Loyalty Rewards

There have been a few milestones in the annals of customer-centric marketing and customer loyalty. Unfortunately a lot of them have been milestones of bad behavior. In fact I would put Facebook’s recent trampling of customer data rights as a bad one. I would put Johnson & Johnson’s Tylenol recall in the 80s as a good milestone. And looking back, I see the airline industry as the first to have put in place customer centric programs with a very clear and compelling customer value exchange. The way I saw it: you traveled, you were rewarded; the more you did it the bigger the reward with free flights, better seats and perhaps even a cocktail along the way.

It was easy to understand and it influenced my behavior and purchases. It was a strategic approach that many have since followed, including hotels, credit cards, retailers and more. The airlines certainly did not invent this, yet they perhaps were the first to package it up on an international enterprise scale along with significant rewards that translated into big bucks.

But what are they doing now? Have they forgotten me, the customer? Gone is the customer centric program that was initially introduced. Frequent flyer programs have been diluted, complicated, and stretched to the point that they are completely different product that what they started with.

An article in the NYTimes on May 11th detailed the convoluted rules, black outs, and hoops that a customer needs to do today to be able to redeem and get a reward. The article, The Calculus Of Upgrades, makes it clear that the airlines customer centric points program have degenerated into a massive customer disenfranchise initiative.

The airlines need to pause and become the customer again. Perhaps it is time for them to stop looking at the customer metrics that show a downturn in seats, a bigger competitive set from low-cost carriers and look at frequent flyer programs as if they were a member. If they do, I’m sure we will all be much happier and less grumpy when we next have to bring our own peanuts along on the flight.

With the economy still sorting itself out and the post-holiday period giving a chance to review 2009, I suppose it would easy for retailers, restaurants or any business to put customers in two segments. Those two segments: buyers and non-buyers. But retailing is never that simple and segmentation has never been more important.

We’ve been among those evangelizing segmentation for years. The more mainstream analytics business has caught up to the science of segmentation particularly behavioral segmentation.  Best-selling books such as Predictably Irrational  (Arielly, 2008) and Nudge  (Sunstein, 2008) detail the nuances of individuals’ behavior through the use of careful, controlled studies. Findings frequently run counter to popular understanding, and researchers in this space are uncovering a wealth of opportunities for understanding consumer behavior.  A recent article in TIME magazine recounts the team of behavioralists leveraged by the successful Obama campaign, and the likely implications of the behavioral revolution in American politics (Grunwald, 2009).

Behavioral segmentation seeks to identify discrete groups of people based on actual behavior.  To accomplish this, databases are often used to track and record customer behavior.  One of the most common ways that customer behavior is collected is through the use of loyalty programs.  Other ways that customer behavior can be tracked include responses to email campaigns, direct mail campaigns, or website activity through a website that requires its users to register in order to access content.

All of these data capture mechanisms provide insight into actual customer behavior, including but not limited to:

·         the products that a customer has purchased

·         the frequency with which a customer visits a store or website

·         the type of content a customer has accessed on a website

·         the average amount of a given customer’s transaction,

·         the number of emails that a customer has opened or clicked

·         direct mail pieces that a customer has responded to

Often, the sheer volume of behavioral data can be overwhelming.  A single table designed to record the history of email sends may easily result in hundreds of millions of records for medium to large list sizes. Some results from behavior-based loyalty will be easy to see. Incremental spending and profit cultivated from the targeted customer groups will grow. ROI for the overall loyalty program will spike with more efficient spending. Customers will become more engaged across all channels and more responsive to targeted offers. Companies can also expect some welcome unforeseen  consequences beyond these more predictable ones.

1)       Database growth: The overall size of a company’s database will grow if behavior-based loyalty is embraced. This will be rooted in a commitment to enticing the right customers to engage with the company and enroll in an exciting rather than predictable program. It will grow in strength from the continued interaction that customers have with your program, continuing to leave tracks of their purchase behaviors and evidence of their attitudes and emotions. Emotional connection with behavior-based loyalty will simply be stronger and the database will gain quality as a result.

2)       Segment strength: Because behavior-based loyalty starts from the standpoint of changing the behavior of a specific group, the company owns that knowledge. It knows how to get a specific segment to move their behavior and then move the needle on sales. “It’s not realistic to expect that you can move an entire customer base,” says MacCurrach. “But you can move the right segment of that customer base with the right knowledge and the right reward scheme.”

3)       Trackable programs: A company doesn’t have to guess about a loyalty program if behavior is at the center. It can use the knowledge gained to answer definitively questions such as did this offer work? Did the reward work? Did the customer respond with incremental behavior?

4)       Create buzz: It’s always one step tougher to predict and measure the word of mouth value created by a loyalty program, but it much more likely that customers and the press will advocate a program that surprises them rather than one that rewards them predictably.

