Multichannel Merchants Entering Customer Loyalty Field

Loyalty programs are not new to the retail industry (think CVS‘s ExtraCare, Petco‘s PALS, and the programs of virtually every grocery store chain). But direct marketers and multichannel merchants such as Wine.com, Pfaltzgraff, Relax the Back, and Car Toys have only recently started offering them. Gifts marketer RedEnvelope has recently joined their ranks: It’s piloting its first-ever customer loyalty program, in which it gives customers a $20 gift certificate for every $200 they spend.

“Historically it’s been too expensive for smaller retailers to launch loyalty programs,” says Mark Goldstein, CEO of Loyalty Lab, which helps companies, including RedEnvelope, launch and manage loyalty programs. “But the reality is that 50%-60% of all retailers have some sort of loyalty program. And if it’s true that 80% of your sales come from 20% of your customers, you need to treat those 20% special.”

The cost of implementing a loyalty program has come down during the past few years in large part because of automation and online capabilities. Back in the day, if a retailer was giving away a clock-radio for a certain number of points, the consumer would have to contact a call center, which would submit the order to a distribution center for fulfillment. Now a company such as RedEnvelope can give consumers the choice between a virtual certificate or having the $20 reward subtracted at the time of purchase.

Loyalty Lab says it can offer retailers an on-demand loyalty program that is up and running in 30 days, at a cost that is about 10% of traditional loyalty program costs. It is charging RedEnvelope a flat monthly fee (between $5,000 and $10,000 per month) to pilot the program through February.

The Web also makes loyalty programs simpler for customers, notes Gary Korotzer, vice president of marketing for RedEnvelope, in part by doing away with a point system. And he should know: He has launched a number of loyalty programs, most recently for investment firm Charles Schwab.

For retailers looking to take the plunge or revamp their loyalty programs, Korotzer has the following advice:

• Don’t ask “when” you should launch a loyalty program, ask “why.” A program should not be launched just because the technology is available and affordable.
• Ask yourself what you’re trying to solve with a loyalty program. Are you looking to retain your customer base or increase it?
• Break your customer groups down into subsets (for example, new customers, old customers, lower spenders) and pilot the programs to these control groups.
• Offer your members special privileges instead of just a discount or a rebate. Rewards such as tickets to a game or a show will make your most loyal customers remember and appreciate you more.
• Points have “kind of surfaced,” he says. “A lot of companies do not go deeper than points. They need to look at how they can serve their clients and how to change their buying habits. Loyalty programs are not just about delivering exceptional customer service, but about retaining your customers.”

RedEnvelope will test the loyalty program through the first quarter of 2006. It will then determine the short-term effect on its customers, Korotzer says, and see if any higher average orders or purchase frequency can be sustained over a longer period of time.