A Simple Equation for Loyalty Marketing

This economic environment is encouraging marketers to focus on shifting their spend from traditional acquisition marketing to efforts that generate value from their existing customers. The marketing paradigm is clear – it costs significantly less to retain an existing customer versus trying to acquire a new (and reluctant) one.

This issue is leading to many conversations about developing and executing loyalty programs. However, based on the quality of the discussions with companies across multiple categories, I see a significant level of misunderstanding. There is a lack of clarity about the role of loyalty programs as well as the components that make up a successful loyalty program.

Let’s first tackle the role issue. In my opinion, the most important role of a loyalty program is to engage with the brand’s core customer group and learn how it can best serve their needs. Brands need to serve these customers in a completely differentiated manner from its competitive set. Marketing applications are just the tip of the iceberg. The knowledge and insight gained from customer behaviors should be used to improve their experience with the brand. The end result is to have these customers become bonded to the brand. This is the secret of success for Tesco and Harrah’s, arguably the two best loyalty programs in the world today.

However, considering most companies don’t have a decade (Harrah’s) or fifteen years (Tesco) to develop and refine their program, here is a simple formula to help create an effective loyalty program.

2RL + 2RC + RW = Loyalty (Two parts Relevance plus 2 parts Recognition plus one part Reward equals Customer Loyalty.)

Relevance is essentially providing your customers with information and offers about products/services that would be the most appropriate to them based on their past transactional behaviors. For example, I buy my jeans from Old Navy. Don’t ask me why, but they fit me better than any other brand. If they send me offers/communications offering new styles of jeans or sweaters that coordinate with my recent purchases, it is relevant to me. Not necessarily the specific items – adjacent categories are still relevant. Unfortunately, Old Navy does not do this. Instead, I receive emails from them offering me great deals on baby and maternity clothes.

Recognition is about letting the customer know that they are important to you. Best Buy does a good job by recognizing their customer’s business with them. Not only do they provide their customers with additional value, but they also communicate with them in a very personal way. They use the data from their Reward Zone program very effectively to build better relationships.

Reward is the specific offer. While this is very important, it is only a small part of the effort to encourage your customer to truly behave the way you would like. A meaningful offer can drive significant results. It doesn’t have to be monetary in nature, either. Here is an example of this that I read in a recent issue of Business Week magazine. Researchers at Britain’s Nottingham School of Economics worked with a large German wholesaler that sells goods on EBay, tracking the lukewarm or negative comments posted on the site by the company’s customers over six months. They then responded to 632 complaints. Half of the e-mailed responses offered a brief apology. Half offered instead a “goodwill gesture” of a small cash rebate. All e-mails asked customers to remove the comments they had posted online. For those offered the rebate, it was a condition of receiving the cash. About 45% of customers receiving an apology withdrew their so-so or negative ratings, compared with 21% of those offered money to do so. To me this shows that a relevant human approach that recognizes their customers’ goodness can deliver a strong response.

So if you are looking to drive loyalty among your core customers, follow this simple formula (2RL + 2RC + RW = CL) and you’ll see some pretty strong results.

What Can We Learn From Students’ Behavior?

Everyone knows that young people – especially students – center their lives around the internet. This is old news. In fact, today’s average student got their first email address at the age of 13 and currently has a mean number of 2.4 email addresses, according to the eROI Student Survey.

This information would lead one to believe that email is a great way to reach a brand’s young customers. However, that may not be the case. The Student Survey also showed that students, on average, read marketing emails on a “rarely to never” basis and only 16% actually take action on marketing emails.

By looking at the ways students are acting, it is clear that marketers may want to reconsider their use of email to reach young consumers. Their behavior shows that this particular channel may not be as effective as others within the direct marketing space.

Social networking and texting, however, are on the rise. 83% of college students use Facebook, 65% use MySpace and 21% use LinkedIn. Additionally, students named text messaging as their preferred means of communication (according to the eROI study).

We need to reach them in the way they prefer, not how we wish. The biggest challenge is our ability to ensure that the desired behaviors do happen. And that we can monetize our investments. It is a conundrum. Do you agree?

