CHAPTER 7
Getting Loyalty Programs Right
Building a Tree House and Letting Your Customers Climb to Reach It
“I’ll take three chicken burgers, four beef burgers, two pork chops, and half a pound of bacon.” Not bad for a trip to the local butcher. The clerk asked me my last name, pulled an index card from a shoebox, and told me I’d be saving more than $15 on today’s purchase. But that wasn’t all. I had just earned access to the infamous Carnivore Club! She asked for my e-mail address and said that within a few days I’d start receiving exclusive offers, promotions, and discounts only for Carnivore Club members. (Apparently my total dollars spent over the past few months had reached a certain threshold and so I was given a key to unlock a new and exciting level of perks.) On the way home I detoured to Starbucks, where I held my iPhone out the car window to pay for my Grande Americano. The employee scanned my phone. “Next one’s on the house,” she said.
Both examples show how two very different companies—one local and low-tech, the other global and high-tech—use loyalty programs to grow their businesses in powerful, highly effective ways. They are classic examples of giving perks to your biggest and most-frequent spenders. However, Joe LaCugna, director of analytics and business intelligence at Starbucks, shared information recently that shook up bloggers, journalists, loyalty experts, and scores of Starbucks fans everywhere when he explained that Starbucks was rewarding its “disloyal” customers more often than its most loyal customers. The better customers—the ones, like myself, who buy a Grande Americano every day—were less likely to receive discounts and promotions from Starbucks than the customers who spend less money and visit the coffee conglomerate less frequently. While most people were busy whining and crying foul that Starbucks could do such a thing to their most loyal customers, I was busy saying to myself, Here’s an organization that actually gets it. Well, partially. (And I’ll explain why only partially shortly.)
Building customer loyalty and advocates for your company doesn’t happen overnight, but a loyalty program can help achieve this goal—if (and it is a big if) it is done right. Once an organization has fulfilled the basic wants and needs of its customer, it has an opportunity to exceed those wants and needs and develop a deeper relationship to foster increased loyalty. That’s why it is important to put systems in place for creating a “ladder of loyal.” Any customer can be merely “satisfied,” but the next step is moving the customer up the ladder, whereby you are dramatically increasing that customer’s satisfaction and delight.
As a customer’s loyalty to a company increases, it’s up to the company to be aware of that movement and treat the customer accordingly. And, by the way, it doesn’t matter if you’re B2C or B2B—all the concepts are the same. This chapter isn’t just about having the loyalty ladder in place; it’s also about implementing systems that allow your customers to willingly and independently ascend that ladder.
In short, on the pages that follow you’ll find lots of actionable advice about how to build an effective customer loyalty program—one that will actually work for your organization and generate results. Let’s face it. If you’re like me, you have a wallet full of cards that don’t signify anything even remotely close to genuine customer loyalty. That’s because these programs died a long time ago and yet organizations continue to trumpet these halfhearted attempts at loyalty programs as best they can. Is that the best they can do? Really? I will show you another way.
WHERE LOYALTY LOST ITS WAY
The rallying cry of failing businesses everywhere is that “There’s no such thing as customer loyalty anymore. Loyalty is dead!” But it’s not exactly true. Whether they are multinational corporations, Internet start-ups, family-owned businesses, or anything in between, many organizations have learned how to engage their customers and keep them coming back again and again. Let’s explore what these organizations are doing differently.
Over the years, a great number of books have seemingly told us everything we could possibly want to know about customer service, customer satisfaction, customer loyalty, and the customer experience. Each year dozens of books are released on these topics. There has been a fair share of more technical books, too, such as Frederick Reichheld’s The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value, which gives larger organizations a fancy measuring device called NPS (net promoter score)—a metric that can be used to gauge customer loyalty. More recently, we’ve also had books (New York Times—bestselling books, no less) that inform businesses that the solution to their woes is simply to start saying “thank you” again, or to do whatever it takes to keep the customer happy, even if it means staying on a customer support call for ten hours! This just isn’t a viable solution for every company in this increasingly competitive global marketplace.1
I’m more of a pragmatist, and I want my clients to experience dramatic results. Your company may not be able to go into the red just to keep someone happy, and your company might not have the time to wait around until someone tweets or mentions your organization in a digital conversation. There’s a better way to tweak and enhance your loyalty-generating efforts—from both a strategic and a tactical level. Let’s explore.
