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What does the term Loyalty Marketing mean to you? To many, it conjures up images of frequent flyer programs and bagel shop punch cards. Others think of pallets of targeted mailings and coupons. Still others envision segmentation studies, RFM, and predictive models. Guess what? They’re all right…and they’re all wrong. In its broadest sense, loyalty marketing is any activity that attempts to attract and retain valuable customers. This includes direct marketing to current customers designed to increase their purchase frequency, average dollar sale, and overall lifetime value. It also includes reactivation marketing to stimulate additional purchasing from those who have lapsed well beyond the average purchase cycle, and acquisition marketing that targets prospects most likely to become high-value customers. Loyalty Programs Grow—and Become More Diverse Loyalty marketing programs are all around us and getting even more popular. As competition increases and the economy remains soft, loyalty marketing becomes an even more important weapon in a company’s arsenal. It’s almost a cliché to say, but an important marketing maxim nonetheless: the cost of acquiring new customers is substantially higher than retaining current ones. Loyalty marketing programs can help build such retention, especially among customers who have the highest potential value. Loyalty programs can generally be segmented into four types--information programs, soft-benefit/value-add programs, discount programs, and rewards programs. However, we sometimes see these in more complex combinations. Information programs include newsletters, magazines, special web content, and other types of communications that keep customers engaged with your company. They do not provide discounts or rewards. These programs are popular with financial services companies, non-profits, and other businesses where information is valuable. For example, each quarter my insurance broker sends a personalized newsletter along with a page of peel-and-stick return address labels personalized with my name and address. Soft-benefit/value-add programs often provide special benefits that are only available to high-value customers. They are intended to provide value to the customer without discounting the product and to build a more emotional bond, which is the best type of loyalty. Some programs offer special shopping hours, exclusive reservations/customer service phone numbers, free training, or gifts with purchase. These are popular with higher-end retailers, travel service companies, and companies with slim gross margins. For a while, my rental car company only charged me the “street” price for refueling, instead of the usual $4 a gallon, saving me valuable minutes when trying to catch a plane. However, I recently found out--the hard way--that they stopped that benefit. Discount programs introduce “hard benefits,” most often distributed via coupons or a discount card. Grocery store cards are an example, even though many people refer to them as “rewards” programs. Discount programs are also very common with affiliation programs, such as AAA®’s “Show Your Card and Save™” or American Express®’ OPEN® for Small Businesses. Some retailers charge an annual fee for a discount card. Others give them away as part of a broader program. Discount cards are a good option for companies that have a high frequency of purchase and an abundance of direct competition. Check your wallet. I bet you’ll find more than one of these programs in there. Rewards programs give customers a valuable return once certain criteria are met. These may be specified, announced rewards, but can also include more “stealth” rewards to capitalize on the good will of an unexpected bonus. Credit cards have used rewards effectively for years with cash back and merchandise programs. Airline “frequent flyer” programs are the most common example. In fact, “miles” and “points” are now the second most popular currency in the U.S., behind cash. Meeting the Challenges Measuring program effectiveness is a major challenge facing many companies. One reason is the lack of an adequate control cell. We often read about glowing ROI claims after applying a rewards or discount program, due to higher repeat purchase rates and average spending of program members vs. non-members. Without a control cell, that can be very misleading; even when comparing “look-alike” customers, it’s hard to make such claims. In many cases, the customers who decide to become members are more likely to come back, program or not. To combat this, some companies set up test markets, and measure those store results vs. the balance of the chain, or other similar markets. Others simply make the gut decision based on all available data. Some companies rely on partial data sources to measure effectiveness, like their proprietary credit card. Many customers open those accounts for the initial discount, which is usually for a large purchase. If it’s the only data available, they are likely missing some very valuable customers who simply prefer their mileage or cash back credit cards. Traditionally, the type of loyalty program employed by a company was predictable, based on purchase frequency, average dollar sale, competition, and product type. However, we are seeing cross-over, as companies get more aggressive in their efforts to retain high value customers. For example, some of the “big box” retailers have introduced rewards programs. For many, that’s a huge gamble. Their margins are thin already, and the rewards they provide are tangible product, unlike most airline programs, whose rewards are simply excess inventory. To combat this, some companies are having the customer pay to join the program. Unfortunately, that turns the program from a customer benefit to a financial decision. Customers will join if they find it valuable once they “do the math.” That detracts from the emotional gain, creating less incremental spending. Another challenge companies are finding is that their discount cards simply mean that they make less on their best-sellers, and slower movers still sit there. That’s why we see more “selected merchandise” programs, or special benefits to persuade customers to choose certain items. As discussed earlier, the biggest challenge facing companies is tracking purchases. Companies used to append name and address from credit card numbers. Eliminating that practice has made it much more difficult to account for a sufficient percentage of each customer’s sales. That affects development of a CRM strategy based on customer value. Some stores are collecting phone number with each purchase, and having some success. However, even with collection rates of 80% and matching rates of 60%, they’re only about half way home. For tracking purchases, it seems we’re stuck with loyalty cards, at least in the near-term. To make it easier, some companies are providing key tags, or stickers to place on existing cards. Others are asking for the last four digits of the customer’s SSN. Coupling that with their ZIP will eliminate most duplicates. However, some people get frazzled at the mention of SSN. Some Fresh Ideas Soon, new innovations will provide interesting opportunities. When Exxon Mobil® introduced SpeedPass™ technology, customers loved it. Now McDonald’s® (Chicago area) and Stop & Shop® (Boston area) are testing SpeedPass for payment. As anti-fraud processes improve, consumers will be more willing to use trackable, electronic payment for even small purchases. Another innovation is the new scanning technology that does not require line-of-sight. Instead of a bar code, a small device is placed on each item. Customers simply pass through the check-out area, and everything is rung up immediately. At that point, they can insert their loyalty card into the slot for payment. With no live person to ensure your identity, customers will need to identify themselves for their own security, giving stores a rationale for the loyalty card and giving customers a benefit for using it (besides discounts and rewards). Both of these developments can be a boon to companies looking for ways to track customer purchases. And best of all, customer convenience, and in turn satisfaction, will actually increase! Marketing Is Not Loyalty Finally, some companies are putting too much faith in loyalty marketing. By pumping money into this effort, they sometimes cut corners on operations, facilities management, and customer service, expecting a loyalty program to keep customers coming back. It’s important to remember that while loyalty marketing can be valuable asset for any business, nothing can replace friendly service, convenience, quality merchandise, and value. As marketers, we should be the first to admit that we don’t have a monopoly on loyalty! |
Keeping Up with Loyalty Marketing
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