If A Customer Behaves In The Forest And No One Is Around To Analyze It…

According to the Annual Marketing Survey by Alterian, companies will continue to invest heavily into online marketing in 2009, but less than half of marketers plan to use analytics to measure their campaigns.

Online direct marketing will also increase this year, with 62% of organizations planning an increase in that budget. Additionally, companies will look towards social networks, email, SEO and pay-per-click advertising. Yet, only 47% of those surveyed will use analytics to measure the success of this activity.

The data gathered around these types of consumer behaviors can be extremely valuable. It is this kind of information that can help you recognize your best customers and how they respond to your brand’s communications. Analysis of customer behavior can help refine your marketing campaign, increase customer loyalty and ultimately drive profits in today’s challenging economic situation.

So why aren’t more of you doing it?

Loyalty. How Do You Do It Right?

The idea of inviting customers to join a program, then encourage them to continue trading in exchange for rewards has had a long and distinguished history; from retail to air travel, from magazine subscriptions to credit cards.

Because only one in ten programs really work there are skeptics. Their problems usually come from the L word – loyalty. We believe that these programs need to be built differently – especially in this economic environment. As the recession looms, companies have to do more with less. Keeping customers loyal can be a great way to make your marketing dollars go far. Here are a few principles to consider when creating effective loyalty communications.

Loyalty not monogamy: Skeptics say it’s all very well introducing a loyalty scheme to get the first mover advantage. But what happens when competitors follow suit and customers end up carrying two or three cards in the same category? Isn’t that subsidizing promiscuity rather than reinforcing loyalty? The short answer is: get real.

When marketers strive to increase customer loyalty they can only aim to create a little extra goodwill, a margin of preference and incremental shifts in buying behavior. But a lot of small, positive choices by many customers can add up to a massive difference to the bottom line.

Every customer has a variety of suppliers for different needs. All that a loyalty program seeks to secure is a bigger slice of customer commitment, share of mind and share of spend than the brand would otherwise achieve. That comes from consolidating spend that would have been spread over a wide number of competitors. If a program does that consistently well it pays back royally, for customers and the balance sheet.

A loyalty program is not an end; it is the means to an end: Offering a customer reward program could be the best way to encourage loyalty amongst your customers. Or not.

There is no guaranteed value in building a loyalty program, neither to the customer nor the business. There is no off-the-shelf solution to suit every brand. To ask ‘what sort of loyalty program do I need?’ is not a good place to start. Instead we should take a step back and start with the basics. ‘What problems do I need to fix to make my customers more satisfied?’ or ‘how can I persuade good customers to be even better?’ Those are the sort of questions to grapple with first. The executional answer may include a structured rewards program or it might be something very different.

Loyalty marketing is a business strategy first, a promotional tactic second.

The natural child of the brand: The best loyalty programs are created in the brand’s own image. They take the brand promise and demonstrate it through personal, relevant benefit to customers. Like any natural child, a loyalty program should share something important with its parents – its DNA.

Equally important, the program has to be loved by the business. Just as marketers have to champion their brand, they also have to commit to the loyalty program that represents that brand to its members. They have to see a program as part of the body language of the business. Loyalty programs invariably stand or fall on how well they are represented by the people on the front line.

What’s the customer contract? Loyalty works both ways. Even the most committed football fan will turn away from a club if it shows no respect for the paying supporters. Equally, the best loyalty programs work as a mutually beneficial contract between the brand and the customer.

In fact, loyalty schemes are so much about the brand showing loyalty to the customer as they are about the customer showing loyalty to the brand. And the reward to customers should be no more a bribe than the company’s dividend to its shareholders is a bribe.

Reward the behavior you seek: What does customer loyalty look like in your business?

Your priority might be to increase the frequency of visits, or you may need customers to consolidate spend, or you may want to shift transactions from phone to internet. A loyalty scheme that sets out to thank customers for doing one or two things is more likely to succeed than one that asks them to do too much, or indeed asks for nothing in particular. The main challenge from the outset is to define clearly what it is you want your customers to do, and reward them when they do it.

These principles are just that. Just a list of tips based on what we’ve observed and experienced over a decade designing loyalty programs in different sectors. For further reading, I thoroughly recommend Scoring Points – How Tesco Is Winning Customer Loyalty (Kogan Page, 2004).