Get with the Loyalty Program

May 01, 2006 9:30 PM  By

Creating a loyalty program that works is more critical now than ever. Case in point: The number of shoppers who defined themselves as longtime loyal customers dipped to 77% this year from 84% in 2005, according to a study by Adjoined Consulting and SAS.

That should come as no surprise. Research has shown that 36% of Wal-Mart shoppers also shop at Target. And shoppers looking for a new iPod can pick from 27 retailers. Indeed, loyalty can be elusive.

So how do we define a loyal customer? At a high level, it’s someone who will buy from you time and time again regardless of the price. A loyal customer is looking for something from you beyond a price point — something he can’t get elsewhere, something that sets you apart and makes him feel special.

Drilling down further, we see that every merchant defines a loyal customer a bit differently. For some it might be a shopper who bought twice in the past year. For others it’s someone who returns to shop twice a week. To an airline it might be an executive who flies 25,000 miles a year. For a retail giant it might be a woman who buys two pairs of Manolo Blahnik shoes a month.

Regardless of how you define loyalty, remember this: A loyalty program should be only one component of a company’s overall strategy and marketing campaign. If it’s not connected to a larger company-wide initiative it will most certainly fail.

Today about a quarter of all online retailers, from outdoor gear merchant REI to electronics superstore Best Buy, have established loyalty programs. Another 43% of merchants plan to implement one. These programs can boost customer retention rates by an average of 5% and increase profits by 25%-95%, according to JupiterResearch.

Yet Forrester Research, in a January report, said formal loyalty programs can be ineffective if you are overpromoting discounts and special offers — essentially rewarding people for purchasing at a lower price. The Forrester study also found that only about a quarter of consumers felt more connected to a retailer because of its loyalty program.

The truth is, designing a loyalty program for your business can be tricky. A loyalty program will fail if it doesn’t meet your needs and the needs of the customer. No two companies are alike. No two shoppers are alike. Remember this, and you will increase your chance of success.

KNOW YOUR CUSTOMER

Before you begin work on a loyalty program, determine what motivates your customers. Consider the income level of the group you are trying to target. Are you trying to shift an occasional shopper into a higher-value category, or are you simply trying to hold on to your mid- to high-volume customers? This will help you determine your plan.

To best uncover what motivates your customers, try the obvious: Ask them in a simple e-mail survey. Listen to what they tell you.

The following are some areas that define what motivates customers to join a loyalty program. Some programs address a mix of these categories, of course, but these four categories should provide a starting base:

  1. Recognition/status

    Airlines provide this to frequent flyers through points. Frequent flyers get to board first, they get upgraded, and they are treated far better than the average Joe in coach. Banana Republic’s Luxe program, which offers free alterations and basic shipping at no charge, is limited to shoppers who spend at least $800 a year with the retailer. At Babystyle.com, big-spending customers earn perks such as free shipping, free gift wrap, and bonus gifts when they spend more. Higher-income “elite” customers typically seek status, thereby responding to a tiered offering such as Babystyle’s.

  2. Discounts and rewards

    For a $29 annual membership, women’s sportswear merchant Title Nine offers its Team T9 members 5% off every product as well as shipping upgrades and prior notice of upcoming sales and product introductions. Athletic retailer FinishLine.com gives customers a $20 reward certificate each time they spend $200 over the course of a year. These customers also get discounts on footwear and apparel. In general, value seekers in lower-income brackets than “elite” customers respond well to coupons and discounts.

  3. High quality and service

    Skincare and cosmetics giant Clinique provides this by giving club members personal product recommendations, the ability to shop from past purchases, faster checkout, expert skincare and makeup tips, access to its lab reports, and free samples with orders. A little personal attention and a free sample can go a long way with the right customer.

  4. Convenience

    Overstock.com gives its Club O members their own customer service number to call so that they don’t have to wait. For anyone who hates musical hold and values his time, this is a great perk. For the $29.95 Club O fee, members also always know that shipping will cost just $1, whether they buy a blender or a couch.

FREE OR FEE?

