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Customer Service

Road Map to Retention

  Article published in DM Direct Special Report
October 1, 2002 Issue
  By Channing Rollo

Customer loyalty is the brass ring of business: everyone is chasing it, desiring it, yet cannot quite grasp it. The mind-boggling speed and choice of electronic commerce, coupled with reduced shopping involvement and declining brand allegiance, have made customer loyalty an elusive prize. But loyalty need not be out of reach, for technology has provided merchants with new tools - along with the new challenges - for fostering customer allegiance. The rules are simple: customer retention begins by delighting the customer with a dynamite product/service and a positive, consistent purchasing experience. However, this is merely the first element: to create and retain lifetime loyal customers in the current scramble, the merchant must also provide ever- increasing value.

There is little business risk in investing in progressive value aimed at customer retention: loyalty has been empirically demonstrated to bring enormous economic returns. A smart customer rewards initiative. If initiative is implemented in conjunction with a great product/service and stellar customer support, it will give the consumer ample incentive to remain loyal and purchase frequently over his or her lifetime, as each transaction is increasingly personal and gratifying.

Importance of Loyalty

Where do most companies focus their attention? Profit, cash flow and customer acquisition. According to Frederick Reichheld, author of The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value, this concentration is exceedingly misguided. Reichheld asserts that the one business principle most likely to be ignored - customer loyalty - is the only true reflection of how much value a company is generating. Economic experts view customer retention rate as a window to the future, the foremost predictor of strategic success. Why? Customers are the very first to notice when a company's offerings decline in value or when competitors offer superior value and communicate this by shifting their business.

Customer loyalty, in conjunction with being a value indicator, also has a powerful effect on the business bottom line. We all know the statistic - a five percent increase in retention can result in a bottom-line profit increase of up to 75 percent, depending on the industry. The dramatic economic power of customer retention is revealed when viewing customers in terms of lifetime value (LTV). According the book Loyalty.com, a comprehensive study of customer loyalty programs, Cadillac calculates the LTV of their loyal customers at $332,000, while Pizza Hut estimates that their life-long customers are worth in excess of $8,000 to the company. These figures make perfect business sense when one considers that a customer retained for life is more cost-effective, requires less service, provides more business and contributes to new customer acquisition through positive referrals. Thus, customer retention initiatives - creating longitudinal investments in customers - guarantee significant current and future economic benefit.

The Empowered Consumer

The introduction of the Internet and omnipresent information technology pose both opportunities and threats to customer loyalty. On one hand, online (or technology-mediated) shopping is inherently impersonal, thus the consumer's feelings of attachment and investment are lessened. The traditional marketing approach divides consumer purchasing behavior into a five-step process: 1) perception of need, 2) information search, 3) alternative evaluation (assessing value from evoked set of products or services), 4) actual purchase, and 5) post-purchase use and assessment. While these five steps are still present in online shopping, the process is far more rapid when taking place in the Internet's electronic medium: a consumer may move through all five steps in a mere five minutes. This is true even with high-involvement purchases (traditionally requiring extended problem solving): in under an hour at the computer, a person can research cars, compare features and prices, completely customize a vehicle and request it shipped to their local dealer. With the ease of the Internet trumping geographical barriers and the switching costs of traditional retailers, providing a value or reward distinction is essential. Thankfully - on the other hand - technology enables vendors to connect and learn about their customers like never before. Customer intimacy powered by customer relationship management (CRM) means ample opportunities for personalization, customization and communication.

Customers have three currencies to "spend" when purchasing from a vendor: time, money and data (increasingly defined as privacy). Providing superior value may involve any (or all) of these. Wise vendors encourage customer attention and sharing, as well as purchasing. For those with nearly interchangeable offerings and service levels, it will be a far greater challenge to hold on to consumers when the competition lowers their prices or runs a promotion.

Ways to Woo the Empowered Consumer

With reduced customer involvement and brand allegiance, how can a merchant inspire loyalty? Customers base purchase (and repurchase) decisions on perceptions of value (price/benefit), thus only the ongoing perception of high value fuels purchase loyalty. Offering ongoing value incentives is the principle behind reward initiatives. Such incentives - which include options such as private label points programs, continuity/club options and more - are designed to encourage and reward customers for purchase loyalty. Studies of American consumers reveal that 60 percent or more of individuals increase their purchases (by a reported 30 percent) from a particular vendor when offered incentives.

