Frequency vs. Loyalty: What’s the right answer?

The issue of customer loyalty and the role of loyalty marketing continues to be a big issue being discussed in almost every company right now. With smaller budgets, smaller marketing departments and a focus on customer retention, it is no surprise that marketers are trying to figure this out.

A large number of them have been reacting in a knee-jerk manner – creating and launching loyalty programs.

But, are loyalty programs really necessary? Is loyalty really an achievable goal for most brands in most categories?

I have a very clear point-of-view. Most brands don’t really need a loyalty program. What they actually need is a frequency marketing program – a program that will bring their customers back more frequently than they currently are. That’s what most marketers want. And, that’s actually what they need (to drive transactions). But, there is enough confusion in the definitions that very few marketers are distinguishing between the two.

In an attempt to simplify the discussion, I have provided some thoughts on distinctions between frequency and loyalty.

Frequency is about getting more transactions than you currently get from your existing customers.  If someone comes once-a-month (12X a year), can you get them to come one more time? Loyalty is about deepening the relationship that they currently have with you.

Frequency is behavioral while loyalty is attitudinal.  Behaviors drive transactions and make the cash register ring.  Attitudes make for nice charts in tracking studies.

Frequency is easier to effect with more relevant communications and offers – timed right.  Loyalty is harder to gain.  Changing attitudes to the deeper level takes significant level of time and resources.  It is also a goal that is unachievable in most categories.

Increasing frequency has the potential to create loyalty – you have to use the simple equation (2RL+2RC+RW=CL) – but execute consistently over time.  It also assumes that your category has the level of emotional cachet to allow those bonds to be made.

Frequency marketing programs are easier to execute.  They do not create liabilities on your balance sheet and can be evolved and refined at the company’s discretion.  Loyalty marketing programs, on the other hand, require a long-term commitment that becomes a big factor for the company and the balance sheet.  It becomes extremely hard to refine and evolve the program without the agreement of your customers.

Frequency can be executed by marketing with some support of other departments.  Loyalty programs require alignment across the entire organization.

None of my arguments above should constrain your aspirations to generating loyalty. I posit that if you can begin to improve frequency levels among your core customers, with the appropriate attitudinal beliefs, you will create loyalty.  It will be the outcome of a strategic frequency marketing program and will be cheaper and faster to execute.

Given that reality of time being our worst enemy, it’s the way to have a quick and immediate impact on the business.

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.

Extreme Makeover: Brand Edition

When it comes to brands and their positioning and packaging, marketers get bored of them long before consumers even get used to them. Unlike their customers, marketers think about, talk about and look at their brand all day long. Even the most loyal customers don’t have this kind of relationship. Then, often sooner than necessary, marketers suggest a change to keep the brand “fresh.” This is a tricky thing to do, however, and often occurs long before it needs to.

A good example of this is the recent Tropicana orange juice packaging redesign. When Tropicana debuted new packaging and brand identity for its Tropicana Pure Premium orange juice, consumers responded with passionate complaints and outrage. After less than two months, the company decided to respond to their customers’ demands and return to the original packaging.

Interestingly, the sheer volume of consumer response was not the reason for the switch. According to Tropicana NA president Neil Campbell in a recent New York Times article, it was because it came from “some of [their] most loyal customers.” I think this is a great point. There will always be dissatisfied consumers, but marketers need to focus on their best and most loyal customers in order to continue to move the brand in the right direction. This is something that most companies don’t spend enough time doing.

In the article, Campbell also stated “I feel it’s the right thing to do, to innovate as a company. I wouldn’t want to stop innovating as a result of this. At the same time, if consumers are speaking, you have to listen.” While innovation is the key to keeping up with your customers, it needs to be smart and well-executed – not just innovation for the sake of innovation.

In times like these, when consumers are changing their minds and their behaviors almost hourly, marketers need to use real-time data and analytics to continue to learn about their customer-base and their evolving needs and wants. Then, when they are really ready for a change, marketers can give it to them. Until then, marketers should avoid giving their brands a makeover when their most loyal customers still love the original.

Targeting Teens During A Recession

It looks like anxiety over today’s economy has spread to a younger demographic. While in the past, young consumers were relatively recession-resistant, today’s teens are adjusting their buying behaviors accordingly. This shift highlights the difference between this generation of youngsters and generations before them.

In 2006, Euro RSCG Worldwide conducted a Global Cross-Aging Study, which polled people on their attitudes about aging. The study found that today’s youth is being forced to grow up too quickly and that older people are behaving youthful longer. This key issue is being exacerbated by the uncertainty and angst concerning the economy.

The destruction of net worth is forcing Baby Boomers to work longer. While their parents confidently retired at age 65, the anxiety of diminishing retirement funds is causing Boomers to rethink their plans. Young people, on the other hand, are being forced to mature much earlier. They are dealing with money worries at an age their parents never had to. With the threat of nonexistent social security and rising rates of unemployment, teens and young adults are feeling even more pressure to save money. In fact, 58% of American youths say they regularly save or invest for the long term.

Suddenly, this emotional observation has become a pragmatic reality.

American Student List (a company with the most comprehensive list of students) conducted a study on recession-minded teens and young adults, which was featured in a recent Ad Age article. Interestingly, this study found that while both genders are worried about the economy, males and females are reacting differently. Female teens and young adults are more likely to engage in money-saving activities (41% v. 35%) than males. Additionally, nearly half of females in this age group are looking for sales (48%) and staying home (51%) more often than a year ago, compared to fewer than 43% of males in both categories. On the other hand, almost half (48%) of the males polled buy high-end brands just as often, and nearly one-third (29%) spend money on entertainment more often.

These findings shed light on the immense opportunity for gender-specific behavioral marketing that engages teens and young adults – especially when it targets teens that spend their own money. In this recession, marketers should communicate with male and female youths in a unique way in order to get the best results.

The ASL study also highlights the importance of brand loyalty in today’s economic environment. The study found that when teen and young adult consumers’ store relationships grew stronger, shopping frequency during the past year also increased. For this reason, marketers will benefit most from advertising brand value and finding new ways to become part of this age group’s daily lives.

This key consumer group should be reached on a personal level, taking into consideration age, gender and lifestyle. Now more than ever, young people will be extremely choosy when it comes to where they spend their hard-earned money. Brands need build to Brand Rituals™ among their teen and young adult customer groups in order to engender loyalty and keep them coming back for more – regardless of fluctuations in their piggy bank.

Real Issues, Real Solutions, Real Results

In today’s challenging economic environment, it is more important than ever to address the issues that matter most to your customers. Now is the time to pay close attention to their changing behaviors and react appropriately.

In fact, a new report from Forrester Research shows that customer experience is closely tied to customer loyalty, and that the correlation between the two has increased since last year.

Bruce Temkin, VP and principal analyst at Forrester pointed out that, “when times are good, consumers just continue on their merry way, but in this economic environment, every purchase they make, every service interaction they have is a large portion of what they care about. They’re more emotional about everything and, therefore, a bad experience resonates even more negatively.”

Without analytics and research, you miss out on valuable information which can make or break the relationship you have with your customers.

Once you understand the challenges facing your customers, you can offer real solutions to address these issues and make their lives easier. In return, you will foster brand loyalty and generate real results and ROI.

What do you think? How can focusing on customer’s real issues and problems help a brand’s business?

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).