Once you’ve analyzed what motivates your customers, you should be able to determine the type of program you’ll choose: free, as many grocers and pharmacies offer, or a fee-based program, found at big club stores such as Costco and retailers such as Barnes & Noble. You could also offer a branded credit card, as Banana Republic, Home Depot, and Macy’s, among many others, do. These cards provide shoppers a percentage off purchases and cash back. If you go this route, it’s smart to partner with complementary sellers to reach consumers in a specific lifestyle demographic and to tailor rewards to include family and friends of your most profitable customers, as Forrester Research recommends.

With a fee-based program, be wary of being too frugal. It’s a good idea to make promotional offers account for at least 10% of your overall reward expense. Customers must feel that they are getting something valuable in exchange for their investment.

Fee-based programs can offer many diverse benefits to shoppers. Amazon.com, for example, offers a $79 free-shipping program that’s attractive to its most active customers, saving them hundreds of dollars on shipping.

Of course, for someone who buys two CDs a year, a shipping program isn’t going to fly. Garden Botanika, which sells natural beauty products, offers a $15 annual Garden Club membership. Members, who generate about 54% of the company’s sales, receive 15% off purchases every day. The program, which relaunched last year after the company increased both its membership fee and its discount, has proven a success.

So has a free program offered by candle merchant Illuminations. Before launching its Candlelight Club, the company knew it wanted a free loyalty program. Clay Lingo, vice president of Illumination’s direct-to-consumer business, also didn’t want to ask his customers to track what they bought with points or to tote a plastic card in their wallet to get discounts. He wanted the program to be easy and seamless. Candlelight Club gives members exclusive offers not available in the company’s 41 stores, new-product offerings, access to storewide sales not available to the general public, and decorating tips. Lingo says Candlelight Club is a hit; it has one of the lower opt-out rates in the retail business.

With either a free or a paid loyalty program, consider adding VIP access to special or limited-edition products, which helps draw shoppers back to the site. So does advance notice of sales or new products. Exclusive content, such as special Website sections or e-mailed articles, is also an effective tool to encourage loyalty. Free programs can be more lucrative when you offer coupons that apply to higher-margin products.

MULTICHANNEL EXECUTION

Making a loyalty program work across your Website, catalog, and stores might seem daunting, but it’s doable. When launching Candlelight Club in 2002, Illuminations unveiled its program in its stores, where cashiers entered customer e-mail addresses into the point-of-sales terminal. Few customers opted out. Today customers can sign up for the program online.

Lingo measures the effectiveness of Candlelight Club promotions by tracking the clickthrough rates, following online purchasing habits after an e-mail promotion is sent out or in-store traffic patterns in specific geographic areas after a store coupon is e-mailed. He has found that Illuminations always see a lift when it is messaging, though some messages resonate more than others.

Still, many companies are finding that it’s difficult to deeply integrate their channels and reach specific groups of customers with their existing computer systems. One problem noted by Mark Goldstein, CEO of San Francisco-based services provider Loyalty Lab, is that many e-mail providers don’t support the more specific demands of today’s loyalty programs, which require combing data from multiple sources and giving clients a united view of customer purchases on the Web, in the store, and through the catalog.

By having access to a multichannel view of customers, a company can tailor promotions to reflect buyers’ complete buying profile, not just their buying behavior online. Goldstein says that if a vendor can’t provide real-time sales statistics tracking the impact of your loyalty program across all your channels it might be time for a new vendor.

If you haven’t started planning a loyalty program, it’s time to get going. Seek help from the professionals, make sure you’ve detailed your expected outcome, and above all, understand that a first try isn’t cast in stone. You can always edit what’s not working and add new features, because this is a work in progress.

The bottom line? You must view a loyalty program as an opportunity, a valuable way for you to better know your customers, who will tell you what they like and don’t like. So listen.


Ken Burke is founder/CEO of MarketLive, an e-commerce technology and services provider based in Petaluma, CA, and the author of Intelligent Selling: The Art and Science of Selling Online.

Prelaunch checklist

You’ve considered what motivates customers and decided on the type of loyalty plan that you think will work best. That’s great — now here are a few more tasks to undertake before you launch:

  • Ballpark a reasonable launch date.
  • Estimate the program’s impact on the company’s overall sales and customer retention numbers.
  • Try to determine how long it will take to get a return on your investment. Experts say it’s typically a two-year wait for ROI, so be patient.
  • Test your program before it launches. This will give you the opportunity to prevent a disaster and make tweaks before you introduce the program to the general public.
    KB