The links between loyalty programs and referrals have a significant impact on the bottom line.
Posted Oct 1, 2005
Customer loyalty--it's a phrase we hear repeatedly, yet its meaning is still often convoluted. For some, customer loyalty means customer satisfaction. For others, customer loyalty refers to increased spend levels. While the idea certainly encompasses both of these views, we need to take the concept one step further to see its real payoff: customer referrals.
A recommendation is perhaps one of the strongest signs of loyalty, because making a referral goes beyond being satisfied. A customer who makes a referral is putting his own reputation on the line--and takes this risk only if he is loyal. Fred Reichheld, a thought leader on the subject of loyalty, echoes this in his latest book, The One Number You Need to Grow, Reichheld contends that customer loyalty can be measured by asking customers a single question: How likely would you be to recommend our company to a friend? By gauging the responses Reichheld believes it is possible to predict how fast a firm will grow compared with its competitors. His research shows that the percentage of customers enthusiastic enough to refer a friend or colleague correlates with differences in growth rates among competitors in many industries.
Let's take this notion a step farther and look at referrals to loyalty programs themselves. Not only do customers refer people to companies, they also refer people to loyalty programs. Eighty-two percent of Americans participating in customer loyalty programs have referred friends and family to their favorite loyalty programs, according to the "2004/2005 Customer Loyalty Research Report" by marketing consulting firm Parago. High income earners (with household incomes of more than $125,000) tend to be most active in referrals: More than 90 percent of high income members refer one or more people to a program; 64 percent of high income members have referred four or more people to a program.
As the cost of acquiring new customers via traditional marking efforts continues to rise, marketers need to take a closer look at the link between loyalty programs and referrals--a link that can have a significant impact on a company's bottom line. With 82 percent of customers referring and recruiting new customers based on their loyalty programs' perks and rewards, according to the report, it is critical to offer the rewards that are most effective at driving loyalty.
That leads to another question: What type of reward is most effective? Loyalty programs and their growing set of award offerings have been around for years--at one point gift certificates, airline tickets, and electronic gadgets had been shown to have broad appeal, but customers have grown bored with the sameness of loyalty program offerings. What ignites their emotions (and loyalty) are awards that appeal to their dreams and desires, personalized experiences that relate to their age, lifestyle, and culture, and provide them with lasting memories. Customers choose the rewards that are most meaningful to them, from a hot air balloon ride at sunset, to the chance to drive a NASCAR-style stock, to a day at the spa, thereby promoting redemption, strengthening the emotional bond between the company and customer, and garnering loyalty.
We are seeing a number of leading brands embracing experiential rewards as an opportunity to broaden their portfolio of award offerings, differentiate themselves from competitors, and create more meaningful and memorable interactions with their customers. Many are partnering with concierge providers, allowing them to offer their customers an amazingly broad array of experiences. For instance, experiences play a major role in Merrill Lynch's reward program, which is available to all Merrill Lynch Visa Signature cardholders who are investment clients with assets under management. Some cardholders have invited friends over for an interactive cooking class in their home. Others have enjoyed a makeover by Jose Eber. Cardholders who wanted something even more personalized rewarded themselves with a "Reward of Choice." By calling Merrill's concierge service, cardholders simply tell the service what they want--the concierge provides a point quote and brings the experience to life.
"As we say, imagination is the only prerequisite. We know that our card members want to experience the good things in life, and no matter what they desire, we want to make it happen for them--one cardholder at a time," says Peter Barsoom, director of card payments at Merrill Lynch. "Because of the very personal nature of these interactions virtually every one of them is an opportunity for Merrill Lynch to deliver a brand-enhancing experience."
By offering customers the ability to choose their own rewards, you are giving them the opportunity to create personal and lasting memories. Each time the customer looks back on the experience, he will relive the emotion of the award and appreciate the company that gave it to him, strengthening his bond with the company, fueling his loyalty, and reinforcing his desire to refer the company to his friends.
About the Author
Janet Kraus is CEO and cofounder, in 1997, of Circles, and drives the company's vision and strategy. Her understanding of the value of loyalty and relationship marketing has made Circles a leading provider of concierge and personal assistance services, and has guided Circles through a 100 percent increase in revenue over the past two years. Circles received the Greater Boston Chamber of Commerce Small Business of the Year award for 2003. While receiving an MBA at Stanford's Graduate School of Business, Janet spearheaded the financing and building of the first multimedia center with access to the Internet. Janet received her BA from Yale University. She can be reached at www.circles.com
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