Misplaced Loyalties

Loyalty Program Insights By: Dave Carrithers, Chief Bee Keeper, BusinessHive & Jeff Crapo - Co-founder & VP New Business Development, WebMiles, Inc.

How and why have we seen many loyalty programs come, super-Nova and then fizzle out? Why is loyalty such a buzzword within the business services and consulting industry, yet few charged with managing loyalty programs understand how to set concrete metrics to measure success to prove it is all worth the effort? Why are there increasing demands for short-term results with loyalty programs if loyalty programs are supposed to develop long-term relationships? Are there any loyalty programs that make sense?

Admittedly there is a lot of confusion when it comes to what works and what does not work in the world of customer loyalty. Much confusion may be coming from catch phrases and 'thought of the second' clubs that are creating a buzz that is sometimes hard to think through. Fortunately, at the core of customer loyalty are the building blocks of a solid and successful business practices.

Building customer loyalty makes good business sense. But as with most business areas, there are many myths that have taken hold of the industry. Following are just a few of the many loyalty myths in the mainstream today:

Loyalty Myth #1 Offering a Loyalty Rewards Program Will Solve Customer Defections:

Why do companies consider offering customer loyalty programs? Usually it is because they suspect (but often are not sure) they are losing customers to the competition and want to do something to stop the customer defection. Unfortunately one of the biggest mistakes companies make is applying a loyalty reward "band-aid" to a customer defection problem that is in need of stitches. No matter how good the loyalty rewards program, it cannot make up for deficient products, uncompetitive pricing, or servicing problems. Loyalty rewards programs fail when they are a tactical response implemented to solve customer attrition problems that first required broader strategic and organizational changes. Most often, the best solution to customer loyalty lies in asking customers what they want, listening to their feedback, and implementing solutions focused on solving their issues.

This being said, in the proper setting a loyalty rewards program is a powerful weapon in the war of customer retention and, when correctly implemented, can be very effective for beating the competition. When the playing field is relatively even, a loyalty rewards program can provide a significant competitive advantage over all other players by attracting and retaining the most profitable customers.

Loyalty Myth #2 All Customers Are Valuable:

Many businesses mistakenly believe that all customers need to be treated with equal levels of service and attention. Yet, are all customers equal in their value to the company? Are some customers unprofitable? Do they deserve the same level of service as profitable customers?

In the world of customer loyalty, it is acceptable to play favorites with customers. Unfortunately, many loyalty programs are structured to provide "something for everyone" in an effort to attract a broad base of customers and treat them as equals. This logic will weaken a loyalty program's effectiveness by attracting unprofitable customers who benefit at the expense of the company. Worse yet, spending time and attention on unprofitable customers reduces resources that could be more effectively deployed on quality customers, thereby producing a better ROI. A loyalty reward program should be structured to attract and motivate profitable behaviors and nothing less.

It is important to be brave and willing to distinguish best customers from worst customers. Start by taking the time to properly profile a profitable customer and come to a clear understanding of where to draw the line for unprofitable customers. Then determine the different types of best customers and use this picture in the creation of a customer loyalty strategy. Loyalty programs are successful when they retain and activate best customers and motivate customers to move upward from one customer group into another more profitable group.

Loyalty Myth # 3 It Costs More To Get New Customers Than to Keep Existing Customers:

Surprisingly, while often used in the loyalty industry, this statement is not entirely accurate. It would be accurate if all customers were equal in value and were profitable customers, but the fact is that not all customers are worth keeping. Some customers are worth losing to the competition, particularly if those customers are causing the business to lose money. Interestingly, many companies have a hard time letting go of the revenues from bad customers and do not understand that revenue does not equal profit.

A successful loyalty program is not only capable of retaining existing customers, but when marketed to the competition's customers, it may attract profitable customers from them as well. Again, clearly identifying the characteristics of a profitable customer is crucial to the success of a loyalty program.

Loyalty Myth #4 Customer Loyalty & Incentives Programs Are The Same:

"Customers who glide into your arms for a coupon or minimal discount are the same customers who dance away with someone else at the slightest enticement." -The Loyalty Effect

While there may be similarities between incentives programs and loyalty programs, they are representative of two very different customer strategies. Incentives programs function primarily as customer acquisition tools and quick hit activation programs that are generally characterized by low award values. These programs may include awards such as cash, coupons, and merchandise. Incentives programs are built for rapid redemption and short-term effectiveness and generally do not have the power to drive long-term customer loyalty.

Loyalty rewards programs are characterized by high award values and powerful rewards that are effective long-term customer loyalty tools. These programs attract customers that are concerned with the long-term value proposition for their loyalty. Airline miles are one of most successful loyalty rewards programs ever created and have been in circulation for over 20 years. Loyalty rewards programs are structured to reward long-term currency accumulation with a highly valued reward, thereby motivating strong customer loyalty.

It is important to remember that a loyalty program is only as strong as its weakest link. If the program allows customers to redeem their currency earnings within a relatively short period of time then by its very nature it is not rewarding long-term customer loyalty. By the same token, the reward must carry a highly perceived value and the customer must be able to accumulate enough of the currency through loyal behavior for the program to stay interesting.

Loyalty Myth #5 If You Give Them A Reward, They Will Return:

Creating a loyalty program is not as simple as choosing a reward and giving it to loyal customers. Many loyalty programs make the mistake of failing to offer a reward that is motivating to the customers to whom it is offered and wonder why the program failed. Just as not all customers are not created equally, not all loyalty rewards are equal in the eyes of a good customer. In fact, some rewards are more highly desired by customers because they carry a higher perceived value and therefore are much more powerful in driving customer loyalty. One such example is that of airline miles, where research and behavioral studies indicate that consumers perceive the value of an airline mile to be much higher than the actual cost. This difference between perceived value and actual cost of the reward is one key success factor in successful loyalty programs.

