CRM Strategy: Fire the Worst Customers, Reward the Loyal

Back in 1995, Norman Mayne, the CEO of Dorothy Lane Market, knew he was creating a major stir when he was one of the first executives to start talking about "firing" customers. But he did just that, and then launched Club DLM. Still the most radical, data-driven loyalty program in the supermarket industry, Club DLM is aimed squarely at attracting, keeping and pampering only the most profitable and most regular customers at the expense of everyone else. "If youre loyal, we treat you very well," says Mayne, whose father, Calvin, started Dorothy Lane as a roadside food stand in 1948. If youre not? Go elsewhere. Mayne fully acknowledges hes ceded the cherry-pickers to Kroger and Meijer, his chain-store rivals. Mayne figures its one big reason why hes been able to keep Dayton, Ohio-based Dorothy Lane Market in the black amid growing competition.

While the three-store grocery chain offers what seems like good old-fashioned personalized service, it relies on sophisticated use of technology to track individual customer spending habits and pinpoint its most profitable customers, design its stores to provide better service and offer each type of customer targeted incentives to keep them coming back for more.

Its not all about price: Some prices are as much or higher than rivals. The way Mayne figures it, targeted pampering is the secret, and keeping the best customers from defecting can influence DLMs growth rate considerably.

So far so good: Of all the people who have joined Club DLM since its inception eight years ago, 56 percent were still shopping with DLM in 2003. But studies suggest that the average one-year customer retention rate in American business is 80 percent, which would mean a complete turnover every five years. So Maynes data-driven loyalty strategy is clearly working. Mayne says Club DLM has given his stores an extra three points of gross margin and the ability to shape a new-customer strategy that generates higher profits per customer.

"Before, we used to advertise our specials in newspapers at the cost of thousands of dollars per week," Mayne says. Not anymore. "We realized that whenever we ran those ads, all we did was attract cherry-pickers." In October 1995, the chain ran its last newspaper ad and began focusing its marketing efforts on keeping and pleasing the 30 percent of its customers who supply 80 percent of its profits, and especially pleasing the 1 percent who account for 11 percent of the take.

The perks vary. Sometimes theyre highly personalized, as when the chain offered its top 800 bread-buying customers three free loaves of French bread from its bakery. Sometimes, the perks are event-driven. During a local price war on milk, Maynes recalls, grocers were paying $1.70 a gallon for milk and selling it for 99 cents. Mayne knew the one way to go broke was to lose 71 cents on an item that people buy 200 times a year. So for good customers, DLM printed coupons that let them buy up to five gallons of milk for 49 cents a gallon. "People who just stopped into the store paid $1.89," Maynes says.

But Mayne also uses the loyalty program to help shape the business itself, using customer data to influence store offerings. For example, based on customer preferences for healthier foods, the stores now offer a wide variety of perishables, natural foods and gourmet products. A walk-in, temperature-controlled wine cellar, a cooking school and a "Healthy Living Department" are new features. The chain also recently began using a dietician to run store tours and a support group for customers with diabetes. Its employee newsletter, The Legend Continues, reports how a store associate baked a cake for a customer to demonstrate a fat-free recipe. "To us, loyalty marketing engenders all of our behavior. Its about much more than Club DLM," says Amy Brinkmoeller, the companys manager of information systems. "We underpromise and overdeliver."

Along with regular e-mails, the 14,000 members of the loyalty program who receive the newsletter get different versions, depending on their spending levels. Along with food-related tips, the newsletter includes 8 to 12 coupons on the back page. Unlike standard store coupons, however, these coupons are targeted, with different customer groups receiving different batches of coupons and different levels of discounts—depending on what the data tells DLM executives about which customers like what. And the more the customer spends, the better the deal.

Dorothy Lanes marketing strategy has earned it admirers far outside of Dayton. "Loyalty programs dont cost less than advertising," says Hal Varian, dean of the School of Information Management and Systems at U.C. Berkeley. "Its a question of better-targeted advertising at a similar cost, which enables Dorothy Lane to get better results per customer—a much more effective way to market."

Indeed, of the chains 50,000 weekly transactions, 65 percent involve loyalty cards, and the privately held company has 2003 revenues of $60 million, up from $36 million in 1997, reflecting the opening of a third store in 2002.

But Mayne considers the most important payoff to be the data that the Club DLM program keeps gathering, enriching, and slicing and dicing every time a club card is swiped at checkout. "I never realized how blind we were about our customers until we started collecting and analyzing the data," he says. The upshot? Persuasion power lets a small-fry like Dorothy Lane create a niche to compete effectively against the big guys and create a customer experience that people are willing to pay for again and again. Price, says Mayne—like size—isnt everything.