• June 1, 2008
  • By Jessica Tsai, Assistant Editor, CRM magazine

Lollipop Loyalty

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Customers are spoiled -- and they have every right to be. Most of them have very little allegiance to just one store or brand, especially when prices are so comparable. As a result, companies are turning to loyalty programs to keep customers coming back. Unfortunately, those programs have become almost as ubiquitous as the stores themselves. It's not enough just to give your customer a plastic card that hangs off his key chain. Companies need to build loyalty based on intrinsic qualities before they can expect a reward to do any good.

According to research firm Colloquy, U.S. membership in loyalty-rewards programs had reached a whopping 1.3 billion by the fourth quarter of 2006. Or, looking at it another way, the average American household belongs to

12 different loyalty programs. However, Colloquy's study also found that, of the 12, only approximately 4.7 qualified as what the firm deemed "active participation."

"Loyalty cards are losing their power," says Chris Cottle, vice president of enterprise feedback management provider Allegiance. In fact, he adds, there's a certain extent of bribing that's become a normal part of consumer expectations. All things being equal, a company with a loyalty program will most likely gain a slight advantage. But loyalty-reward programs aren't a secret, nor are they difficult to execute. If you have one, more likely than not your competitors do, too.

That hasn't stopped some consumers from clamoring for more: On the recently launched MyStarbucksIdea.com (powered by Salesforce.com's Salesforce Ideas platform), Starbucks customers have repeatedly listed (and voted for) loyalty cards as an offering they'd like to see. "Most of the local and chain vendors in our area all feature customer loyalty cards that give a free reward equal to the purchases that they are making," one poster on the site noted. "Rather than getting a free shot of syrup (which I don't use), I would rather be rewarded for coming back the way other businesses already do for me. Everyone likes a little appreciation!" Starbucks, in turn, has promised "to leverage technology to create innovative ways for Starbucks to connect with our customers and build loyalty programs," and already responded in April 2008 with the first phase of a Starbucks Card Rewards program, "rewarding registered cardholders and providing unique new benefits when using their cards in Starbucks stores," according to a company release.

Still, instead of cultivating deep-seated loyalty, most companies focus on one-upping each other for the short-term win. "That's got to be demoralizing for them," Cottle says. "To get a customer, [they've] got to make their stuff cheaper all the time." At some point, instead of being a competitive advantage, loyalty programs become just another commodity. And companies know it: Cottle says they're really feeling the burden of being "held hostage by their own loyalty programs." In a CRM magazine column last year ("Keeping the Store," February 2007), experts from consulting firm McKinsey & Co. said that "[a]n analysis of more than 50 U.S. retailers over the past 10 years reveals that store sales growth for retailers with loyalty programs has averaged about 2.3 percent, while sales growth for retailers without loyalty programs has averaged 4.3 percent."

The problem with loyalty programs isn't just that everyone around you has one. It's that the superficial bond will last only as long as your competitor's offer isn't equal or better -- and yet it's a potentially fatal mistake to compete solely on discounts. "Coupons and rewards have no resilience," argues Bill Bleuel, professor of decision sciences at Pepperdine University's Graziadio School of Business and Management. "It's a short-term activity that maybe gets the customer for a short period of time, increases cash flow, or [helps] get rid of some old inventory -- but it doesn't build long-term loyalty."

Bleuel goes so far as to call rewards "unnatural." Unlike the other three fundamentals of a company -- product, process, and relationships -- rewards can exist regardless of whether or not a company is doing well. "You can have a crappy company, a bad product, and terrible service -- but have good coupons," he says. Customers always want to save money, especially as the country faces a recession, but a rewards program on its own is not enough to brave the attacks of competition. Although recent studies have shown consumers are valuing price over service, companies cannot expect this trend to last forever. (See "Price Check, Aisle 5," May 2008.)

The fast-food industry, for example, is saturated with low-cost, high-frequency transactions, and low switching costs. Even with higher-value transactions such as plane tickets, every airline offers mileage points, making customers unlikely to stick around if another airline offers a better deal or better rewards. The only way to differentiate is by making an emotional bond to enhance loyalty.

Loyalty programs themselves aren't the problem here -- the issue is marketers believing that loyalty programs are the cure-all for their competitive woes. "[Loyalty] is something you have to work on," says Phil Sugar, chief executive officer of Delaware-based loyalty-and-rewards platform Smart Button. Loyalty vendors, he says, can't ensure quality service or top-of-the-line products. Each business has to get all its ducks in a row first. What firms like Smart Button do, he says, is "show you how [to] use this to be your best."

