Monday Mornings with Madison

REWARDING CUSTOMER LOYALTY

Given that this is the 100th issue of Monday Mornings, it seems a good time to examine the issue of customer loyalty.  Many businesses wonder if customer loyalty should be rewarded, and if so, how?  Marketing wisdom says it is important to reward customer loyalty.  Why?  It is a matter of dollars and sense.  According to market research, it costs five times as much money to find a new customer than it does to get a current customer to come back and do business with you.

The question of how to reward customer loyalty is trickier, full of risks and limitations.  If the purpose of rewarding customer loyalty is to ensure greater or ongoing customer loyalty, the problem is that one does not always equal the other.  Rewarding a customer does not always translate to greater customer loyalty.  One danger, for example, is the risk of dilution, where a product that customers would have purchased anyway is either given away or discounted as a reward. The benefit typically has low actual value.  

Customer Loyalty Programs as Bribe

Another risk is when a Customer Reward Program becomes a Customer Bribe Program.  At times, this thing happens when parenting a child.  You start “bribing” your child to do something, such as “If you eat everything on your plate, you can have a cookie.”  But there is no end in sight to the bribing process.  The one-cookie-for-a-clean-plate trick typically works for a week or two and then the bribe must be increased to two cookies or three before the child will willingly complete the entire meal.

Companies sometimes make the same mistake when it comes to rewarding customer loyalty.  Airlines were one of the first industries to make this mistake.  As one airline started to capture greater market share with its frequent flyer program, every other airline added similar programs.  Today, virtually all major carriers have some kind of mileage reward program.  If meant to reward existing customers, it was unsuccessful because there is little differentiation between the programs.  Many passengers, especially frequent flyers, are no more loyal to one airline than they were previously.  Instead, most belong to multiple Frequent Flyer Programs.  All that happened is that the cost of business was raised for all players in the airline industry.  Ultimately, points meant prizes, not loyalty.  

The credit card industry experienced the same thing.  Practically all banks offering credit cards today have some sort of rewards scheme under the guise of customer loyalty.  It is no wonder then that most Americans, even in the current economic market, carry credit cards from 3-4 banks and switch from one to another – depending on the prizes offered – on a regular basis. 

Under the pretext of rewarding customer loyalty, those programs simply raise the cost of doing business for everyone in those industries.  And, like getting the child to eat dinner, the cost of such programs only goes up.

Customer Loyalty Programs to Track BehaviorAnother risk is using customer loyalty programs to gain greater insights into the customer’s buying behavior with the ultimate goal of increasing customer loyalty.  The problem is that in the drive to retain as many customers as possible, they target their marketing to customers who offer the greatest gross revenue rather than profitability. 

For example, one airline frequent flyer program targeted its regular flyers but found this was unprofitable for chasing high gross income clients and discontinued it.   However, while many companies minimize investment in customers who spend the least, segments of that group might provide the best opportunity for future profits. British Airways, for example, uses its loyalty program and predictive modeling to identify customers with long-term potential – those deserving differential treatment, regardless of their spend. 

Despite the risks, customer loyalty programs can work, and depending on the industry, may be a necessity.  There are basically four types of Customer Loyalty Programs.

Type # 1: A Membership Program.
Most programs provide special incentives to members as part of their membership.  Sam’s Club, for example is a membership-based retail store.  

Type # 2: A Rewards Program.
Rewards programs provide gifts and perks that are “earned” according to the amount of business the customer generates. For example, some manufacturers offer a reward for their most successful dealers.  Airlines and credit card companies typically have Rewards Programs.

Type # 3: Create a Community.
Feeding the human need to belong to a community, some companies create ‘communities’ that are part of their brand.  For example, a running shoes manufacturer called On the Run (http://www.ontheruntx.com) created a community of customers by sponsoring marathon and triathlon training programs and sponsoring local running events.

Type # 4: Create Intertwined Business Processes.
This is not a traditional customer loyalty program…but perhaps the best way to guarantee that customers keep coming back. Basically, this method consists of positioning your business processes so deep in your client’s or customer’s business processes that it would financially hurt their business if they were to stop doing business with you. That’s guaranteed customer loyalty.

Ultimately, it makes sense for businesses to reward loyal customers.  It’s not that hard to implement a Customer Loyalty Program.  Consider what makes sense for your business and weigh the risks.  Then implement a program that will encourage their loyalty and reward them for their continued business without diluting your business and product value.

QUOTE OF THE WEEK
“You’ve got to give loyalty, if you want loyalty.” Donald T. Regan

© 2009 – 2011, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

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