CUSTOMER CARE: Getting with the (Loyalty) Program

May 01, 2001 9:30 PM  By

You know the mantra by now: It costs more to attain a customer than to retain a customer. Clearly, then, nurturing customer loyalty is key to a catalog’s survival. Fortunately, catalogers have myriad ways to do so.

Cathy Halligan, director of San Francisco-based brand consultancy Prophet, makes a point of distinguishing between loyalty programs and loyalty activities. “If you sell products and services that are readily available in the marketplace, and the channel in which they are sold and the customer’s experience in purchasing the product are not truly differentiated in his mind, the cost of switching from one provider to another is low for him,” Halligan explains. “In that case, explicit loyalty programs are needed. The airline mileage programs are an excellent example of this. If, however, you sell a proprietary product or offer a truly differentiated ‘store’ and customer experience, loyalty activities that strengthen the brand’s customer experience across all touch points are much more effective.”

Offering best customers free gift wrapping during the holidays, as kitchen products cataloger/retailer Williams-Sonoma did, is an example of a loyalty activity. So is food gifts cataloger Harry and David’s holiday-season practice of sending customers a reminder/order form listing whom they sent gifts to last year and what those gifts were.

An online version of the Harry and David gift reminder form would be offering a gift reminder service on your Website. Numerous marketers, from upscale chocolatier Godiva to homespun crafts marketer Amish Country Gifts, allow Web visitors to input information about birthdays, anniversaries, and other gift-giving occasions; the marketers will then send the customers an e-mail prior to the event to remind them to buy that gift.

The Web, in fact, leaves marketers with little excuse for not implementing loyalty activities. “The Internet is further strengthening CRM [customer relationship management] and loyalty,” says John Lenser, principal of San Francisco-based catalog consultancy Lenser Associates, “because for the first time, we have a tool that allows cost-effective one-on-one marketing.”

Do you send repeat customers e-mails offering them, for a limited time only, free shipping, as eco-friendly wellness products cataloger Gaiam recently did? Then you’re using the Internet for one-to-one loyalty marketing. Do you provide community microsites on your Website featuring editorial, bulletin boards, and chat rooms targeted to specific segments of your audience, as Gall’s, a cataloger of equipment for public-safety professionals, does? Then you too are tapping the Web’s one-to-one marketing and loyalty potential.

From activities to a program

The beauty of loyalty activities is that, very often, they cost the cataloger little or nothing to implement. But if you feel the need, perhaps in the face of increasing competition or a drop in market share, to differentiate your company with a full-fledged loyalty program, you may consider creating some sort of membership club or providing discounts to best customers.

The Classic Awards program, launched in January by women’s apparel cataloger/retailer The Talbots, is a textbook example of a loyalty program — or, in Talbots vernacular, “an annual national customer appreciation program.” For every $500 she charges on her Talbots credit card, a customer receives a $25 “appreciation dividend” toward her next Talbot card purchase. Members also receive a 10% discount for their birthday and notifications of sales before they are available to the public.

Given how strong Talbots’ sales have been recently, you might think that the Hingham, MA-based company would have no need to implement a loyalty program. For the fiscal year ended Feb. 3, revenue was $1.59 billion, up 22% from the previous year. Moreover, net income rose 97%, to $115.2 million.

But according to spokeswoman Betsy Thompson, you can never have too much customer loyalty. “It’s important to stay loyal with your customer so that loyalty does not waver,” she says. “Loyalty is definitely a part of branding, and you have to continually work on that.”

A variation of the frequent-buyer loyalty program is a club in which members pay to enjoy benefits. Colorful Images, a cataloger of personalized paper products and gifts from Longmont, CO-based multititle mailer Concepts Direct, charges $9.95 for a one-year membership in its Preferred Customer Club. Members receive 10% off all purchases as well as special offers throughout the year. “Among our club members, we see response rates that are as much as 1.5 times to two times better than average,” says Concepts Direct president/CEO Mike Wolfe.

