Five Things You Need to Know About Loyalty Marketing

Loyalty programs are hot. Borders Rewards just launched last week, Tesco is on its way to the United States with its Clubcard, CVS is bringing its ExtraCare program to California, and even Yahoo! is quietly researching its options. Jupiter Research estimates that two-thirds of online retailers will have a loyalty program by the end of 2006.

If done correctly, loyalty programs can build stronger customer relationships, create lock-in, drive incremental revenue, and much more. But if launched without foresight, they can hurt margins, irritate customers, and distract marketers.

If you are thinking about launching a loyalty-marketing program, here are five key concepts you need to know:

1. Whatever you have budgeted for training isn’t enough.
   Loyalty programs must be ingrained in your operations and culture to become long-term successes. The excitement around the launch will fade, your poster signs or home page presence will cycle to someone else, and employee turnover will erode your institutional knowledge. Most companies underestimate the training needs over the long term. Start building a relationship with your operations and HR departments now because you will need them to sustain training and focus over the long haul.
2. Promotional offers should account for at least 10% of your reward expenses.
   Using a program’s accrual mechanism (points or otherwise) as a promotional currency—say, offering double points rather than a straight discount– can generate some of the best results. There will be segments of customers who are highly responsive to this sort of promotional offer. And since these promotions are nearly always less expensive than discounts, good ROI is easier to achieve.
3. A few great benefits are better than many average benefits.
   Most marketers know that a message that makes one point is much stronger than a message with several points. But many seem to forget this when designing loyalty programs. While it is true that programs must meet the needs of multiple consumer segments, picking one great benefit for each segment will provide better results than jamming a whole bunch of benefits together.
4. Testing can save your job.
   As much as you think you know about your customers, when you put a loyalty program in front of them, you can’t be certain how they will react. Testing multiple concepts simultaneously is strongly recommended. One idea usually trounces the rest, and often does it quickly. An alternative is to write your terms and conditions so that changing benefits is not problematic.
5. Positive ROI usually comes in the second year.
   Start-up costs, initial enrollment rates, and rewards expenses all may vary widely, but most programs take a year to reach critical mass. When preparing your business case, be sure to secure at least two years of funding. Sustained effort to drive enrollment (since more members usually means more incremental revenue) can help you achieve ROI sooner.

Armed with these ideas, you can approach your loyalty-marketing concept with more confidence. Most people design or implement only one program in their careers, so they don’t have personal experience to draw upon. Start with these five concepts and you will be a long way toward a successful program.

Michael Greenberg, vice president of marketing for Loyalty Lab ( www.loyaltylab.com), a San Francisco-based developer of customer loyalty programs for the retail industry, and pend a monthly column for CHIEF MARKETER.