The Fallacy of the “Loyalty Program”
Starbucks and my local butcher are the exception. Most loyalty programs are generic and, consequently, fell into the “worthless” pile a long time ago. Seinfeld fans will remember how George Costanza’s wallet was so stuffed with loyalty cards that it made him sit with a tilt. It’s absurd, but it’s not far off. We’ve all opened our wallets or purses to find loads of rewards and points cards that we almost always forget to pull out at the moment of transaction. Or, if you’re like me, you have a drawer at home with a stack of these things. It seems as though every business on the planet believes that having a loyalty card is the necessary step to creating customer loyalty.
These cards are not indicative of customer loyalty, of course. And the bigger problem is that most of the cards (and the corresponding programs) don’t work as the companies thought they would. Yet every year, organizations continue to waste billions of dollars developing loyalty programs while they fail to build anything even remotely related to customer loyalty. How did we stray so far from our target?
The cards are doing a few things right, though. Points cards are the most common type of loyalty program. We earn points and cash them in for a reward (which might be a freebie, discount, or something else). When we remember to cash in our points, we are thrilled about the stuff we receive. It’s always a bonus to receive a free flight or a discount car rental. It might make us feel good for that moment, but what does that mean for customer loyalty? Unfortunately, not much.
Consider this example: The popular (if slightly misleadingly named) Air Miles program in Canada is a syndicated loyalty program where one card can be used to collect points (or miles) at hundreds of different businesses across the country. Those points can then be cashed in for various items such as gift certificates, travel rewards, or household goods. The program is designed to increase customer loyalty. There’s no denying it; it’s a massively successful rewards program (the parent company—LoyaltyOne Inc.—generates annual revenues of almost $1 billion Canadian).2
Almost two-thirds of all Canadian households belong to the Air Miles program. But is it effective? Does it build loyalty toward a specific brand—the type of loyalty we’re looking to build with Evergreen relationships? Of course not.
The other problem with points as the ultimate motivator for loyalty is that your customers very quickly determine the value, which can sometimes do more harm than good. One example of where this has happened is Delta Air Lines SkyMiles program. One of the world’s largest frequent-flyer communities on the Web, Flyertalk.com, has more than half a million members. The members have renamed Delta’s SkyMiles as “Sky Pesos,” due to their perceived low value. Each time someone brings up Delta’s reward program, some member jumps into the conversation to ensure the correct terminology—Sky Pesos—is used. And almost every time, a handful of other members chime in on just how little value the points actually give.
Truth be told, all loyalty programs based on a simple card will influence buying and purchasing behavior, but chances are they won’t build anything even remotely close to Evergreen loyalty. Each time I fill up my car, I swipe my Air Miles card, get a few points, and before I know it I have a few thousand points that I can exchange for a gift certificate to Home Depot, or a new watch, or maybe a blender. But I don’t believe this is truly meeting the purpose of building “loyalty” to any one particular brand—at least not for me. It certainly hasn’t made me feel more partial or more interested in one brand over another. It definitely hasn’t made me feel that there’s a relationship between myself and any of these companies.
If we can agree that the purpose of increasing loyalty is to give your customers a reason to do business with you and avoid others—mainly your competitors—then we better be darn sure we’re developing a relationship that goes beyond the transactional and moves closer to one that’s more meaningful and impactful. That takes a lot more than just sticking a swipe card into our customer’s (already full) wallets. By the way, we’ve seen more of these swipe cards moving to mobile devices, which is a step in the right direction, but the main issue, the implementation of the programs, remains a problem.
Let’s face it. Loyalty programs have gotten a bad rap, and mostly the critiques are valid. Why? Because, for the most part, they simply don’t work. I’m not loyal to any particular airline because of the miles they give me. I’m loyal to first class. I’m not loyal to a specific hotel chain because of my rewards points. Sure, I’m fond of the Mandarin Oriental Hotel Group, but that doesn’t mean I’m not willing to stay elsewhere if, say, there isn’t a Mandarin Oriental in Providence, Rhode Island (which there’s not, by the way … in fact, there aren’t many hotel choices at all in Providence). Typically, I’ll choose the next best thing or the hotel with the most positive reviews.
