It’s no secret that the number of cross-channel customers has grown exponentially in recent years — to more than 45 million in 2005 — and that they tend to be more valuable than single-channel shoppers. Cambridge, MA-based Forrester Research has found that multichannel customers spend up to 10 times as much as single-channel customers do, and they have an income that’s about $10,000 higher.
As a result, more companies are creating channel-agnostic frequent-buyer/loyalty programs, despite concern about potential operational challenges.
Customers are beginning to expect loyalty programs that span all channels, says Kelly Hlavinka, director at Milford, OH-based Colloquy, a provider of loyalty marketing research and services. “From a strategic-design perspective, every retailer and multichannel merchant should reward [customers] across all channels.”
In the past, she says, merchants focused more on their convenience than on what their customers would find most rewarding. “If you dialed the clock back five or six years, companies would put loyalty programs in place only as far as what was easy to implement,” Hlavinka says. A classic example is a program that rewards customers only when they charge items on the merchant’s private-label credit card rather than rewarding them for a purchase regardless of the payment method. In fact, this is still fairly prevalent, she says: “For example, Neiman Marcus still only rewards purchases on their store card.”
Likewise, some programs reward customers only for purchases made in a specific channel. For instance, members of bookseller Borders’ loyalty program cannot accrue points from online purchase. And members of J&R Music and Computer World’s loyalty program, which the merchant is still beta-testing, can earn points only on orders from the Website, not from phone or in-store purchases.
But for the most part, loyalty marketing professionals advise against designing a program to favor one channel over another. With a loyalty program today, “you really have to handle at least two channels,” says Shari Altman, president of Altman Dedicated Direct, a Rural Hall, NC-based consultancy specializing in acquisition and loyalty marketing. “It behooves you to integrate because your customers shop differently — some on the phone, some online, some by mail order catalog. Consumers are ahead of merchants and marketers in terms of channel integration. They think about you as a brand.”
Taking customers’ preferences in mind is, of course, part and parcel of a loyalty marketing program: You are, after all, trying to retain and get more value of your best buyers by appealing to them in a way that the competition doesn’t. But a cross-channel loyalty program offers you another benefit as well, Hlavinka says: A well-crafted program will allow you to get a view into a customer’s purchase history over time across multiple payment methods and multiple channels. “This is the first step in truly understanding a customer’s value to the merchant,” she says.
Laying the groundwork
The first step in implementing a cross-channel loyalty program is understanding the opportunity, says Michael Greenberg, vice president of marketing for Loyalty Lab, a San Francisco-based developer of customer loyalty programs for retailers. “Determine whether there is an opportunity for increased revenue through greater frequency [of purchase] and increased retention.”
Next, Altman says, determine the type of program that’s most appropriate for your brand: a discount program vs. a points program, for instance, and what kind of membership fees, if any, you will charge. If you decide to reward members with discounts, will they be offered on all items or only selected items? And what soft benefits, or value-added services, will be available to members? Options include special toll-free service lines, early notification of sales, previews of new merchandise, extended guarantees, and member newsletters or magazines.
Developing the general program structure requires an attention to detail, as you have to work out the fine points of fund rates, expiration dates, and promotion frequency. “You have to do some level of analysis,” Altman says. “Whether they’re paying to become a member or they are becoming members based on existing spending, in essence you’re giving something away. Loyalty programs all have a cost for you. Assess and determine those costs up front.”
You also need to ensure that your database and order management systems can gather purchase data, maintain point balances, and recognize and reward customers across channels. If your existing systems don’t have the capacity to do so, you’ll need to upgrade or outsource. For example, using a system such as Epsilon’s Loyalty Solutions Platform, you can send disparate data feeds from retail, Internet, and catalog operations to a third-party loyalty program operator, which will convert and consolidate the information on its platform to create one integrated database on your behalf.
“The key is setting up data-capture systems at the point of sale, whether it’s the Internet channel or data from catalogs,” Hlavinka says. Direct marketers already have good data collection and capture processes for their Web and catalog channels, she says, “because without it, they can’t fulfill orders after all. But at point-of-sale in a retail store, a merchant doesn’t have to collect transaction customer data to process a sale.”
That’s one reason cross-channel loyalty programs typically issue cards for members to use when buying items in the stores, Hlavinka says. So even if they pay cash for items, they can show their card and have their account credited for the purchase. The loyalty cards, when scanned, have the pertinent customer data for stores to keep track of purchases.
Start me up
It takes from six months to a year to plan, test, and roll out a cross-channel loyalty program, says Melissa Tatoris, director of loyalty marketing for Delray Beach, FL-based Office Depot. The $14.4 billion cataloger/retailer launched its Worklife Rewards cross-channel loyalty program in June 2006; an earlier version of the program, Advantage, launched in March 2004.
