent forms, you can ensure that customers understand the purpose of data collection and that you care about their rights.

In summary, ethical considerations in creating customer segments require companies to prioritize transparency and consent. You can adhere to ethical standards while maintaining a positive relationship with customers by effectively communicating the risks of data sharing, offering clear unsubscribe options, and designing intuitive consent forms. These measures can help build trust and ensure recipients feel respected and in control of their personal information.

Fairness, equity, and conscious consumerism 

Recognize and respect diversity among individuals, as everyone celebrates different occasions and has unique perspectives. For example, when planning marketing campaigns around specific events such as Mother's Day or Christmas, it's essential to show empathy and recognize that not everyone has a mother or celebrates Christian holidays. 

In such cases, it becomes necessary to take a more inclusive approach. Instead of using specific references such as "Christmas sales," it'd be more appropriate to communicate it more broadly, such as "winter sales." This approach allows for a diversity of customer backgrounds and beliefs while avoiding the potential exclusion or alienation of specific segments of the population.

Moreover, ethical grouping goes beyond mere inclusivity in marketing campaigns. It includes considering the more general implications of your strategies and making sure they don't perpetuate unfair advantage or inequality among customers. Examine whether your practices disproportionately favor certain groups or lead to unequal treatment.

Another element — conscious consumerism — emphasizes the importance of ethical decision-making and responsible consumption. Your grouping process should align with the values and preferences of conscious shoppers, offering options that reflect sustainable, socially responsible, and environmentally friendly practices.

For example, companies can reward users who consistently choose environmentally friendly products or demonstrate ethical behavior in their purchasing decisions. Incorporating conscious consumerism into segmentation can strengthen a sense of shared values with consumers, leading to stronger brand loyalty and positive social impact. One such segment is millennials and Generation Z, who prioritize environmental and ethical issues. By aligning with their values, companies can establish a strong connection with these younger demographics, fostering brand loyalty and driving positive social impact. 

Socially responsible consumers prioritize ethical considerations such as fair trade and labor conditions and respond well to conscious consumerism. By emphasizing your commitment to social responsibility and offering incentives that reinforce these values, you can engage and build loyalty among this segment. Additionally, targeting health-conscious consumers through conscious consumerism is a practical approach. By emphasizing the health benefits and sustainability aspects of products, companies can capture the attention of these consumers and strengthen their brand positioning.

Lastly, niche markets like vegan or vegetarian consumers have specific ethical or environmental considerations. Segmenting and targeting these markets with tailored messaging and rewards can effectively engage and satisfy their unique needs, leading to dedicated customer bases and a reputation as a trusted product provider that aligns with their ethical choices.

An example of conscious consumerism in loyalty programs.

Summary

The foundation of effective loyalty segmentation lies in a comprehensive understanding of your customer base. By leveraging data analytics and customer insights, you can uncover valuable patterns and trends to help you identify distinct segments and their specific characteristics. This knowledge will empower you to deliver personalized experiences and relevant offers that resonate with each group, ultimately deepening their loyalty to your brand.

Continuously monitor and evaluate the effectiveness of your grouping strategy. Regularly assess the performance of your marketing campaigns, analyze feedback, and measure key metrics to identify areas for improvement and refine your approach to customer loyalty over time. Adaptability and agility will be critical in an ever-evolving marketplace, so be prepared to iterate and optimize.

Implementing customer segments can be pretty challenging, but the potential rewards are well worth the effort. So, take the first step today. Dive into your customer data, identify meaningful groups, and start crafting targeted strategies to differentiate your brand and create loyal advocates.

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