Category: Reality Check

Pointers on Behavioral Segmentation

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Behavioral segmentation is the practice of segmenting your customers based on what they do. I wrote previously about the basics of behavioral segmentation. During the last year, I’ve been putting it into practice through a customer segmentation project with a CASC business partner. Today I’d like to share with you some of the lessons I’ve learned through that experience.

NOT Just an Analytics Exercise

Behavioral segmentation has the advantage of revealing segments of similarly behaved consumers that you may not have thought of previously. It requires a lot of data crunching. There is no doubt about that. However, it is important to remember that behavioral segmentation is not entirely an exercise in numbers. If data crunching is all that you do, you risk creating segments that either are based on artificial or fake relationships or are not very actionable from a target marketing perspective.

Successful behavioral segmentation should be a collaborative exercise between your analytics team and those who have a good grasp of your business and your customers. The latter are most likely found in your marketing or sales department. The process of behavioral segmentation should be developed as an iterative process that goes back and forth between analytics and marketing. The analytics team should start by understanding from the marketing team the purpose of the segmentation exercise, the observed behaviors at hand, and the capability of marketing to implement behavioral segmentation insights. Based on this initial information, the analytics team can produce an initial set of behavioral segments based on customer data.

This initial segmentation scheme should be presented to the marketing team both to make sense of the results and to see if meaningful actions can be taken to target each segment. The input from the marketing team is then fed back to the next round of data crunching to adjust the segmentation focus and approach. This process is repeated until both sides are satisfied with a meaningful set of segments to be implemented in practice.

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Loyalty Program Review: Chipotle Rewards

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Chipotle, the fast-casual restaurant chain specializing in Mexican food, has launched a new loyalty program called Chipotle Rewards. The company is currently beta testing the program in three markets: Phoenix, AZ; Kansas City, MO/KS; and Columbus, OH, and plans to roll out nationwide in 2019. For this week’s blog, I thought it would be fun to do a professional review of the new program using the five criteria for assessing loyalty program value I wrote about previously.

First, a few details about Chipotle Rewards. The program is free to join. Members earn 10 points per $1 spent at its restaurants or through catering orders, and 15 points per $1 for orders placed via its website or mobile app. There will be bonus actions consumers can complete to earn additional points. Once a member accumulates 1250 points, those points can be redeemed for a free regular-priced entrée item. Rewards expire after 60 days. Till Nov. 21, 2018, the program is offering a joining incentive of a free order of Chips & Guac after the new member makes the first purchase under the program. Let’s take a look at how this design stacks up against the five value criteria.

Criterion #1: Cash Value

In my geographic area, a typical entrée on the Chipotle menu costs about $7~$8. Together with the point earning ratio of 10 points per $1 and a reward threshold of 1250 points, we can calculate the reward ratio to be ($7~$8/1250)*10 = $0.056~$0.064 per dollar spent (or 5.6%~6.4%). This reward ratio is pretty high compared with a typical credit card reward program, but how does it compare with other restaurant loyalty programs? Chipotle’s direct competitor, QDOBA, also runs a loyalty program called QDOBA Rewards. The program requires 3000 points for a free entrée priced at the $8 range, with lower thresholds for cheaper items. The earning ratio for QDOBA Rewards is the same 10 points per $1 at the two lower tiers (Recruit and Apprentice), and goes up to 15 points per $1 for the Pro tier and 20 points per $1 for the highest Champ tier. Putting these numbers together, it appears QDOBA Rewards has a base reward ratio of about 2.67% for the two lower tiers, and 4% and 5.33% for the two higher tiers. Comparatively speaking, Chipotle Rewards offers a higher cash value. However, considering the bonus points per visit offered to higher-tier members of QDOBA Rewards, the two programs are more comparable in cash value at the higher tiers. Continue reading “Loyalty Program Review: Chipotle Rewards”

Measuring Loyalty Program Performance and ROI Part 3

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I hope you have enjoyed reading Part 1 and Part 2 of the loyalty program performance measurement series. In this last portion, let’s look at what your metrics should be for the last two types of program goals: to attract new customers, and to gain customer insight.

Metrics When New Customer Acquisition is the Goal

The obvious metric for measuring new customer acquisition is the number of new customers acquired as a result of the loyalty program. Although it seems rather straightforward, it is necessary to note a few things about this. One, depending on the nature of your business, determining who are new customers may not be so easy. An online retail business typically has customers’ name and contact information. So identifying and determining the number of new customers is pretty straightforward. Without such information, a new loyalty program member may simply be an existing customer who decided to sign up for the program. Therefore, it is generally not a good idea to count sign-ups for the loyalty program as a metric for customer acquisition.

Instead, you may want to leverage POS data to identify new credit cards that have not previously been used at your business. This is not 100% accurate either obviously, as existing customers may simply be using a different credit card. But it is likely to be closer to the true number of new customers. Measurement of foot traffic or sales and then excluding frequency+spending growth by existing members can be another crude measure of new business. Finally, it is also possible to draw a random sample of your visiting customers and ask the simple question of whether it is the first time that they are buying from your store. Whichever approach you use, it’ll be best to have some baseline customer acquisition numbers before the program was established to compare the new numbers to. Continue reading “Measuring Loyalty Program Performance and ROI Part 3”