Most importantly retailers in most every vertical need to embrace behavioral based loyalty to move from “I think I know my customer” to “I know my customer.” Knowing your customers is an essential competitive advantage. Knowing what will make them more profitable through a surprise and delight strategy is the next level of customer knowledge and the true cutting edge of customer loyalty. Without it a company runs the risk of being just another number among the 701 million retail industry loyalty programs. By employing it, retailers have a shot at making loyalty programs work for their customers and for a neglected part of their interests – the bottom line.

Hate to say “I told you so.” But….

We have been saying for about a year now that marketers are doing a good job at cookie-cutter customer loyalty programs. A new CMO Council Survey released earlier this week confirms that. Unfortunately, the survey confirms another more disturbing trend that we have predicted: Marketers think they could be doing better at loyalty.

And they could.

Here are the details: Surveying more than 600 marketers with active loyalty programs the CMO Council found that most (61 percent) believe that loyalty program participants are the best and most profitable customers. An almost equal number of respondents (65 percent) view customer loyalty program investments as a very essential, or a quite valuable part of the marketing mix. Unfortunately, only 13 percent of respondents believe they have been highly effective in leveraging loyalty and brand preference among club members, and nearly 20 percent don't even have a strategy for this. Another 25 percent admit they have not mobilized brand loyalists to become active advocacy agents, either.

The study also reveals that marketers are mostly inducing loyalty with discounts or free products and premiums rather than quicker, better service or improved customer handling. Some 39 percent of respondents view discounts and savings as the key member benefits, 34 percent view free products and premiums as essential incentives, while 33 percent are committed to offering points for merchandise redemption as a further motivator.

The report contains other good information points that show the dichotomy between what marketers like and what they wish they could do with their loyalty programs. Suffice to say that loyalty programs will continue to be a preferred customer retention model. But in order to close this dissonance between loyalty reality and the desired state, we recommend the following actions:

Stop shelling out random and predictable points: If a company thinks rewards are points and points only, something’s wrong. If you truly understand what your customer wants, it has to be more than points. It’s a relationship and an experience. Points can be given by your competitor. Get your data engine running to find out what moves the valuable customer and it will add to your program’s profitability.

Surprise and delight: Customer data can provide clues about the experiences that will set you apart. Maybe it’s a discount for frequent customers. Maybe it’s an invite to an in-store only event for customers that have fallen off in their spending habits. If you don’t find out, you’re stuck on the point treadmill.

Segment beyond loyalty members: Most companies look at their loyalty program members as one large segment. That’s a mistake. There are plenty of behavioral segments, value segments, and demographic segments within the loyalty membership.

Here at Customer Portfolios we’re feeling a little more than vindicated about our bullish view on e-commerce lately. Today comScore issued a report that shows 4 out of 5 US internet users visited a retail site during the month of November. For some categories such as consumer electronics, that’s a 33 percent jump over 2008. Overall holiday business was up four percent online, which is a good number considering the economy. According to a report in The New York Times on January 7, The industry collectively turned in a 2.9 percent year-over-year sales increase at stores open at least a year, according to Thomson Reuters. Some 75 percent of retailers beat analysts’ estimates — the most companies to do so since March 2007. Several retailers — including Macy’s, Nordstrom, Aéropostale, TJX Companies, Ross Stores, American Eagle Outfitters and Limited — expressed their growing confidence by raising their earnings estimates.

 
Here’s why we feel vindicated. This number, and some other success stories show, that it is customer engagement that will attract and keep customers. If a consumer visits a retail website, it’s because they are researching products, reacting to a brand or simply engaging with the retail brand experience. In our experience, consumers do not go to a website to earn points on a retail entitlement program. And it is not in the retailers best financial interest to push a loyalty program online when that program may or may not generate incremental business. Retailing is about excitement over entitlement. Look at Amazon (of course), which did not log its best holiday season because of a loyalty program, but because they did a great job using a new product (Kindle) to drive traffic and generate excitement.

The companies that do well in e-commerce understand that the future state of customer loyalty, behavior-based customer loyalty is based not on predictable behavior from the customer and the company, but on breaking the predictable patterns from the customer and appreciating those most valuable customers with exciting experiences, goods, and or services. Customers should not do the math or even understand the math around customer loyalty programs, they should be excited by them.


The ability to execute exciting loyalty programs depends on a customer command center, which must go beyond feeding simple revenue transactions. It needs to define and measure the more subtle ways in which customers share information and how often they touch a brand across all channels. Customers may sleep but customer information never rests. That’s where the goals of the company need to meet and use the wealth of information.

Here at CP we call this constant customer information “Lights-Out” marketing.  It can automatically execute programs that are relevant to the customer and more importantly relevant to encouraging and rewarding behavior that syncs with the companies marketing and sales priorities at that moment. Lights-Out programs will be executed if there is just one customer that meets those criteria or a million. The programs will be targeted even as the customer grows and their behavior modifies or the loyalty behavior changes. The integrated command center is a closed-loop marketing architecture that automates triggered programs and optimizes the relevance, frequency, and timing of marketing communications.  As stated earlier, customer information is easy and common. Using it to encourage profitable behavior is an art and a science.