LOYAL SUBJECTS

Oct 01, 2005 9:30 PM  By

Periodically I get calls from prospective clients stating that they “want to start a loyalty program or club.” When I start probing to understand what they feel the goals of their loyalty program should be, most reply with a vague “have greater loyalty from our customers.” Many marketers assume that a formal loyalty program or club is the only way to obtain this.

Here’s the first thing you need to know about loyalty programs: They can’t create loyalty. Sounds contradictory, doesn’t it? But the reality is that true loyalty is garnered by positive experiences your customer has with your brand: your products, your customer service staff, your Website, your catalog, your store. If there isn’t enough value in the products you offer, or if your customer service staff is surly or unavailable, or if your site is confusing and inaccessible, it will reduce loyalty. No formal loyalty program or club can make up for poor-quality products or service.

That said, a value-added program that complements and enhances your already-excellent offerings can bring you a bigger payback sooner. At the same time, certain obstacles can make formal loyalty programs difficult or impossible to implement.

Loyalty programs take time to set up and execute, and then time to track and analyze to determine results. If your situation demands quick results, a formal loyalty program may not make sense for your firm at this time. The same holds true if you don’t have the ability to implement the systems necessary to track members and ensure that they receive the benefits due them. If program memberships are renewed annually, then you also need to be able to identify anniversary dates for membership.

And formal loyalty programs are difficult to eliminate. Once you announce your program in your catalog, on your Website, and in your stores, canceling it may engender anger from existing members.

All of this means you need to think long and hard about a formal loyalty program before embarking on one, making sure it is indeed the best solution to achieve the goals you are aiming for. For example, if analysis shows that increasing the number of one-time buyers who make a second purchase will bring large dividends for your firm, consider sending a simple personalized letter and one-time special offer at the appropriate number of months after the first purchase if no second purchase has been made. This might enable you to achieve your goal with a lot less expense, risk, and time than developing a formal loyalty program.

WHAT A LOYALTY PROGRAM CAN DO

Loyalty programs can serve a purpose. They can enhance existing brand loyalty, improve customer retention and lifetime value, and increase your firm’s share of wallet (the percentage of dollars in the product category that the customer spends with your brand).

The first step in crafting any loyalty program is to start with the end in mind — which of the viable goals are you trying to achieve, and for which customer segments? It’s important to look at a loyalty program as part of the bigger picture of customer retention. To do that we need to examine questions such as

  • How long, on average, have customers been active buyers?

  • How long does it take the average new buyer to make his second purchase? At what point after the first purchase does it become more likely that the new buyer will not buy again — in other words, go inactive?

  • For two-time or more-active buyers, how many months after the last purchase is it more likely they will become inactive rather than purchase again?

  • How do you define your best — and presumably most profitable — buyers? What purchasing characteristics do they have in terms of how long they have been customers, the number of purchases made per year, the number of items per order, the average order size, etc.?

If different segments of your file are based on demographics, psychographics, product categories of purchase, or other segmentation characteristics, the answers to these questions may be different for each of those segments. But the point is to look at understanding how and when interaction with your brand is at risk of going dormant, as well as what actions separate the unprofitable customers from the profitable customers and the highly profitable customers.

Once you understand what is happening on your file, you can consider what loyalty and retention tactics, including implementation of a formal loyalty program, may make sense to improve the situation. At the heart of every loyalty program — formal or not — should be two focal points:

  • Identifying which unprofitable customers can be made profitable and what you need to do to move those unprofitable customers to profitable status.

  • Determining which offers in terms of added-value products and services can provide incentive for profitable customers to become more like your best customers.

    If you can pinpoint which customers are most at risk of becoming inactive and when, and if you can home in on which customers can be made more profitable, then perhaps you would benefit from launching a formal loyalty program. But first, just a few more questions:

  • Does your brand enjoy a certain amount of loyalty already? Do your products and services satisfy customers most of the time?

  • Have you defined which segments of your audience you want to target with your retention goals? Do you have multiple segments and goals in mind?

  • Will offering a formal loyalty program give you an advantage over competitors — and the chance to increase your firm’s share of the customer’s wallet in your product category?

  • Are you prepared to invest the time to develop and analyze results for testing a formal loyalty program?

  • Can you manage a formal program operationally?

  • Do you accept that implementing a formal loyalty program is a long-term strategy?

If you answered yes to the above, a formal loyalty program may be the best approach for you.

KEY CONSIDERATIONS

Once you’ve decided to make the commitment to a formal loyalty program, you have several issues to address and options to consider. Key among your considerations:

  • How do customers become members? Will you charge a fee or allow customers to qualify after a certain number of purchases? Many loyalty programs charge an annual or one-time fee, though marketers with continuity programs such as skincare merchant Principal Secret and cosmetics company Alexis Vogel often automatically enroll subscribers into their loyalty programs. If you charge a fee, will you guarantee the value of the membership? In other words, will you rebate the membership fee if the customer feels the membership has not netted him the value in savings and other offers that you touted when you sold it? A strong guarantee can overcome customers’ hesitation to shell out a fee up front. Examples of such programs include Eurosport Goal Club, Camping World’s President’s Club, and Heartland America’s Value Club.

