9 - Loyalty
Loyalty pertains to the expected future behavior of a customer, that they are committed to continuing to purchase a brand. Most notably, it does not pertain to past behavior: that a customer has purchased from you in the past, even repeatedly, is not a reliable sign that they will continue to do so, and taking it for granted that they will do so may decrease their intent to purchase.
Companies are recognizing the importance of rewarding and valuing loyal customers, as the cost of retaining their business is significantly less than that of prospecting for new customers. Not only are your competitors constantly seeking to lure your customers away, but customer loyalty is generally low in certain categories - one study finds 79% of casual apparel and 70% of grocery consumers say they are always seeking alternatives to their current retailers (this far exceeds most other product categories).
Point-based reward systems are a common approach to gaining an ongoing stream of business. They must be carefully balanced to ensure that the program is financially attractive to the prospects, but at the same time the value of giveaways must remain well below the profit made from their business. But they are not a novelty: one study found that there were two billion membership accounts in the US, the average household is a member of 18, and participation has increased by 16% in the past two years.
It's also been suggested that loyalty programs do not necessarily increase consumer spending. The goal is to up-sell or cross-sell a loyal customer to gain more revenue from them, but this doesn't always happen - in grocery and casual apparel, less than half of program participants spent more.
Meanwhile, the basic costs of operating loyalty programs are high, between operational costs and the discounts provided, and there is the problem of freeloaders, who seek to get the benefits of the program without paying in.
A particular concern for merchants in low-margin categories or those who lack significant economies of scale is that the travel and credit card industries, who have much larger margin, have set expectations fairly high. If you cannot offer similar treatment through your rewards program, it will seem miserly by comparison to what they are accustomed to receiving.
Small and low-margin companies may attempt to skirt the problems of rolling their own program by latching onto a larger system. The author refers to the Nectar system, popular in the UK, which is shared by a wide range of companies.
Another strategy is to offer rewards with greater perceived value that are specific to the merchant, such as discounts on store purchases. Consider the CVS "ExtraCare" program that rebates 2% on purchases and an extra dollar for every two prescriptions filled. CVS also gives program members the ability to accrue points in the U-Promise program, which is an independent platform that accrues credits for college tuition that is leveraged by various brands and retailers.
There's also some consideration of "rolling ownership" products in which a member buys back old or used merchandise by extending a discount on new items. This seems particularly worthwhile for high fashion (who don't want their brands on the racks of the local thrift store)
The retailer GameStop offers store credit as well as rewards points to their customers who trade in old games and equipment, which has been highly successful. The store reports that nearly half of the firm's sales are attached to a club membership, and club members spend three times more than non-members. There are also two levels of membership, one for free and another that costs $14.99 to join (for which the member gets discounts, a magazine, and exclusive offers) and has found the paying members to be "much more committed" to the brand.
The author presents a mash-up of interviews with three "leading experts" in loyalty programs.
- Getting customers into loyalty programs is critical, Every anonymous transaction represents lost future sales and a blind spot in your customer intelligence that will lead you to make poorly informed decisions. You must know your customers in order to serve them well enough to keep them - and without a program to identify and track them, you don't really know them.
- Loyalty programs are necessary for brand differentiation. Only one company in a category can be the low-price leader. For every other retailer there is a specific reason customers choose to shop them, which loyalty programs can help to identify.
- Loyalty programs should be profitable - if they aren't, then it's a bad idea to have one. However, it's generally the case that the program is badly conceived or executed. Many "me too" programs fall into this rut - that's not strategic thinking, and has little chance of being successful.
- A company must be customer-centric to get benefits from a loyalty program. If it is indifferent to the customer, the program will likely fail, or the firm will fail to get benefits from the program. A program that attempts to manipulate the customer for the benefit of the brand is doomed.
- Retailers generally do loyalty programs better than manufacturers, who are a step removed from the customers. They have a more direct relationship and can offer more choices to meet more needs. Consumers must be highly motivated to participate in a program run by a manufacturer with whom they have no retail contact, or it must be exceedingly easy to participate.
- Increasing or retaining sales directly is one potential benefit of a loyalty program - but the greater benefit is getting detailed intelligence about customers than informs the brand on how to become more valuable to customers.
- Private-label cards often shoot themselves in the foot by offering an immediate discount (10% or 20% in some cases) for applying. As expected, the card immediately goes into a drawer, and it becomes a discount (without benefit to the store) rather than a loyalty program.
- American Express has done well. Its rewards points program are a value-add to customers who use the card regularly (and use it more regularly to earn points), and their "open" forum for small business owners provides a genuine value-add that underscores the value of the card.
- A case study for cross study was a brand in the canned soup category communicated a discount on its frozen dinner line to participants in a loyalty program. Their redemption rate was nearly 50%, compared to 9% among other shoppers to whom the same promotion was extended.
- The overtures to loyalists must be intelligently timed. Consider disposable razors: a campaign to restock is only appealing to those who need to restock - a person who has just purchased a five-pack isn't interested, and will forget about it. Push it when he's using the last razor in the pack, and take rates will significantly increase.
- Universal scrip programs created by a coalition of merchants work well in small markets like Canada, the UK, and Australia, but they will likely not be transferrable to the US. Getting a critical mass of participating retailers is not impossible, but extremely difficult in such a large and diverse market.
- Loyalty programs of the past reflected the values of past generations - the silent and the boomer generations were basically conformists. More recent generations are individualistic, and that will need to figure into the way they were approached. Breadth and flexibility will be key differences in programs that survive in future, and they must account for the always-on lifestyle.
- A particular problem for the future is that younger customers have received significant incentives through services such as Groupon, which can offer deep discounts of 50% or more. Offering a 10% discount seems generous to many merchants, yet unappealing to their target market.
- Also consider the potential of value adds that encourage loyalty at the full price rather than "bribing" customers to rebuy. Some of the more successful programs offer perks rather than discounts.
- Product design can also be a source of loyalty - consider how well Apple's products work when used in conjunction with one another, making it easier for an iPhone or iPad user to connect their device to an Apple computer than a PC. The additional ease of use encourages cross-product loyalty to their brand.