So why do we care about building this thing called customer loyalty? Well, for starters loyal customers tend to buy more, and they buy more often, and they’re usually cheaper to take care of. They’re also more profitable than new customers. So, does it make sense to try to build customer loyalty? Yes. Can a “loyalty program” help you do that? Absolutely! But only if you do it right.
Learning from Starbucks
Do you get a lot of e-mail from Starbucks? You know, a free Grande Latte after 2:00 p.m. or an extra shot of espresso any day this week? Well, congratulations, you’re probably one of Starbucks not-so-loyal customers. Why would Starbucks spend more time on someone like you instead of one of its most loyal customers? It’s marketing like this that makes most loyalty “experts” scratch their heads. Head scratching commenced when the director of analytics, Joe LaCugna, noted at a Big Data Retail Forum in Chicago in the spring of 2013 that Starbucks had discovered some interesting information about the massive Starbucks loyalty program. Apparently, Starbucks had gathered so much data, from more than 6 million loyalty cardholders, that the company came to an interesting conclusion: It was better off perking its worst customers and spending less time worrying about the best customers.3 When they heard his comments, bloggers and customer service experts everywhere went absolutely bonkers.
When you think about it, however, this makes a lot of sense—even though Starbucks shouldn’t have needed that much data to gain that insight. Anyway, you see, Starbucks isn’t worried about the coffee giant’s loyalists; it is most interesting in turning the person who comes to Starbucks every so often into a loyal customer—or at the very least, a more profitable one. The approach is to take low-value customers and turn them into high-value customers. And that’s what you should be doing, too.
This is one of the main reasons you should be operating a loyalty program. I work with clients day in and day out, and we carefully look at the data within their loyalty programs to find where their best opportunities exist and how they can further segment their customers to increase customer value. And that, my friend, is one of the keys of a successful customer loyalty program. These programs are designed to reward and perk the best customers for their purchasing habits, sure, but the ultimate goal should be to increase profitability of customers across various segments and the entire organization.
So how is Starbucks doing it? Well, very simply, Starbucks is using its data and segmenting customers according to things like total spend or total visits, and the stores are putting those customers into their own unique marketing programs to increase the frequency of those customers’ spending and interaction with the brand. LaCugna and his team believe they don’t need to reward the most loyal of their loyal customers since they are already getting perked based on their purchasing habits. (Remember my story about the Grande Americano that I got after I went to the butcher? That was the freebie that I’ve come to expect after I buy nine of the same.)
While Starbucks is doing so many things right with its loyalty program, this is one area where I think it’s wrong and could do better. Here’s why: Regardless of how loyal a customer is, there always needs to be a ladder in front of that customer, somewhere for that person to go. When you stick a ladder directly in front of someone, the urge to climb is typically irresistible. Starbucks has an opportunity to use its data to increase the profitability and loyalty of the less loyal customers, sure. But Starbucks also has an opportunity (a huge one, I might add) to take its most loyal customers to an entirely different level of involvement. The problem, though, is that Starbucks is overlooking these customers and, unfortunately, taking us for granted—which is just another variation of our culture’s rampant addiction to “new(ish) customers.”
And don’t think I’m talking about what most experts talk about. They whine that “long-term Starbucks customers are going to be upset; they’re not receiving as many deals!” This is not the point. Starbucks is right. The most loyal of the loyal Starbucks customers don’t really care about being perked or promoted with coupons or discounts, but there is a better way. After reviewing a few definitions of “customer loyalty,” I will show you how.
A Modern Definition of Customer Loyalty
Before we go much further, I think it’s important to have a proper understanding of what customer loyalty is, particularly since I believe this term is mostly misunderstood. My trusty iMac dictionary defines loyalty as “the constant support and allegiance to a person or institution.” Google the question “What is customer loyalty?” and you’ll get different responses, including:
• Customer loyalty is about getting customers to buy, and buy often.
• Customer loyalty is when customers commit themselves and their allegiance to a specific brand.
These definitions come close, but they don’t paint the full picture. Here’s what I believe the correct definition to be:
Customer loyalty is what happens when an organization builds and fosters a relationship with a customer based on
consistently positive experiences. Those experiences are capable
of fulfilling needs and wants that are more emotional than
physically tangible, thereby deepening that relationship.
Finally, the relationship provides exceedingly immense value
through the delivery of products, services, or information.