The key to offering the right loyalty reward to motivate the profitable customer is to carefully research and evaluate before choosing a program. If in doubt, test the program with a discrete subset of customers and watch their behaviors. Most importantly, observe what is working for other companies in the industry. Don't be afraid to copy or improve on a successful loyalty program.

The ability for a customer to reach the desired reward or what's otherwise known as attainability is also a key factor in the reward decision. A successful loyalty program will properly match the reward currency with the program attainability to be sure that the customer is capable of reaching a meaningful reward level within an acceptable time frame. The recent rise in popularity of coalition loyalty programs comes from such programs' ability to provide multiple earning channels offering the same reward currency - thereby increasing program attainability for the consumer and offering the customer a better chance at reaching a more desired reward. Coalition programs do well when their currency is offered with frequent repeat purchase decisions such as groceries, gas, restaurants, etc., but they may not be the answer for less frequent purchase decisions such as specialty products or services.

Loyalty Myth #6 Customer Loyalty Is About Marketing:

The thinking that loyalty programs should be judged by typical marketing program success metrics is evidence of a dangerous expectation that loyalty programs produce quick results. Unlike typical marketing initiatives that are about driving quick customer growth and acquisition, loyalty programs are about generating long-term changes in customer retention and profitability. Part of the pressure to deliver short-term results comes from P&L obsessions, which focus on revenue, sales growth, and customer acquisition but do not measure customer retention and loyalty. Companies that do not reasonably define all objectives before implementing a loyalty program are sure to focus simply on short-term metrics at the expense of long-term customer loyalty and profitability.

Needless to say, many companies choose to place responsibility for customer loyalty solely within the marketing department. This comes from the thinking that loyalty programs are all about loyalty marketing and that better loyalty marketing is the solution to customer defection. Ultimately, this strategy has a tendency to create orphaned loyalty programs that were destined for failure before they were launched. No loyalty program will ever fulfill its full potential if it does not include the total support of all departments and their commitment to best practices that are focused on customer loyalty.

If the marketing department is not the best owner of a loyalty program, then where should loyalty program ownership reside? A better question might be, who really benefits from a well-managed loyalty program? Sales? Customer service? The company owners/shareholders? And who has the ability to make necessary internal changes based on the interaction with customers? Operations? Finance? In the end what becomes more evident is the need to look at ownership for customer loyalty differently, maybe even as part of a higher chain of command. Any company that wants to create a successful loyalty program needs to be sure that the internal loyalty champion is not only enthusiastic about creating customer loyalty, but that the loyalty champion is also empowered across all departments to ensure that the proper input and support is offered by all. Might a President/CEO or even an empowered VP of Customer loyalty be the most logical leader for customer loyalty practices and programs? Perhaps. In any case, the most successful loyalty program will be the one that has highly empowered leadership and is fully supported by the entire company.

What's In The Cards?

The dynamics of customer relationships are constantly changing. Over the past years, the introduction of new technologies and ideas such as the web browser, wireless devices, smart cards, PDA's and other computing technologies have provided a brand new horizon for customer interactions. This explosion of technology has provided for exponential growth in the number of possible 'interactions' or 'touch points' with consumers. The ability to aggregate consumer behavioral data across a growing number of daily interaction points is the result of a literal convergence of technology on tracking, knowing, and analyzing the customer.

Just as companies are becoming more knowledgeable about their customers, customers are becoming more informed and more empowered purchasers. Vast arrays of information are now instantly available to the average customer with more access and power being granted on a daily basis. Consumers now instantly price check with thousands of merchants without leaving the comfort of their own home. They track the every move of goods during shipment. They know the inventory of stores before going shopping. They interact with strangers and share information on company quality and service. They are less willing to settle for business inefficiencies and they demand more for their loyalty.

As business and consumer demands for customer loyalty solutions increase, the loyalty industry is alive with innovative new tools and technologies to drive customer loyalty. No longer are the old loyalty and incentive giants alone, for many new companies with the best and the brightest talents have emerged to serve the growing demand for better solutions to customer loyalty. This increased competition in the loyalty industry is good news for companies in search of improving customer retention and increasing profits.

So what about the myths and complexities of loyalty? Ultimately, it is important to remember that building customer loyalty is not a 'silver bullet solution', it is more of a holistic approach to better business. It starts with the simple idea that a profitable customer is important, and the best-of-the-best customers are to be kept in focus and foremost in the business strategy. It ends with -- Actually, improving customer loyalty doesn't end, it's about keeping up with and exceeding your customers' demands and expectations. If you don't, another company will.

Recap:

1. No matter how good the loyalty currency, it cannot make up for deficient products, uncompetitive pricing, or servicing problems.

6. The most successful loyalty program will be the one that has highly empowered leadership and is fully supported by the entire company.

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WebMiles, Inc. is a loyalty company offering a unique turn-key solution backed by an impressive track record with major retailers. We help our partners define, launch and promote a travel awards loyalty programs that drive customer behaviors and produce measurable results.

The patent-pending WebMiles® program gives merchants the ability to reward their customers with proprietary universal airline miles good for free or discounted travel on any airline with no blackout dates or frequent flier seat restrictions. By offering a proven, desirable reward and creating strategic alliances with key industry partners, WebMiles is fast becoming the customer loyalty program of choice for major merchants and retailers. www.WebMiles.com or contact Jeff Crapo at 801-907-4207 or e-mail Jeff@WebMiles.com.

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BusinessHive, a Saint Louis business, provides consulting services for business individuals looking for honest and straightforward counseling, coaching & implementation of business solutions that improve profit performance and loyalty with employees, channels and customers.