Grounded or Airborne?

AT LUNCH THE OTHER day we listened, fascinated, as a group of prosperous businessmen discussed their frequent flyer miles strategies. One of the group — we’ll call him Doug — has been working the mileage game for years. Doug accumulates miles on the two airlines that fly to his favorite vacation destination.

He’s also found a third airline that flies to one of his important business destinations that will apply its frequent flyer miles to one of his other two preferred carriers.

You already know what’s wrong with this picture. All three of Doug’s airlines could cancel their frequent flyer programs tomorrow, and his airline choices wouldn’t change. The next day he’d still fly the carriers that take him where he wants to go at the times he wants to travel.

Loyalty programs dig deep into airline pocketbooks. But are they worth their hefty price if they fail to do what they were designed to do — create a preference for one airline over its competition? From Doug’s point of view the playing field is utterly level. In the airline business (as in many others) loyalty and the programs designed to drive it have become a commodity.

SO WHY BOTHER?

Customers who come back and buy again are a bonanza. Gaining their loyalty is a worthwhile pursuit. The sales produced by returning customers cost less to generate.

During downturns, customer loyalty can keep the lights on. Good customers are relatively “low maintenance.” And, most importantly, customers talk to their friends, creating new opportunities through word of mouth — the most valuable kind of advertising. To the skeptics who say that loyalty is an emotion, an intangible that can’t be measured, we argue that the best expression of loyalty is the act of buying again. And the act of buying again can be measured quite precisely.

Loyalty programs continually are put in place with the best intentions by executives for several reasons:

• To retain their best customers.

• To get a greater share of their customers’ business (think frequent flyer programs).

• To collect customer information to enable marketing programs.

• To forecast what customers will do in the future. Loyalty cards and programs enable matching transactions to customer records, which in turn enables predictive analytics.

• To do what their competitors are doing. Some observers scoff at companies that institute loyalty programs just to match their competition. However, it’s one of the most frequently cited reasons heard by the authors.

BUILDING MOMENTUM

Whatever a loyalty effort’s goals, building momentum is harder than it’s ever been. Today’s customers resist trading their privacy and data security for the modest incentives and rewards offered. They don’t want to carry still another rewards card in their already overstuffed wallets. Customers recognize these programs as another kind of discounting and often find the discount doesn’t offset the trouble of participating.

Loyalty programs can even have negative effects. The smart buyer who works hard to get the best price may view rewards programs as a form of coercion. And when administrative roadblocks make claiming rewards difficult, customers can get angry.

Few companies know their customers’ lifetime value. Without this information, it’s very hard to know whether benefits generated from these programs are enough to cover their costs. It’s entirely possible that a loyalty program could have an overall negative effect on profitability. Finally, there’s the question of whether the rewards and incentives really fulfill their goal of maintaining the loyalty of a customer who might get a better offer from a competitor.

So while businesses ardently pursue their best customers, the loyalty cart is being turned upside down. The net effect of the competition, the multiple cards and the accompanying hassles is to turn customer loyalty into a commodity with a definable price. We all know what happens in that situation: A competitor appears with a lower price.

WHAT’S THE ANSWER?

But there’s a glimmer of hope in this dark-side scenario.

Loyalty — best defined as the intention to purchase again — can be measured very accurately. Using fine-grained predictive analytics on transaction data, it’s possible to learn enough about customers to create loyalty programs that really appeal to them. Good programs that offer customers real value have shown they not only retain business but also identify opportunities for cross-selling and upselling.

Here’s how to create a customer loyalty program:

• Remember that every good loyalty plan is based on three things; measurement, measurement and measurement.

• Use analytics to turn your measurements into marketing intelligence. The main intention should be to know your customers. (Good analysis will nearly always tell you more about your customers than they know about themselves.)

• Use technology to recognize your customers. Know their names and characteristics when they come to your checkout counter, your call center, and when you send them a catalog.

• Use analysis to anticipate each individual customer’s needs — what they’ll buy next and when, what they might buy for the first time, and what they might buy from you that they’re now buying elsewhere.

• Include all your customers in the program. Too many companies spend too much time on their top customers, ignoring the huge potential from middle-tier customers and even up-and-coming newbies. Analytics can identify what actions to take with these lower ranking customers.

• Use what you know to make the right offer at the right time. The wrong item or bad timing are irritating to the customer and ultimately unproductive.

• Make the incentives and rewards you offer relevant to your business. If you’re in the car business offer car-related incentives. If you run a restaurant…well, you get the point. You need to build loyalty programs around something more than coupons, discounts, low prices or cash incentives (unless your company is named Wal-Mart). Someone can (and will) take away your pricing advantage sooner or later.

DON’T FORGET THE FUNDAMENTALS

To escape from the quicksand of commoditized loyalty, companies need to stand on a firm foundation of business fundamentals:

• Make customer loyalty a companywide program.

• Make each of your employees responsible for customer loyalty.

• Figure out your firm’s unique competitive advantage and use it to make yourself indispensable to customers. If you don’t have one, create one.

• A loyalty program is not an excuse for ignoring these fundamentals. It should be a framework for delivering them to customers.

Customer loyalty always has been something the corner druggist did better than most large corporations. But programs built on good analytics work no matter how large or small a business is. Big companies should not feel “sized” out of the game because they feel that analyzing large customer sets is next to impossible.

Since analysis is based on transaction data, the computer and measurement techniques available today make analytics affordable for most companies. And the larger the customer set, the more there is to be gained by looking at all customers, not just the top tier of revenue producers.

We’d offer a warning, though. Don’t even bother with the analytics if you’re not going to regard customer loyalty as a continuing project. An effective program is built on campaigns that generate results which are fed back into the models and keep the analysis current. All this demands the time, ingenuity and dedication of everyone in the organization.

A well-planned and well-executed loyalty program should boost sales, improve margins and more than pay its way. But the real payoff is a growing group of customers who will come back to you for future purchases, even in the face of fractionally better offers by competitors.

MARK KLEIN ([email protected]; top) is founder, CEO and manager and ARTHUR EINSTEIN ([email protected]) is vice president of marketing at Loyalty Builders in Portsmouth, NH.