Do you see what I’ve just defined? The Three Cs framework. To foster and nurture customer loyalty we need to stop considering various aspects of our organizations—such as customer acquisition and customer retention—as independent functions, and understand that customer loyalty is something that culminates naturally when the Three Cs are employed in a thoughtful manner to create a cohesive customer experience. Furthermore, customer loyalty happens before, during, and after the actual sale. When viewed in this manner, it becomes clear that the purpose of loyalty programs is to help us gain a better understanding of our customers and tailor specific marketing messages toward different subsets of customers.
For many companies, customer loyalty can seem like a pie-in-the-sky ideal. “Sure, it’s a good idea,” they say. “But does it really exist? Are customers genuinely interested in having a long-term relationship with the companies they do business with?” The answer is a resounding yes! I’ve helped restaurants, hotels, plumbers, golf clubs, and auto mechanics build real, emotionally driven customer loyalty. To do that, though, you need to embrace the Three Cs framework and go beyond—far, far beyond—the simple points card.
DEVELOPING (OR REFINING) YOUR LOYALTY PROGRAM
Now that we can all agree that loyalty programs—at least the way they used to be designed—are gone, and gone forever, it’s time for you to develop a new type of loyalty program. Throughout the rest of this chapter, I’ll explain how to structure a rewards program that actually works, and how to think about your best customers, both strategically and tactically. The first thing to realize is this: Creating a loyalty program is more about process than perfection. Communities are built by having a number of different structures in place. Customer loyalty programs aren’t much different. By building effective systems for capturing and rewarding customer loyalty, your business will benefit from the ability to:
• Enhance your customer experience for your most valuable customers.
• Retain customers longer.
• Maximize value of your best and most loyal customers.
This list could go on and on. The benefits derived from a properly defined loyalty program are endless. Let’s see how it’s done.
Understanding the Objectives of an Effective Loyalty Program
A properly functioning loyalty program will increase the profitability of an organization. Starbucks needed the data of more than 6 million loyal members to tell them money could be made with customers who shopped with them less frequently. Duh! You don’t need even a fraction of that data to come to a similar conclusion. What you do need is a proper understanding of what makes a loyalty program effective. Three distinct objectives need to drive the overarching strategy of any loyalty program:
1. To increase customer retention and increase the frequency of purchases and also the size of each transaction
2. To gain a better understanding of your customers, including actionable insights
3. To generate authentic, segmented, and individualized communication and messaging
All three sound pretty good, don’t they? Obviously increasing the frequency of purchases and the size of each transaction is pretty exciting. Of course, knowing more about your customers and what they like could also be pretty valuable. Imagine how your marketing return on investment (ROI) would change if you were able to generate highly targeted and specific marketing messages. It sure is more exciting to be at the top of a tree and looking down, rather than the other way around. Are you gaining altitude yet?
Identifying How the Program Fits Within Your Big Picture
How does your organization create an effective loyalty program—one that goes beyond punch cards and point accumulations? The thing to remember is that you need to keep your current customers cradled in your loving arms as much as humanly possible. Let’s face it. We’re all navigating choppy waters when it comes to customer acquisition. It’s more expensive than ever before, and that’s one of the major reasons we are finally seeing organizations turn the tide to focus on what matters most—retaining their current customers. A customer loyalty program isn’t the only factor in the equation when it comes to increasing customer loyalty; it’s simply a small dab of glue in the big scheme of things. Organizations are under immense pressure to bring current customers back more often, and that’s really what this book is about. But the solution comes from an organizationwide shift and understanding that business has changed; things aren’t the way they used to be.
A report from a top-tier loyalty association claimed that “marketing is now playing a role in the loyalty equation.” Gee… Do you think? I’m shocked and saddened to read such things. When did marketing ever not play a role in the loyalty equation? I hope this far into the book you’ve realized that every facet of your business is “playing a role” in the loyalty equation—especially marketing. I find it hard to believe that this observation comes as a revelation to some people.
Your goal in building your corporate character in a way that identifies with your ideal customer archetype is to ensure your success when it comes to retention and loyalty. Don’t worry, I won’t tell you that it costs ten times more to acquire a new customer than it does to keep (or sell to) an existing one. If you’ve read this far, you already know that. Customer loyalty is the result of consistent, day-to-day marketing.