Get to Know Me

In fact, the upside of loyalty programs may outweigh the race to the pricing bottom. Once customers register for a program, companies find themselves with a wealth of valuable information -- from identity traits to spending habits -- that marketers can use to focus targeting and improve satisfaction.

Companies are often conflicted between customer acquisition and customer retention. Sugar describes his own experience with wireless Internet service: An early adopter, Sugar had a wireless connection seven years ago, before most of his neighbors even knew what wireless was. He recently discovered his neighbor had signed onto the service -- and had received a free Wi-Fi router, a free digital camera, and six months of half-price Internet. When Sugar called to complain that he deserved to be treated at least that well -- over the seven years, he says, he'd referred 25 people to the company -- he was told that he wasn't eligible because he wasn't a new customer. "So I said, 'Well, I'll be eligible when I go to [a competing wireless provider].'" For most industries, the full extent of customer value comes from the relationship long after the purchase. Once you get them through the door, you need to keep them.

On the other hand, the Chili's restaurant chain faced a unique problem: More than enough total customers were coming in, but the company wanted each customer to come more frequently. Customers who register for the restaurant's loyalty program qualify to receive free points good for future purchases; by sharing their dining preferences, customers provide information such as whether they'd better appreciate a free dessert or a free appetizer. With technology from Chockstone, an Oregon-based provider of loyalty marketing platforms, Chili's performs analytics using behavior-based and demographic information to present well-tailored promotions. For a customer who only comes in during dinner, sending a lunchtime promotion may be just the incentive needed to drive an expansion of habit. Equipped with this granular information, restaurants are well-positioned to serve up a great experience and fortify the customer bond.

Ensuring Benefits Reach Real Customers

Subway, the fast-food restaurant chain, used to have a primitive loyalty program of paper cards and stamps. After accumulating a certain number of stamps, customers were rewarded with a free sandwich. The program soon became derided as the "Friends and Family Free Sandwich Program," according to Jeffrey Lipp, chief executive officer of Chockstone. Employees would steal rolls of stamps and either share them with friends or sell them on eBay. When Subway executives finally caught onto this scheme, they realized it was time for a program overhaul.

After the paper-stamp fiasco, Subway converted to a technology-based platform where discounts are printed on the bottom of each receipt. With Chockstone's real-time analytics software, Subway knows that a particular customer has been coming in, say, once every 15 days for the past six months. This then triggers a reward unique to that customer -- perhaps an offer that gives her a free bag of chips if she comes back within the next five days. Historically, restaurants have only really been able to present discounts anonymously, but now, Lipp says, technology is enabling the systematic generation of customer-centric offers.

No Money, Just Data

Without explicitly asking customers about their personal desires, companies can increase loyalty by engaging consumers through feedback surveys and evaluations. Cottle asks companies to think, "How can we get them to connect with us with their hearts, and not because of a few points?" The answer, he says, is for companies to reach out for customer insight, and then ensure that the consumer knows the information is going to be acted upon. If feedback inspires change, the customer should be told exactly how the input contributed to the improvement and the company's ability to address consumer demands. "All of a sudden, the customer feels valued and respected," Cottle says. "So while that's not necessarily an offer," he adds, "it goes into the foundational elements of any relationship." For companies that are trying to increase or restore loyalty after a few missteps, talking to customers is perhaps the safest and most effective way to get started.

Another way to inspire loyalty is to be innovative and creative, and to extend a benefit that everyone can enjoy simultaneously. This past March, Chockstone announced a technology called SingleSwipe -- the union of loyalty programs with debit and credit cards. Customers are uniquely identified at the point of sale when they use their existing credit or debit cards, instead of having to carry a store-specific card. Merchants have also shown interest in the convenience of one-swipe consumers. Moreover, large payment processors such as Chase and Bank of America are able to process transactions quickly and efficiently, which in turn improves any real-time rewards and promotions engine.

And yet some loyalty-builders have nothing to do with points or rewards at all. Midwestern supermarket and drug-store chain Hy-Vee, for example, enlisted Dr. David L. Katz, director of the Yale-Griffin Prevention Research Center, to rate from 1 (least healthy) to 100 (healthiest) the nutrition content of every food item in the store. With this program, Hy-Vee is truly differentiating itself from the rest of the market. "They're building loyalty through their product [and] no one can really copy that," Bleuel says.