Members of the Worklife Rewards program earn 5% back in bonus rewards when they spend $200 or more on qualified purchases during a reward period, an additional 15% back on qualified purchases of Office Depot’s Copy.Print.Ship. services of at least $35 during a reward period, and double reward credit every day on Office Depot-brand ink and toner.
“We had to determine whether we should have a loyalty program,” Tatoris says. “Research indicates that consumers place a high value on loyalty programs. But you have to run your numbers based on what your value proposition is going to be, making sure it’s rewarding for customers and financially beneficial for the company. You have to find that magic sweet spot.”
As is the case with any other major marketing initiative, part of the prep work involves conducting a competitive analysis and a marketing plan. The name of the program, too, is “critically important,” Tatoris says. Office Depot changed the name of its program from Advantage to Worklife Rewards to reflect its customer base of both consumers and businesses, or the “convergence of work and life.”
“You also have to make sure all marketing collateral is tied together,” Tatoris continues. “Work in collaboration with everyone from retail personnel to advertising and the IT department who code it for you internally. It’s critically important everyone is aligned on the team.”
Putting it to the test
When it’s time to test the program, you should invite a representative sample — not just a group of your best customers — to join. If there are multiple test concepts, Greenberg says, make sure the samples for each are of similar composition. Most experts say the test period should be from three months to a year long.
“Give time for any operational issues to surface,” Altman advises. “It’s very hard to stop a program once it starts. It definitely can hurt you, but you can make changes during the test period.” You can also use the test period to change or improve documentation, as there are always issues missed in the training materials that need to be updated before the public rollout.
While you’re testing, keep a control group for comparison, and measure results. Key metrics include enrollment rate, incremental visits, and average order size. The goal is to have enough data after the specified test period to determine if the test group made enough additional purchases or larger purchases to warrant the expense of the program.
Greenberg says it usually doesn’t take long to figure out if a loyalty program will be successful. “Usually a winner is pretty clear, pretty quickly,” he says. “The test period helps shake out the operations team, and 60 days is plenty to get that straightened out.” We’re in a day and age where it’s so much easier to make changes, he notes: “People are much more flexible now with changes, and a program can be adapted on the fly.”
You should continue measuring and analyzing performance even after you roll out the loyalty program. You also want to keep testing ideas to improve results. And continue to adjust the benefits as well, Greenberg says: “Make frequent updates to benefits to keep the program fresh.”
For Office Depot, Worklife Rewards has “an extremely successful program,” Tatoris says. “We believe our program does give us an edge. Multichannel shoppers are the most loyal, shop the most, and do spend more. We want to make it seamless for the customer, and we’ve done a super job in maintaining our customer growth.”
Implementing a cross-channel loyalty program, Tatoris concludes, is “really a process of effectively planning, having a solid value proposition, having resources in place, and flawless execution.” And as long as the plan is clear, “there’s no more difficulty in launching a loyalty program in a single channel or multiple channels,” she says.
In the end, Greenberg says understanding your customer is crucial to developing a successful loyalty program. “Each company is different, and the appropriate approach for a particular company depends on this understanding,” he says.
Loyalty programs are one of the most common mechanisms for tying together transactions from multiple channels. A single-channel program only makes sense in a testing phase, where a retailer is trying to work out logistics and is tweaking the value proposition, Greenberg notes. “Not running the program in all channels means they would be leaving most of the value untapped.”
Looking for more information on developing or maintaining a loyalty program?
Go to www.ChiefMarketer.com, a sister site of Multichannel Merchant, and input “loyalty program” in the search box.
You’ll find a series of loyalty marketing by Colloquy editorial director Rick Ferguson as well as articles by Loyalty Lab’s Michael Greenberg.
SHOULD CLUB MEMBERS PAY TO PLAY?
When you’re launching a loyalty program, you have to determine to whom you will offering the program and what the requirements are.
“Some people pay to get in, and those programs are simple and straightforward,” says consultant Shari Altman, president of Altman Dedicated Direct. “In other loyalty programs, people become members by exhibiting a certain type of shopping behavior, such as buying more than X amount of products.”
There are several considerations as to whether to charge a fee or to offer a free program. Kelly Hlavinka, director at loyalty marketing services provider Colloquy, says the most important is how wide a cross-section of your customers you want to participate. Colloquy has found that fee-based programs typically result in only 30%- 40% of the enrollments of a free program. “So if [customer] identification is a key objective, a fee-based program may not be the best fit,” she says.
If you’re not sure which approach is best for you, one option is to ask your customers for their preferences, says Michael Greenberg, vice president of marketing for loyalty program developer Loyalty Lab. Or you could pilot the two types of program in different markets to see which one performs better. You might also ask your store managers which approach they think will work best, since they usually know the customer better than the marketing department, Greenberg notes.