Building Your Loyalty Ladder
When thinking about creating a loyalty program, you need to consider your ascension ladder. Unfortunately, most organizations don’t. Here’s what typically happens: A medium-size restaurant decides to start a loyalty card program. For every dollar spent, the customer will earn a point. And for every 400 points, the customer will earn a predetermined reward. That’s the loyalty program. That’s it. All done. Call it a day!
The problem is that the company has built a “ladder” that consists of one single step, and there is nowhere for customers to go after they take that first step. This is the biggest mistake companies make. The next biggest mistake is that companies think customers will actually take that first step. Most won’t. If you go this route with your loyalty program, both you and your customers will be disappointed. (And, really, shame on you for wasting such a wonderful opportunity!) Don’t fret, though, if this sounds like your company, because you can still turn the tide. I’m here to help.
But first, let’s review another typical problem with rewards cards, as illustrated with this example. I went to buy a frozen yogurt at a new shop in my local mall. While I was checking out, the young woman asked me if I wanted join the store’s exclusive loyalty program. I asked two questions:
• What makes it exclusive?
• What can I expect?
“Well, it’s not really exclusive,” she replied, “but you’ll get a lot of great promotions and coupons.” No loyalty ladder, and certainly no purpose. This is backward and the epitome of a poorly designed loyalty program. If it’s so exclusive, then why can anyone join? Not to mention, the timing of the request was off: I hadn’t even tasted the product yet.
You need a ladder. There should be multiple rungs that a customer can continue to climb.
Most important, as the customer climbs the ladder, so does his or her emotional commitment to you and your brand. Likewise, your involvement in the relationship with the customer should also increase. It’s your duty to create a ladder of loyalty that your customers can climb. Here’s the thing about ladders: We all know they are designed to be climbed. That’s their purpose. And that’s what we’ve all been conditioned to do (except for the dolt who walks under the ladder). If we don’t present a ladder to our customers, then we’re not giving them anywhere to go.
Consider for a moment the following visual. Imagine you are looking at a high-rise building that’s transparent and entirely built of windows. On each floor you can see people hanging out and doing things. Each floor is like a party. And the party gets better the higher you go. You’ve got to show your customers what’s happening on the fifteenth floor and why they should want to climb the ladder to the penthouse.
Prioritizing Status over Stuff
In all probability, everything people in your organization thought they knew about customer loyalty is wrong. Particularly if they thought loyalty was earned through size and frequency of purchase. Particularly if they believed they could essentially buy more loyalty through points and rewards. The problem is that customers care far less about rewards and “stuff” than they do about recognition, appreciation, and value.
In his classic book, Drive: The Surprising Truth About What Motivates Us, thought leader Daniel Pink inadvertently shows us why most loyalty programs don’t work as well as they could when he examines employees and what motivates them to do their best work. Pink explains that historically most organizations have motivated employees though extrinsic rewards (think: cash bonuses), but that is a thing of the past. Today’s organizations must recognize that what really drives people professionally are intrinsic motivators such as autonomy, mastery, and purpose.4
Pink’s work can transform the way we think about customer loyalty programs. Don’t get me wrong, customers like perks and rewards, but customers in today’s digitally interconnected society want more. Just as connection and community can trump what it is you actually offer to customers (your content), intrinsic rewards can trump the tangible rewards we’ve traditionally used to increase loyalty. Loyalty programs have typically been built on extrinsic motivators (external rewards, such as cash back, points, discounts, and more stuff) as opposed to intrinsic motivators (internal rewards such as status and recognition). Your loyalty program should be focused on the intrinsic and tied into all your community structures. In a nutshell, your customers are far less concerned about earning stuff than they are about the recognition that comes from various levels of loyalty. Customers want to feel appreciated and recognized. How can you better recognize your customers?
A client of mine has an information-based website. It’s a subscription model where customers pay a monthly fee for access. Given the high price point, he only gets about a dozen new customers each month. (That’s actually all he needs.) Each month he does a free webinar for all existing and new customers. What he does next is interesting. During each monthly webinar he introduces all new members by showing their names and congratulating them on joining the exclusive club. He takes a moment to thank each one of them individually. In so doing, he simultaneously recognizes the new customers and creates camaraderie among existing members of the community. He doesn’t have to give away points; this small token of appreciation and recognition is powerful enough. Often the smallest stuff has the biggest impact. Now I know personalized introductions aren’t feasible if your company gets dozens, hundreds, or thousands of new customers each month, but think about it: What is possible?