Regardless of program type or media, extensive evaluation and execution of online and offline loyalty initiatives reveal the following rules for developing an optimal loyalty endeavor:

  • Emphasize the relationship - Loyalty reward initiatives should not be thought of as mere marketing promotions or customer bribes. They are relationships - a means by which the merchant shares value with the customer in proportion to the value the customer's loyalty creates for the merchant. It is essentially giving back a portion of the value that the customer - by being an ongoing source of revenue - provides the company. If the merchant builds and thinks of the program as a gimmick, so will its customers.
  • Deliver sustained and progressive value - One-time offers will get one-time customers. For lifetime loyalty, the merchant must offer sustained service and rewards. This means a never-ending promotion and, therefore, prudent financial planning is absolutely necessary. While sustained rewards may be a costly investment for a merchant, the returns will be enormous: consumers will stay with a merchant whose benefits are reliable and permanent.

As a customer's purchase level, monetary level and/or frequency increases (RFM), so should the level of return to the customer. Instead of throwing money away on endless customer acquisition, the vendor should direct funds and efforts into retaining its best customers via a tiered system. Implementing a program that rewards every repeat buyer, with heightened rewards as the consumer heightens his or her commercial activity, will ensure that loyalty is established and customers stick around. Also, if value increases with increased participation, competitors will be unable to lure customers away given the increased switching costs. Progressive reward levels encourage customers to shift their business and concentrate their purchases with a single vendor.

  • Focus on the brand - When developing a loyalty program or initiative, merchants should be cautious not to develop deal loyalty rather than brand loyalty. To bolster the brand through rewards, the brand/product itself should comprise the incentive. An example of this principle is the typical frequent-flyer program: the more you fly with a particular airline, the more opportunities you will receive from that airline to fly for free. Thus, the reward is more of the service itself, not a monetary incentive or some other merchant's service or product. A Sloan Management Review study found that programs which reward customers with a free quantity of the product/service following multiple purchases direct the customer's aspirations to the product/service and not the deal, thereby encouraging true brand loyalty. As such, a program of "Buy 10 subs, get 1 free" is better at inspiring loyalty to the sub maker than "Buy 10 subs, get $3.00 back" (which will only create deal loyalty). Assuming the merchant has a quality product, the use of the product as the incentive will best serve business and brand interests.
  • Communicate, communicate, communicate - Personalized, sincere communication is the most important element of most loyalty initiatives. Programs that are impersonal, one-time offers do not develop relationships. A good loyalty program will seek to learn more about the customer and remain in frequent contact. Without investing in meaningful, individualized letters, messages and offers (not just mass-mail advertising pieces), the program will die. Best case scenario: the merchant contacts the customer even when it is not trying to make a sale, just to maintain the bond.

It makes sense: just as in interpersonal human relationships, communication is essential to long-term bond formation. And true communication is not one- way: sending only marketing materials is not a dialogue. For the relationship to thrive, the merchant must solicit the customer's input and opinions. Customers enjoy the opportunity to "talk back" to their providers. Communication is also important when dealing with customers that leave. Should a customer defect, extra effort should be expended to connect with him or her and find out why. According to investor Warren Buffett, "There might be more to be gained by studying business failure than business successes...start out with failure and then engineer its removal."