The Context of Loyalty

Customers have come to expect more from their shopping experiences and rewards programs, for better or worse, are now part of that experience. Compared to the loyalty-program overflow in the airline industry, though, some companies have managed to avoid providing a material incentive. Chockstone's Lipp says that some programs simply don't apply to companies that only engage with each customer a few times a year. "The ability to give away a free cookie to drive that extra purchase doesn't play well in that environment," he says. On the other hand, a company that's on the ball with its product and service may not need the buffer of a loyalty program. Nordstrom, for example, is recognized for its ability to tend to your every shopping need, up until you make the purchase. "Are they well-known for their rewards program? Do they even have one? I don't know," Lipp says. What he does know is that even in a recession, if he needs clothes, he goes to Nordstrom.

Everything comes down to making the customer feel valuable. Loyalty programs are contributing to that effort, but they're not enough to keep you in the game long term. "Loyalty-reward programs do serve a purpose. [They] do make consumers feel nice, but left on their own, they're not the right thing," Cottle says. "Put it in context, everything's good. Take it out, and things go bad."

SIDEBAR: Loyalty from the Inside Out

If your employees aren't loyal, it's hard to imagine your customers will be. Dianne Durkin, president and founder of consultancy The Loyalty Factor, says younger employees are notorious for job-swapping -- and, as with customers, it's far more costly to acquire and train a new employee than it is to retain an existing one. It's imperative that a company hire people who fit its culture, and invest in the "little things" that will entice them to stay.

"The two most underutilized words in the English language are 'thank you,'" Durkin says. Forget high salaries and bonuses; employees really want appreciation and recognition. Whether it's a simple "Good job!" or a handwritten note placed on a desk -- no emails! -- the personal touch makes employees feel not only relevant but important.

Given today's high turnover rate, employers need to understand what does contribute to employee loyalty. Durkin ranks the top factors, in order of descending importance:

  • Vision and purpose: Make sure employees have a solid grasp of company direction and what they contribute to the corporation.
  • A learning environment: Provide an opportunity for growth and responsibility. People have a short attention span; they'll be more likely to stay if they're challenged with new and interesting projects.
  • A fun environment: The workplace has to be an enjoyable space to interact with others. Staffers will treat each other (and customers!) better.
  • Modern technology: Employees using advanced technology outside of work expect the same at work.
  • A good salary: People need adequate compensation for the work they're doing, but it's not foremost among their concerns.

Southwest Airlines is one of the few airlines to make it to the top of the consumer-loyalty list, in part because its employees are extremely happy as well. When Durkin asked why they choose to stay, employees responded, "Because this is a company that loves us back." Passengers, in turn, say humorous crews and in-flight games make Southwest a joy to fly. "If you're a businessperson on one of these flights," she says, "don't plan on doing any business." (She means that in a good way.)

Some firms have even embarked on rewards programs for employees. Points can be awarded to recognize achievement or as a display of gratitude, and can be redeemed for rewards at the company store. Before launching any programs, Durkin suggests asking these essential questions: What is the level of pride and commitment in the firm? What are the firm's top three strengths? What are its top three areas of development? What do you personally need to increase your productivity and efficiency? What is the one message you'd give to your firm's leader? Those answers will help develop the appropriate programs that will drive employee -- and then customer -- loyalty.

SIDEBAR: Happy Kampers

Kampgrounds of America (KOA) has approximately 420 franchise campgrounds and operates 30 properties itself. For years, KOA's loyalty program consisted of a 10 percent discount with a Value Kard membership. Membership itself, says Steve Young, director of loyalty marketing for KOA, wasn't difficult to acquire, nor was the discount unique to KOA. "Anyone with a heartbeat could get a 10 percent discount," he recollects.Young's marketing team began by asking for customer perspectives. Their research, he says, indicated that campers "would drive a little farther to go to a KOA if [KOA] provided something other than the 10 percent discount."

The program details were primarily derived from the company's effort to communicate with existing members and get to the core of what makes the relationship valuable. Smart Button's technology helped KOA create a Web site where campers track their stay history, check point status, and set personal camping preferences -- making it easier for campers to reserve and register and for KOA to accommodate each stay (and improve its marketing). The program, Young says, "gives people the reward of camping for camping -- it lets them do what they love to do."All 540,000 campers in the previous program were transferred to the new Value Kard Rewards program for a free year. Young suspects that the fee increase from $16 to $24 will have a negative impact on membership renewal, but, he says, with thousands of new members just two weeks after launch, KOA may be in for a pleasant surprise.

Contact Editorial Assistant Jessica Tsai at jtsai@destinationCRM.com.

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