Customer intelligence is a powerful tool for building loyal customer relationships. However, companies often misunderstand the meaning and relevance of customer loyalty. Sometimes, for instance, they strive for the loyalty of unprofitable customers. Other times, they reward their best, most profitable customers in ways that undermine profitability.

“Rewarding them by giving discounts is very expensive,” says Harvard Business School professor Rajiv Lal, who recently has studied the impact of Frequent Shopper Programs on grocery retailing. “The best way to reward your best customers is by making them an offer that is highly valued by them, but doesn't cost you a lot of money. For example, allocate more services to good customers. This could mean a designated line at the deli counter, or a ten items or less checkout line. You already have the buying behavior you want. So think about your costs, and make sure you aren't changing good behavior."

Lal also cites the powerful example of Harrah’s Entertainment – profiled recently in this space – to illustrate how to smartly use a rewards program to affect customer behavior: “They ask a) How much is this customer potentially worth? and b) what would it take to make the customer spend more? It isn't about rewarding existing behavior. It is about using the loyalty program—the data you collect—to affect customer behavior in ways that are rewarding for both the customer and the store. Unfortunately, most retailers do not have any sense of wallet share.”