  • Mix "hard" and "soft" rewards - Because thousands of companies attempt to use various loyalty initiatives, consumers are skeptical of program requirements and rewards. Offering only small trinkets and "soft benefits" such as improved service may actually insult the customer (although depending on the industry, service or exclusive information may qualify as a "hard reward"). Hard rewards are defined as something that the customer would have to pay for if it were not for the reward program. Customers are looking for real value in the program, and are very sophisticated in detecting a rip-off or gimmick plan. A combination of benefits is best: while hard benefits are often copied, a program's soft benefits may serve to distinguish the plan from others.
  • Personalize and customize incentives - To push the consumer toward his or her next purchase, rewards or incentives should be personalized. The primary impetus for this additional principle is the marketplace's tendency to copy programs and ideas. To ensure that the customer does not later defect to a competitor's reward program, the merchant's program should (from the outset) offer increasing levels of personalized rewards that reflect the customer's prior purchases, preferences and interests. This is where the value of technology comes into play: with comprehensive CRM and stellar customer support, the customer's experiences feel increasingly intimate.
  • Target desired (profitable) customers - Detailed customer segmentation and target audience analyses are essential to establishing a profitable loyalty initiative. Reward programs should be designed to retain the very best customers, not low-margin buyers. This may seem obvious, but many promotions end up attracting exactly the wrong type of customer. For example, imagine that a bank decides to run a promotion to acquire new patrons. They decide to go with the latest fad and offer live professional wrestling entertainment in the bank lobby. According to demographic statistics, wrestling fans are predominantly from lower to middle- income homes. These are not the individuals most banks should be targeting, as the banking profits such individuals yield are relatively low. The wrestling promotion might also do further damage to the bank by frightening away some of their upper-income, profitable customers. Thus, when applying the 80/20 rule of marketing, loyalty initiatives are best when created with the profitable 20 percent in mind.
  • Avoid the satisfaction trap - Countless studies have shown that customer satisfaction alone does not equal customer loyalty. When tracking repurchase loyalty, one car manufacturer was dismayed to find that although 90 percent of its auto users described themselves as "satisfied" or "very satisfied" with their vehicles, their repurchase rate hovered around 30-40 percent. This puzzling phenomenon is due to a vast and important gap between what consumers say and what they do. Or as powerfully expressed by loyalty guru Reichheld, "Companies can avoid the satisfaction trap if they remember that what matters is not how satisfied you keep your customers, but how many satisfied and profitable customers you keep." Don't confuse the two - measure the success of your program by retention.
  • Make participation easy - Consumers do not want to jump through hoops, fill out forms or carry innumerable special cards to be members of a loyalty program. The merchant should aim to make joining and participating as painless as possible. Loyalty initiatives with optimum participation are entirely hassle-free: the customer joins by merely making a purchase and is informed immediately of being a valued customer who is already on the road to value returns. Following the purchase, buyers receive clear details about how the program works and that each successive purchase will increase returns to them.

When executing a loyalty initiative, businesses must be cautious that the customer rewards offered do not end up as a cost to the company - the merchant should share the value of loyalty with the customer, but the reward program costs should not exceed the loyalty's value. One restaurant chain made this painful mistake when it offered a trip for two around the world to any loyalty club member who dined at all of their restaurants nationwide, and were shocked when nearly fifty members qualified. Because the reward program was not well planned, it ended up costing the chain in excess of $2 million before it was discontinued. And a vital last point: rewards programs are merely the "icing on the cake" - they cannot fix fatal market flaws or compensate for poor services and products.

In conclusion, loyalty initiatives should be designed to be sustainable, progressive in reward-giving and brand centered. They must also be personal, communicative and geared toward establishing a genuine dialogue for mutual learning and sharing. These elements, if implemented correctly, will give the consumer a strong incentive to purchase frequently over time, as each transaction is increasingly personal, rich and rewarding.

Evaluation of Loyalty Program Options

To follow is an exploration of numerous options for loyalty initiatives. Also reviewed are coupons, coalition programs and purchasing incentives, which are often mistaken as loyalty tools, but are actually acquisition tools.

Loyalty Tool: Clubs

Loyalty Tool: Continuity

Loyalty Tool: Private Label Exclusive Rewards Program

Acquisition Tool: Coalition Points Program

Acquisition Tool: Coupons

Acquisition Tool: Prizes/Incentives


For more information on related topics visit the following related portals...
CRM and Customer Acquisition/Retention.

Channing Rollo, business intelligence manager and founder of thinkBIG at ClientLogic, is responsible for analyzing and reporting on customer management industry trends, fulfillment and the CRM competitive landscape. Rollo's compositions have appeared in numerous leading trade publications, including Outsourcing Journal, Call Center Magazine, Customer Service Managment Magazine ZDNet, DMA's The Bottom Line, CRMguru, DMReview and FierceCRM. Rollo joined ClientLogic in March 2000, as an e-business analyst before being named manager of Strategic Marketing & Communications. For more information, please contact channrol@clientlogic.com.

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