  • What will your membership term be? One year? Lifetime? Annual terms bring more revenue, though there is the risk of attrition, as each year the customer must decide whether to sign up once again. Lifetime memberships bring less revenue in the long run, but potential members view them as less risky; they’re more confident that they’ll get their money’s worth.

  • How will you implement renewals — automatically? Through reminder notices? If you have an annual membership fee, we strongly recommend a reminder notice prior to automatic billing. In other words, make it easy for someone to remain a member (if he doesn’t opt out, his credit card will be charged for the next year’s membership), but of course provide him notification and ample time to contact you if he doesn’t want to continue as a member.

  • Which hard benefits will you offer? Hard benefits refer to items with direct monetary value such as discounts (almost every program offers these), free or free upgraded shipping (used by Road Runner Sports Run America Club and Eastwood Buyers’ Club), free gifts (offered by home products catalogers Improvements and Home Focus), and special payment plans (such as those of The Sportsman’s Guide Buyer’s Club) that are not available to nonmembers. Will the discounts you offer be available on all items or only selected items? Discounts on selected items may be okay, so long as you offer a sufficient number and they include popular items, not just the dogs of your product line.

  • Which soft benefits will you offer? Soft benefits are added-value services available only to members or only to members without charge. These include special toll-free service lines, private early announcements about sales and previews of new merchandise, extended guarantees, and member newsletters or magazines. Soft benefits can consist of just about anything you can think of that your customers would value that is service oriented. When determining the benefits you’ll offer, you need to take into consideration your margins as well as the desires of your customers. Do they crave fast delivery? Desire special treatment and recognition when they call? Think about what will really get your audience excited — in addition to what you can afford, of course.

  • Will you track points for members to redeem at a later date or discount purchases immediately? Tracking points requires appropriate software to maintain balances and deduct when points are used. Also, assigning points can have less impact because it isn’t as immediate as a discount on the spot. The Eurosport Goal Club solves this problem by offering both immediate discounts and points for future purchases.

  • Will you have only one tier of membership, or will you offer two? The Heartland America Value Club and the Road Runner Sports Run America Club are among those that opt for the latter. Having multiple tiers may make sense to move customers up step by step; it can also ensure your best customers that you consider them extra special. But a two-tier program is that much more complex to oversee than a single-tier program.

EASY DOES IT

Once you establish the tactics you want to include in your formal loyalty program, take a step back and make sure that what you’ve put together is clear and understandable. A formal loyalty program with confusing and complicated rules will serve only to stop customers from joining or, at a minimum, frustrate and annoy those who do join your program.

So put your customer hat on and scrutinize how buyers join your loyalty program, as well as how they gain access to and use the membership benefits you’ve identified. Make sure the terms and policies are simple and straightforward and that you’ve put enough “meat on the bone” in terms of real value in the benefits offered. You want your targeted customer segments to feel that they’ll be missing out on something great if they don’t become members.

Once you’ve identified your tactics, execute a test by segmenting a portion of your target audience. Pull out some of your test segment as your control group — those who won’t be offered the loyalty program — and then begin promoting the program to those in your test group.

Promoting the new program may mean producing a separate version of your catalog or perhaps a separate mailing and e-mail to the test group announcing the program and outlining the benefits. Don’t rush in and make a blanket offer to every customer and prospect you come in contact with. Once you announce the program in every catalog and on your public Website you won’t be able to withdraw it should you decide that the program isn’t working for you in terms of achieving your sales, profitability, and increased customer lifetime value goals.

It’s hard to say exactly how long a test should run, because it all boils down to how confident you want to be in the results. By and large, though, most companies test for six months before deciding on a full-scale rollout. Not only does this allow you to see whether you can achieve the goals you set, but it also lets you put your loyalty program operations through its paces and ensure there are no major hiccups.

One final point: Make sure that everyone in your company is up to speed on your loyalty program plans and tests, especially your customer service team. You don’t want a well-meaning customer service rep to offer loyalty club membership to everyone while you are trying to limit exposure to the segments of your file you decided to test the concept on.

Formal loyalty programs can be challenging to implement, and they may not be the optimal way to achieve your retention and profitability goals. But when they are done right, loyalty programs can help you convert more prospects to buyers and encourage more of your buyers to behave like your best customers.


Shari Altman is president of Altman Dedicated Direct, a direct marketing consultancy specializing in acquisition and loyalty marketing based in Rural Hall, NC.

BE A SHOWOFF!

If you go ahead and launch a formal loyalty program, consider making the discounts explicit in your catalog and on your Website, showing the member price visibly. Some marketers may be reluctant to reveal member pricing to nonmember customers, but this tactic has several benefits. First, it lets current members see how much their membership is saving them without their having to drag out a calculator. Plus, as they decide what to buy vs. their overall mental budget, they will be tallying up the discounted member prices in their mind and may end up purchasing more because they are clear on what the true cost to them is. What’s more, by showing member pricing, you’re providing a continual enticement to prospects and nonmember customers to sign up for the program. And if you have an annual membership, customers will be more likely to rejoin if they’re clear on the value that program membership provides.
SA