Loyalty 101: Take Notes Before You Roll Out a New Program

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The greatest growth area for customer relationship programs today is retail.

A recent survey reported that, among multi-channel retailers without an existing loyalty program, 43 percent planned to introduce some kind of program within the next year. That’s an astonishing figure—and powerful proof that interest in customer loyalty continues to strengthen.

But what kind of programs will all these eager retailers bring to market? When you’re considering a loyalty program, consider these two recommendations, based on our combined experience administering programs and consulting with companies on loyalty:

  1. Avoid compromising your program
  2. Look beyond points, miles and rewards

Here’s what we mean.


  • Avoid Compromising Your Program

    All too often we’ve watched retailers, who obviously feel the hot breath of their competition, push to get to market quickly by making compromises that, in turn, compromise the success of their program. Some key examples are:

    • Implementing a manual program (such as a punch-card) to get around point-of-sale technology limitations—an approach that usually lacks the ability to gather customer data or track individual behavior
    • Building a program around a private-label credit card in the hopes that it will stimulate acquisition and usage—thus losing the ability to track activity by customers using other forms of payment
    • Excluding online (or offline) purchases because the different channels are managed separately—an organizational issue that prevents retailers from tracking, recognizing or rewarding a customer’s total contribution
    • Basing rewards totally on short-term opportunistic promotions that may drive traffic but fail to provide longer-term incentives for profitable customer behavior and brand involvement
  • Look Beyond Points, Miles and Rewards

    When many people think about customer loyalty, they still think about the granddaddy of all loyalty programs, the airline mileage programs. But Granddad isn’t the leader of the pack, anymore. In fact, the airline reward model may be entirely inappropriate for most retailers (we’re not even convinced it’s the right model for airlines). Such programs, as we’ve said before, may have serious pitfalls for the unwary:

    • Many reward programs treat all customers alike regardless of their potential for incremental business.
    • Those programs that do differentiate among customers with elite status based on frequency find that frequency doesn’t necessarily correlate with profitability—and may not support the segmentation of customer needs.
    • They can be too expensive to be supported by some retailers’ margins.
    • Consumers have a decreasing attention span and declining bandwidth; they already carry too many mileage cards, hotel cards, supermarket club cards and punch-cards from their carwash or dry cleaner.
    • And the most serious drawback is that many structured reward programs fail to motivate incremental business, while rewarding purchases that would have been made, anyway.

But many loyalty practitioners still recommend their clients use earning-and-reward programs built on the old airline model. We think it’s important to consider a wide range of options before launching a program. So, as a service to anyone considering launching a loyalty or customer relationship program, we’ve brought together this brief “Loyalty 101” presentation, to provide an overview of common approaches to customer loyalty—and to point out some of the strengths and most common applications of each strategy.


Traditional Program Designs

Loyalty Program approaches Common use Potential issues
Earning points

toward rewards

of free or

discounted

product
Environments with high transaction frequency, moderate price points.


Caution:

Best when product has high perceived value with low variable cost, e.g., airfare. Such a structure creates functional loyalty but rarely emotional affinity.
Difficult to get traction in environments with longer purchase cycle. Economics of many retail businesses don’t allow for leverage between reward cost and perceived value. Profitable applications generally require short earning periods and rewards based on discounts rather than free product.
Use of third-party currencies New programs often enter into partnerships expecting them to provide more cost-effective redemption opportunities.


Caution:

It seldom works. At best, partnerships can provide opportunities to “create”brands with a long purchase cycle. The key determinant of success is careful selection for brand fit. Being the currency for partners to purchase works best for legacy loyalty currencies or concepts, such as airline miles or U-promise.
Customers prefer rewards from the sponsor brand, not partners, with the notable exception of miles for the frequent flyer segment. Relying on partners risks brand dilution without providing customers with something they value. Creating a currency that others will buy works only for the hottest brand in a category. Additionally, partners have their own acquisition goals that often do not allow customization or recognition of the sponsor brand’s profitable members.
Credit cards with single-brand rebates or discounts Can be used to gain loyalty for 12 months but seldom multi-year, as Ford and GM found. Retailers often look to enhance their private-label card with a program.


Caution:

The strategy becomes motivating to the customer when private-label card benefits are part of a multi-tender program.
It can be challenging to create a motivating balance of long and short-term benefits. Also, a program limited to the private label card disenfranchises customers who manage their credit across multiple cards.
Contracts/

Cancellation

penalties

(negative loyalty)
Applied in subscription environments such as wireless service to buy multi-year loyalty.


Caution:

Needs strong brand marketing (like Verizon) to avoid negative functional loyalty.
Most retailers, especially those dealing in commoditized products, don’t foster such a high-involvement tactic.


Beyond Formal Programs

There are a number of constructs that various companies use for recognizing and rewarding loyal behavior both within and outside of a formal loyalty program.

Reward and recognition tools Common use Potential issues
Information Maintenance of relationship, particularly between transactions for high involvement purchases. Customers today want

unbiased, relevant

information about the products they buy and the businesses they patronize. Most retailers over-use promotional email to drive traffic.
Access Provides member with access to products/services/experiences with limited availability e.g., event tickets, airplane simulators, preferred seating, special shopping nights, etc. Strong opportunity for partner tie-ins to create positive on-going relationship not based on sales. Brand fit is again crucial.
Elite Status Member receives status for reaching threshold levels of purchase/participation. A published structure creates aspiration and motivates desired behaviors. The retail environment (unlike airlines) is too democratic to tolerate visibly “special treatment” for certain customers. Also, retail segmentation may vary by product needs rather than frequency of purchase. Finally, differentiation is usually operationally difficult for retailers to deliver.
Recognition Desirable member behaviors are recognized with thank yous, status, or other rewards. The challenge is creating relevant on-going recognition opportunities.
Special Services Differentiated treatment based on customer value or needs. Best Buy has the best practice case study in their concept stores, with special sections for small business, home theater sections designed for affluent males or “concierges” for “soccer moms.” As with Elite Status, special services must be delivered in a way that doesn’t offend “regular customers.”
Involvement tactics Create interactive opportunities with the brand, the product(s) and/or a community of customers. Examples range from cocktail parties for donors to beta testers to Amazon.com user reviews. Works best for retailers with strong brands and strong values. Very difficult for low- or negative- involvement categories and brands unless there is a need for information (e.g. insurance).

These charts provide an overview of some of the most common loyalty program, customer recognition and reward tactics. But it is important to remember that the “right” program for your industry, your business model and, most of all, your customers’ unique needs and preferences will most likely blend a number of these approaches. Some “programs” may best be delivered transparently, as an integral part of the way you do business, rather than as a visible program. Think of it as “programmatic loyalty initiatives” instead of a loyalty program. Finally, any program should always be designed to generate incremental sales while reinforcing your company’s brand message and personality; a program should be a logical, comfortable extension of your core business, rather than a random appendage any marketer could offer.

The best programs are seldom off-the-shelf points-and-rewards schemes. Such programs may be the easiest and cheapest for the marketer to develop; but in the long run, they are often expensive, inflexible and, worst of all, ineffective at reaching what should be the goal of any well-designed customer relationship program: increasing your return on your marketing investment and maximizing lifetime customer value.

© 2005 Metzner Schneider Associates

Kate Hogenson
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Kate Baumgart Hogenson is a senior associate at Metzner Schneider Associates. MSA cofounder Howard Schneider was executive vice president and chief creative officer with Brierley+Partners from 1988 to 2002. MSA cofounder Richard Metzner was cofounder and president of CRM pioneer Brierley+Partners.

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