Showing Customers What They Can’t Have
People want what other people can’t have. It’s human nature. And this tendency can be used as a powerful incentive. One of my small-business clients who runs a restaurant decided to show people exactly what they couldn’t have. Each month, he attaches a supplementary dining menu to the normal menu. The difference is that only loyalty members can order these items. No exceptions. “Not even the Pope can order from this menu without a card!” one menu read. He is very serious. If you aren’t a member, you simply cannot have these items. Servers learned to handle customer requests in a fun way, suggesting they consider joining the loyalty program. Some customers aren’t pleased, but I think it’s brilliant. The restaurant signs up hundreds of new members each time it runs such a promotion.
Another interesting component of this specific loyalty program is that my client charges a $20 fee to join. This charge accomplishes a few things. Most important, it distinguishes between those who are serious about joining and those who will have another useless card in their wallet. It also creates an incentive for the customer to take care of the card. (“After all, I paid for this card; I better keep it, and use it.”) New members are given a “welcome package” when they join the program, which contains a $20 gift certificate that can be used on a future visit. Interestingly, my client has noted that the average spend on that second visit is typically almost 70 percent higher than the original purchase. Brilliant! Could your company do something similar?
What could you offer that others can’t have? I’ve worked with hundreds of people who own and operate membership-based businesses. Most of them are online, but I’ve helped a number of off-line companies successfully implement the concept of membership in their businesses. People thrive on being part of a group of “belongers,” or those who have access to something others don’t, or can’t, have. The true power of the membership, though, comes from packaging your products, services, or offerings and committing your customers to buying regularly and frequently—on autopilot. It’s a win for them, and a major win for you. Almost any business can find a unique way to offer some sort of membership—from the barber, to the car wash, to the driving range, to the restaurant. How could your business?
Selling Loyalty
You can’t buy loyalty, but you can sell it. A moment ago you read about my client who charges $20 to join his loyalty program. It’s a smart move to have customers offset the cost of the program. Aside from the obvious practical benefits that it offers the company, this approach also increases the chances that a customer will actually use the service and become loyal. So why not consider a loyalty program that customers pay for, and then earn perks associated with membership?
Consider one of the more famous programs, Amazon Prime. For $99 a year customers can join Amazon Prime and receive a whole slew of benefits. For example, Prime members receive free two-day shipping on anything Amazon sells, all the time, with no minimum order. Prime members can borrow books from the Kindle Owners’ Lending Library for free. (Remember Jeff Bezos’s “Dear Muggles” letter, recounted in Chapter 3, when he announced that the entire Harry Potter series was available for Kindle owners?) Most recently, Amazon has decided to go head-to-head with the popular Netflix service, and Prime members are now able to stream books and movies from an instant library of more than 40,000 items.
I’ve been a Prime member for three years, and it’s worth every penny. I can’t tell you how often I have needed something and have had it delivered within two days. (Prime members can also have any Prime-eligible item sent overnight for only $3.99.) It’s a great program, and Amazon has certainly experienced an increase in the frequency of transactions from me since I joined.
What’s the difference between Amazon’s program and one that could be run by someone who owns a small company? Not much. In fact, that same restaurant client mentioned previously introduced a Mug Club for craft beer aficionados. By segmenting his customers and identifying the ones who simply loved to try new beers, he launched a VIP club with a $79 fee. Members receive their own mug on display at the restaurant, a bronze plaque with their name, an extra four-ounce pour with every beer, on every visit, and a whole pile of other added benefits. He sold 100 memberships within a matter of days and soon ran out of spots for mugs. In addition, the “club” now actually feels like a club. Nobody wants to lose their spot, and many patrons have renewed for a second year.
The Mug Club now has a waiting list, and my client constantly receives e-mails from friends of members begging for just “one more mug.” People love to see their name in bright lights. It makes them feel important and recognized. In this case, each customer enjoys seeing his or her name on the bar accompanied by a coveted mug spot. It makes each customer think: I’m a star!
Make your customers the stars of the show. The motivation that comes from being recognized is far more valuable than the actual product or service being delivered. I’ll ask again: Why couldn’t you apply these ideas to your business? Whether you operate a B2C or B2B company, the ideas work the same way. It might require a little thought and creativity, but it certainly is possible to do in any industry, for any product.
