Getting loyalty programs right

Loyalty programs can be tremendously expensive and difficult to discontinue, so when establishing or modifying one, use caution. Data, employees and management all need to support the initiative.

The days when a loyalty program meant awarding a free sandwich for every six sandwiches a customer paid for are long over. A new age of customer loyalty programs is about to dawn, thanks to radio frequency identification (RFID) tags and wireless point-of-sale technology, one loyalty expert said.

But when it comes to establishing or revamping a customer loyalty program, there are some key pitfalls to keep in mind.

"Make sure there's a payback," said Nick Wreden, managing director of FusionBrand Inc., in Atlanta. "Don't do a loyalty program unless it's going to be profitable. They're expensive and it's a long-term commitment. If you want some pissed off customers, drop your loyalty program."

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Loyalty programs are an expensive proposition. In the supermarket industry, where loyalty programs are relatively mature, they cost from 1% to 1.5% of revenue, and in other industries they cost between 2% and 5%, Wreden said. Additionally, patience is a virtue. It will be at least 18 months before an organization starts to see return on a loyalty program, Wreden said.

Get good data, and be patient

That patience can be tough to come by. Loni Cibants, manager for customer loyalty at the JM&A Group, in Deerfield Beach, Fla., is trying to establish a loyalty program for her company's customers. Offering insurance and consulting services to car dealerships, JM&A Group does a lot of "churn and burn" business, Cibants said.

"It takes seven months into a relationship to see a profit," Cibants said. "We lose a third of them in 18 months. We spend $9 million a year acquiring customers, but we still lose 52%. Yet we're still enormously successful."

Convincing senior management of the value of a loyalty program requires organizations to get their data in order. Customer loyalty programs collect massive amounts of data but many companies aren't using it, Wreden said. Customer loyalty data provides insight into both share of wallet -- or customer penetration -- and lost customers, Wreden said.

"What happens if you have a loyal customer who stops shopping with you?" Wreden asked. "It's really important to identify them and, 'A' win them back, or 'B' do an exit interview and understand why they left."

As with so many enterprise-wide initiatives, everyone needs to adopt the program and management needs to get behind it, Wreden said. When Tesco, the U.K.'s largest supermarket chain, started its highly successful Clubcard program, managers went to every store in the U.K., showed a video to employees and answered questions.

Programs have reached saturation point

The value of loyalty programs also becomes more difficult to identify as they reach a saturation point. In the '80s and '90s, spending on loyalty programs was increasing 30% a year, but that flow of spending has slowed to a trickle. Last year, spending was only up 1.5%, Wreden said. Additionally, the number of loyalty programs in existence far outweighs the percentage of people enrolled in them.

Organizations need to look beyond the "sandwich card" program, Wreden said.

"The main reason loyalty programs fail is they're trying to encourage future behavior," Wreden said. "They want you to buy more versus rewarding past behavior."

Among RFID, wireless point-of-sale technology, such as Mobil's Speedpass, and new innovations, there will be new investment in loyalty programs, Wreden predicted.

Specifically, loyalty programs will become more flexible. For example, the Hilton HHonors program allows members to choose their rewards -- either airline miles, hotel points or a combination of the two -- through the global hotel chain.

Weed out the unprofitable customers

When modifying or establishing a customer loyalty program, you should keep in mind your unprofitable customers.

"The last thing in the world you want to do is make an unprofitable customer loyal," Wreden said.

Loyalty programs should be set up so unprofitable customers are not eligible for rewards or the program should be used as a tool to make them profitable.

Additionally, business-to-business organizations should take advantage of information-based programs, Wreden said. Under an information-based program, rewards are essentially special information the company has access to.

Ultimately, it is the product that determines loyalty.

"A loyalty program does not ensure loyalty," Wreden said. "What ensures loyalty is everyday operational excellence and solid products."

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