Making loyalty pay

As Colorful Images’ experience proves, loyalty programs can pay off not only with higher retention rates but also with better response. Higher average orders and more frequent purchases on the part of members are other benefits.

Among the more than 1 million members of the Passport Program introduced by apparel cataloger/retailer Chico’s in February 1999, the average order is $130, says vice president of marketing Jim Frain. The average order among nonmembers is $88. What’s more, Passport Program members average about six purchases from the Fort Myers, FL-based company a year — more than twice as many as nonmember customers.

All customers are eligible to join the program, in which about 800,000 customers are currently enrolled. Once they spend $500 at Chico’s, members are entitled to a 5% discount on all purchases and free shipping, in addition to receiving notice of members-only sales and promotions. The 240,000 members who have reached this level, says Frain, account for 80% of the $259.4 million company’s sales.

Frain attributes much of the program’s success to its simplicity. Programs that require customers to keep track of points, submit proofs of purchase, and the like are much more likely to fail — in fact, they can irk and repel previously loyal customers. “Keep it simple,” Frain advises. “Don’t have the customer do any work.”

Even more important, Frain says, is the company’s diligence in promoting the program. “You can’t just launch a program and forget about it,” Frain says. “You have to implement it every day.” Chico’s sends members monthly print mailings, which offer additional coupons and discounts. Chico’s also sends birthday cards offering a 10% discount (“We get a 13% response to those,” Frain says).

Before you begin…

To monitor the effectiveness of its membership promotions, Chico’s generates daily, weekly, and monthly reports tracking conversions rates and other metrics. This sort of reporting and analysis — critical to assuring the profitability of a program — requires robust database software that can also handle basic housekeeping such as flagging customers whose memberships are expiring or who no longer meet the membership criteria.

“Many computer systems do not support a club or do so in a compromised manner,” consultant Lenser warns, “so there is often a software modification expense.”

It’s also important to test the program prior to rolling it out, to ensure that it achieves your goals without taking a bite out of your bottom line. Talbots, for instance, tested its Classic Awards program in six states before launching it nationally.

“Clubs that give a discount or free shipping are not always profitable,” Lenser says. “If you give away 10%, you have to have a 20% sales increase to come out even. If you give away free shipping, you frequently have to have a 25%-30% sales increase to come out even. It can be hard to test such a program, but there is a risk involved in simply jumping in.”

Loyalty programs that charge a membership fee may be less of a risk in terms of profitability, but they have other drawbacks. “A difficult hurdle is the renewal aspect,” says Concepts Direct’s Wolfe. “The customers won’t automatically renew their annual membership, so one has to be aggressive in seeking their continued loyalty.”

In fact, all loyalty programs are an administrative challenge. “You have to develop and maintain collateral material, do special mailings, create newsletters, and dedicate special CSRs to the cause,” Lenser says.

If you opt not to implement a full-fledged loyalty program, you’re actually in the majority. Of the catalogers participating in the 2001 Catalog Age Benchmark Report on Database Marketing (see page 52), 68% do not offer any kind of loyalty programs or clubs.

For his part, Charlie Silver, vice president of marketing and production for apparel and home goods cataloger Bloomingdale’s by Mail, believes that the most effective loyalty activity is to simply offer customers what they want in the channel they want when they want it. “The best form of loyalty marketing,” he says, “comes from catalogers spending time to develop the right product to the right customer.”

Numbers to Ponder

Not sold on the importance of engendering customer loyalty among customers — particularly your best buyers? Then consider these statistics from Cathy Halligan of San Francisco-based consultancy Prophet:

  • In a refinement of the 80/20 rule (80% of a company’s revenue comes from 20% of its customers), often 20% of a cataloger’s revenue comes from 5% of its house file.
  • It’s not unusual for about 50% of a cataloger’s customers to buy just once and never make a second purchase.
  • Worse, typically only 20% of a cataloger’s 12-month buyers make more than one purchase a year.