B-to-B Pays Attention to Retention

(Direct) Ten years ago Frederick Reichheld’s “The Loyalty Effect” demonstrated to the world that a five-percentage-point decrease in customer defections could improve per-customer profit anywhere from 25% to 85%, depending on the industry.

William H. Davidow and Michael S. Malone put it another, equally compelling, way in their book “The Virtual Corporation” — retaining an additional 2% of customers has the same effect as cutting costs 10%.

The world of loyalty marketing has thrived over the years, ranging from dear old S&H Green Stamps in grocery stores to department-store credit cards to airline frequent-flyer miles. These programs for consumers are linked by one characteristic: rewards for purchase in an effort to motivate repurchase and prevent defection.

But in business-to-business, loyalty programs have evolved differently. Business purchases are less likely to fit the frequency model that supports points programs. Most companies that sell to other businesses find the Pareto principle (which maintains that in many cases, 80% of consequences stem from 20% of their causes) stretched to the limit: A few major accounts can represent well over 90% of the revenue. In several industries, a complex network of distribution channels makes the definition of “customer” difficult. Furthermore, doling out rewards to individual buyers may be counter to corporate policies on accepting gifts from vendors.

But on a customer-by-customer basis, a business account represents far more value than a consumer household. Even more critically, the universe of prospects is smaller — numbering in the thousands, vs. the millions. Fortunately, there are a variety of approaches to b-to-b loyalty marketing success.

Partnership strategies
Partnering is about moving a normal customer relationship to the next level, where both parties gain advantage, and the whole is greater than the sum of its parts. In b-to-b, partnerships make sense for many reasons, among them that many of a company’s best customers may also be its suppliers.

Furthermore, industries tend to develop tight communities, where referral and networking provides abundant opportunities not only for sales, but product development, manufacturing and attracting superior employees. The best b-to-b customers look for ways to build strong partnerships. Take Sapient, the Santa Monica, CA-based business innovation consultancy, which two years ago introduced an exclusive client conference. According to director Patti A. Birbiglia, the summit is held three times a year to strengthen relationships between Sapient and key clients. Only 18-20 clients are invited — senior and executive vice presidents and CIOs — for three days of meetings, roundtables, and golf outings. Sapient execs are in attendance, but no selling is allowed.

“The summit lets our key clients feel like they’re a part of Sapient,” Birbiglia notes. “It’s not like, say, Marriott’s rewards program. Instead, we provide clients with a great experience, but its impact is behind the scenes, invisible.”

How does the company know if its program is successful? A combination of hard and soft measures. Sapient captures sales leads emerging from the events. It also tracks feedback from client reps. “The clients love the networking among their peers,” Birbiglia says. “But I also keep an eye on account growth rates before and after the event, and compare them to growth in nonattending accounts. We may not see real results for 18 months.”

Rewards programs
Classic loyalty programs have a place in the b-to-b world, particularly in categories that involve frequent or multiple-unit purchases. Examples abound among business marketing categories that straddle consumer and business markets, such as office products and hospitality.

Staples, for example, has a popular rewards program in place for its small business customers. American Express’s Open is another effort that combines rewards from partner companies like FedEx and Hertz with frequent-flyer miles from airline partners such as Delta. Open also provides a variety of tools and resources at its Website to help small-business owners better manage their firms.

But rewards programs also are found in less traditional sectors such as building supplies. Look at the Value Alliance Club created by Palatine, IL-based agency Interline Creative Group to serve a variety of noncompeting companies selling to contractors.

The original participant was Sloan Valve, a company that markets specialized plumbing fixtures. This is an increasingly competitive category, and the rewards program has become an important strategic weapon for Sloan to encourage repeat purchases.

Sloan developed the program six years ago to attract contractor repurchases without offending its distributors. The program is set up to reward all parties based on their participation in the bottom line. When an electronic faucet is sold, the contractor gets points, but the distributor also earns points at the rate of 10%.

Contractors and distributors can redeem points for prizes. Before 9/11 the rewards were all in travel deals — vacation packages, etc. Now the program has expanded to offer merchandise such as lawn mowers and pool tables.

“The beauty of this program,” says Interline’s Jim Nowakowski, “is that it’s as flexible as a [cash incentive], but adds more value. Instead of giving $5 when a contractor buys a product, you can give points for all kinds of behaviors, like richer points for trying out a new model or reducing points to protect margin on certain products.”

Another of Interline’s brilliant strokes was amortizing the fixed cost of running the program over a half-dozen noncompeting clients, such as T&S Brass and Leonard Water Temperature Controls.

Of the 40,000 contractors in the United States, Sloan does business with about 5,000. Of those, 30%-40% are playing the Value Alliance Club game to the hilt. “They clearly concentrate their purchasing with Sloan, and the result is they’re taking their kids to Disneyland for free,” says Nowakowski.

B-to-b loyalty programs need to be crafted carefully against business objectives, the competitive landscape, and buying behavior. The best such programs combine emotional and rational rewards, observes Mike Capizzi, Frequency Marketing’s vice president. And, he continues, business marketers have an advantage: access to data.

“Most consumer manufacturers would kill for the direct end-user access that business marketers enjoy,” says Capizzi. “If they would just think it through strategically and then take advantage of that asset, loyalty marketing could be a huge advantage in business-to-business marketing.”

Ruth P. Stevens ([email protected]) consults on customer acquisition and retention, and teaches marketing to graduate students at Columbia Business School. She is the author of “The DMA Lead Generation Handbook” and “Trade Show and Event Marketing.”