Fix the Problem, Not the Symptom

What's likely to make a customer loyal? One might justifiably argue that customers will continue to pay for a product or service as long as it provides them with more value than what competitors offer. One CRM consultant took this a step further at a CRM seminar and argued that if your product or service is valuable, you won't need a loyalty program. This suggests that loyalty programs are only for struggling organizations. I respectfully disagree.

Sure, there may be cases where companies are very successful without a loyalty program, but a well-designed loyalty program could make successful companies even more profitable. Unfortunately, too many executives are reactive and only turn to loyalty programs when problems arise. This rarely solves the real problem.

So, for struggling companies, what needs to be done? First, identify the problem. It's natural to think that slumping sales is a problem for any organization; however, it's actually a symptom of a larger problem. In many cases the real problem is that a company's product or service just isn't that good, or it's targeting the wrong customers. Unfortunately, because many executives try to cure the symptom, and not the problem, they come up with a Band-Aid fix, like a loyalty program, to boost sales.

Gary Loveman, CEO of Harrah's Entertainment, understood this in 1998, when the former associate professor at the Harvard University Graduate School of Business Administration was tasked to turn the then struggling casino company around. Under his direction, Harrah's collected more information about its customers to improve its database marketing efforts. One of the most important discoveries gleaned from this effort was that the once coveted "high rollers" were not as profitable as slot-playing retirees with access to disposable cash. With this new focus on more profitable customers, combined with clever advertising and an effective loyalty/rewards program, Harrah's hit the jackpot, becoming the largest gaming empire in 2002 with more than $4 billion in revenue.

It helped that the casino company's advertisements played up how exuberating gambling is, which is what its customers stated is the number one reason why they gamble, according to the story "Cashing In on Loyalty" (June 2004) on destinationCRM.com. If an organization can attach its brand, product, or service to a positive emotional customer experience, it will foster more loyalty and revenue. In the case of Harrah's, customers who had a very happy experience with the casino increased their gambling spend by 24 percent a year, according to the story. Even after this turnaround the company still offers a rewards program.

A loyalty program, however, doesn't have to be a rewards program. Actually, one of my favorite loyalty programs doesn't offer me a dime. For the past couple of years I've been keeping Starbucks debit cards in my wallet. It's valuable to me because I hate carrying loose change and Starbucks enables me to put $20 on the card and draw down from it whenever I make a Starbucks purchase. This way, when asked to pay $2.05 for a Grande Regular, I don't have to worry about carrying 95 cents around for the rest of the day or contributing unnecessarily to my growing pile of coins.

Clearly loyalty programs, when properly executed, can bring tremendous value to companies and their customers, whether a company is struggling or not. For more examples of successful loyalty programs and tips on improving customer loyalty, read our cover story, "Lollipop Loyalty," by Editorial Assistant Jessica Tsai. It should be, ahem...rewarding.

David Myron
Editorial Director
dmyron@infotoday.com

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