The membership model is all around. Don’t for a minute think your business couldn’t create some sort of membership offering, because I’m sure you can come up with something. Consider airline lounges. Are these any different from other VIP clubs? Nope.
In addition to the membership model, consider creating an offering that allows your customers the chance to either earn or buy their way into a program that offers unique access. Here’s another example. If you have kids and you have money, you can go to Disney and skip the lines using Disney’s VIP Tour Services. For $340 per hour, you can skip the lines at the attractions, travel in a private vehicle, and gain VIP seating to shows. I realize this is less of a loyalty program and more of a VIP program that can be purchased. But could you apply the same concept to your own business? Of course you could! What could your customers buy access to that increases convenience or speed of delivery, or access to your content? What could customers buy access to that increases the frequency of purchase with your company?
Could a restaurant allow you to skip the line or have priority access to reservation slots? Imagine if a restaurant proactively called its most loyal customers on Monday to secure their reservations for Friday night (or, more important, let’s say it reached out to the most loyal customers who hadn’t visited in a while). Talk about standing out from the crowd! Airlines let the customers with the most points on their loyalty program snag any open first-class seats. Why couldn’t you create similar levels of VIP access within your organization? You can, and you should.
DESIGNING YOUR CUSTOMER LOYALTY ACTION PLAN
Customers can be fascinating. There’s no doubt about it. But your customers aren’t going to keep the conversation going. A loyalty program can help, but it should be just one aspect of your broader attempts to build meaningful and long-lasting relationships with your customers. A loyalty program is also not the be-all and end-all to increased profits and organizational growth, but it can offer a tremendous opportunity to gain knowledge and understanding of your customer base, and increase the profitability of your current customers. If we are being really honest, customer loyalty is created through consistent and regular marketing and actions, not just a single program.
Nevertheless, with a properly structured loyalty plan in place, your existing customers will continually move up the rungs of a carefully designed ladder of loyalty. This, in turn, should allow you to increase the revenues from your best customers, and increase loyalty and revenue from your less-profitable customers. Don’t waste this opportunity by providing cheap points and lousy rewards. Consider this a golden opportunity to learn more about your customers and what makes them tick. An effective loyalty program combines customer data and behaviors so that you can offer a more personalized and specific experience for that customer or specific segment of customers. Remember your different archetypes? You can (and should) create specific levels of loyalty for each group.
You can’t buy customer loyalty, but if you are not paying attention to it, you’re missing a massive opportunity to increase customer retention, referrals, and customer value. The key to an effective loyalty program is that it allows you to identify your most valuable customers and (as we saw in the Starbucks example) your lower-value customers, and to design programs and initiatives to create the type of behaviors you want from both groups. Let me provide a commonsense approach to properly structuring your loyalty program for maximum effectiveness. I’ve helped organizations design loyalty programs that allow them to identify both their best customers and (more important) those who offer opportunity for massive growth. Figure 7-1 shows what the traditional model of customer loyalty looks like.
Traditional Loyalty Programs
Now, contrast that model to what’s happening when you structure your ladder of loyalty the right way, as shown in Figure 7-2.
The Evergreen Ladder of Loyalty
Don’t you want to learn how to build an Evergreen Ladder of Loyalty? It really is not all that hard. You just need to follow the six simple steps detailed below.
Step One: Define Your Objectives
Everything your business does needs to be carefully designed to meet specific objectives. Your loyalty program is no different. As we’ve discussed, too often loyalty programs aren’t given the type of attention they deserve. Sure, it’s easy to just give people a card and start rewarding them with points, but this is not very effective, and it won’t provide the type of results you’re looking for. It also won’t help you create the type of relationships that are long term and Evergreen. Articulate your objectives for your loyalty program. They might include:
• Increasing customer value and profitability of various customer segments
• Growing the size of the customer database
• Increasing the transaction size and frequency of customer spending
• Developing more targeted marketing based on insights gained about customers
• Retaining customers longer
• Acquiring more new customers
• Building long-lasting customer relationships
• Reducing advertising and marketing costs
• Increasing word-of-mouth and recommendations among customers
I would recommend all of the above objectives as a wonderful starting point. Again, though, I provide this list purely as a starting point for you and your team (if you have one). This list will need to be customized for your company. It is necessary to develop clear-cut objectives. When the objectives for what you plan to do with the customer data and the increased insights you’re bound to gain aren’t carefully defined ahead of time, you run the risk of running your loyalty program in the least effective way possible. This means your loyalty program database is likely to become another list of customers who all receive the same marketing, promotions, and discounts.
