Colloquy Corner: Defining Loyalty Marketing

Welcome to the first in a series a monthly columns by Rick Ferguson, the editorial director of loyalty marketing servies provider Colloquy (www.colloquy.com). Colloquy teaches an ongoing series of loyalty marketing workshops and seminars in conjunction with the Direct Marketing Association. For more information, visit http://www.colloquy.com/cont_conferences.asp.

I write about customer loyalty for a living, so it would seem that producing a monthly column for CHIEF MARKETER would be an easy task–until you realize how broad a topic loyalty marketing really is. What are we talking about, exactly? Points programs? Grocery-store discount cards? Cobranded credit cards? Dialogue marketing campaigns? Punch cards? Ask 10 marketers to define loyalty marketing, and you’ll get 10 different answers.

Rather than become immediately lost in the minutiae of developing customer databases, designing strategic loyalty plays, and the merits of auto enroll vs. invitation enrollment strategies, it might behoove us to begin at the beginning. From a global, big-picture perspective, what exactly is loyalty marketing?

At Colloquy we define loyalty marketing as the effort to identify, maintain, and increase the yield from best customers through long-term, interactive, value-added relationships. We like this definition so much, in fact, that we trademarked it.

Loyalty marketing programs seek to recognize and reward customers based on their actual and projected value to the enterprise. They function on the properties of lift, shift and retain. A “loyal” customer will lift his level of spending per transaction, shift more of his category spend to your brand, and stay a customer longer than a “disloyal” one. He’ll purchase higher-margin products, respond to new product and service launches, respond to surveys, and become an advocate for your brand. Your return on investment compounds over time, increasing the customer’s total lifetime value to your company.

Loyalty marketing starts with a basic premise: In order to create profitable customer behavior shift, you must first identify who those customers are. Armed with this knowledge, you can then introduce initiatives to retain your best customers and increase your share of their overall spend in your space. Loyalty marketers typically assess customers according to value, then act to retain those who are most profitable–or who show the most potential for future profit–and increase their margin contribution.

There are two main differences between loyalty marketing and other forms of mass and traditional direct marketing. The first difference is that loyalty is measurable marketing; you can see, on a dollar-for-dollar basis, what bottom-line results are attributable to your marketing efforts. The second important difference lies in the ability of loyalty marketers to practice effective resource allocation. Instead of distributing your marketing dollars across your entire customer universe, from the most to the least valuable, you target your dollars on those segments most likely to deliver value, now and in the future.

But how do you get customers to raise their hands and allow you to track their behavior? Loyalty marketers seek to exchange value for information. The loyalty program provides both motivation for behavior change and a forum for productive dialogue between you and your customers. This exchange allows you to learn about their behavior and preferences and then leverage that information to produce a measurable return on your program investment. Once members perceive meaningful benefit from this value exchange, they repeat the desired behavior.

The relevant dialogue that results from a loyalty value exchange also delivers a sense of community to members–especially when you listen and react to what they tell you. By tracking personal attributes and transactional history, you can apply value-added mechanisms that further increase their profitable behavior. This approach forms the essence of all customer relationships, which we define as the voluntary exchange of value for information, with the mutual expectation of gain. Loyalty is symbiotic, rather than parasitic; there has to be something in it for both of you, or it won’t work.

The unique challenge for would-be loyalty marketers, therefore, is to identify customers and build a loyalty database. Unless you can identify customers at the point of sale, you can’t track their behavior and offer a value exchange. The device can be a multitender magnetic-stripe loyalty card, a chip-enabled smart card, a contactless payment device, a Website, a biometric reader, or a cobranded or a private-label credit card. Whatever your preferred tracking method, note that you want to capture as much of your customer’s spend as possible–cash and checks as well as credit- or store-card payments. If you’re capturing only transactions from a single tender, then customers who pay with competing credit cards or cash remain invisible, and your inability to recognize and reward them represents lost incremental revenue for your business.

Remember that your business model and industry will dictate which metrics are most indicative of success. If you’re a credit-card marketer, then credit metrics such as charge volume and size of portfolio may be most critical. But it may be that the customer’s total relationship with your bank across all product lines–credit and debit, checking and savings accounts and home mortgages–is a better measure of that customer’s overall worth. Likewise, retailers may find same-store sales their most important measure of success, but loyalty marketers think in terms of same-customer sales. So if you’re exploring loyalty marketing as a strategy, then you have a whopper of a decision to make right off the bat. While traditional marketers build their marketing strategy around products and channels, loyalty marketers build their strategy around customers. Which kind of marketer are you?

Loyalty marketing doesn’t require that you give up marketing your favorite payment-card product, abandon mass marketing, or rethink your entire business model. But it does require you to define a customer-centric set of metrics by which you measure success, and it requires you to identify profitable customer segments and motivate them to engage in profitable behavior. So we come full circle back to the initial conundrum: How do you identify best customers and influence their behavior? That will be the subject of this column, and I hope to provide you with lots of sage advice and examples from the field. Now that we’ve defined our terms, the rest is just details.