Another reason why it is so important to consider the objectives from the get-go is that it’s hard to make significant changes once you’ve kicked off a loyalty program. Once you’ve loaded your customers with cards or key tags, or have started doling out points to reward purchasing behavior, it’s both difficult and expensive to end the program if it’s not working the way you expected. In addition, you can expect your customers to have negative reactions if you change the rules mid-game.
The point of determining your objectives is to very carefully consider the outcomes you want to achieve from your program. You may not know exactly the type of outcome you’d like to achieve, and that’s okay. Your program should be fluid enough to morph and grow; that’s fine. But you want to ensure you are oriented in the right direction.
Step Two: Determine What You Want to Learn
Forget “big data.” Focus on small data, and the types of insights that will help you grow your company. After you determine your overall objectives and how they fit into your company’s organizational framework, decide what you want to happen as a result of your loyalty program. This is really about determining the type of data you’ll use your loyalty program to capture. I would suggest the following data to start:
• Demographic data
• Transaction size
• Recency of last purchase
You’ll also want to articulate how you define an extremely loyal customer to your business. Is your definition based on a certain threshold of spending? If so, what’s that number? You need to give careful thought to the data you need to capture. Sometimes more can be better. You never want to build a program only to realize—thousands or even millions of members later—that you didn’t capture a vital piece of information.
Step Three: Design Your Loyalty Program
Certain basics should be a part of every loyalty program. For instance, every loyalty program must give customers the things they want. As we’ve already discussed, more often than not your customers want the intrinsic benefits that come from recognition more than they want rewards. With that said, rewards are a key component. For a loyalty program to be truly effective, it must maintain a balance between rewards, offers, and communication with customers based on their individual attitudes, purchasing behaviors, demographics, and psychographics. Therefore, you need to define your benefit structure for your customers carefully. Here are some questions to get you thinking about how to structure your program:
• Is it a points-based program? If so, how is the customer rewarded? Do the points turn into a cash discount, or are customers able to redeem points for multiple perks?
• Do cardholders/members experience additional perks? For instance, do they receive an immediate discount at the time of purchase? Do they receive free shipping? Do they receive extended customer support?
• Do you have any surprise gifts or bonuses that customers receive once they spend a certain amount? (Hint: You should.)
• How often will you make exclusive offers to loyalty members?
• Will you reward certain behaviors, or just purchases? (Hint: If you are building community structures, which I hope by now you’ve realized you must, then I strongly urge you to reward the type of loyal behaviors you would like to reinforce.) As we discussed a few pages back, simply because someone carries your card, and even makes frequent purchases from your company, doesn’t necessarily mean the person is a loyal customer.
• Do different customer archetypes require different rewards? And if so, what are they? You need to remember your various customer archetypes and should create rewards specific to them. Perhaps you let them choose. It doesn’t really matter. What does matter is that you build rewards and recognition levels for each different group.
There’s nothing wrong with adjusting your program’s structure later, but for now, it’s crucial to carefully consider and map out (to the best of your current ability) how you’ll design your loyalty program.
Step Four: Identify Metrics of Success
You will have costs associated with creating the loyalty program, maintaining it, and distributing your incentives. Every loyalty initiative includes various costs. Time and energy (major investments, in and of themselves) are also required to do it right. With all of this output, you need to know that the program is going to be worth the investment. I don’t blame you. You need to determine what key metrics you will use to gauge the success of your program. These are your indicators of success and progress. It’s important that you are clear on your measures or indicators so that at any given time you can review the ROI and adjust your program as required. Don’t forget behavioral measures, such as increased engagement or participation. You can’t judge loyalty primarily on direct financial impact.
Loyalty program metrics might be identified by answering these questions:
• Is the value of your customer base increasing?
• Is the value of an individual member/customer increasing? (For example, is the customer spending more now than before becoming a member? Is the person shopping with your business more frequently?)
• Has your customer attrition decreased?
• Are loyalty members generally happier and more pleased with your product or service?
• Do loyalty members contribute more to the community? Are they more engaged?
You want to be sure you are actively measuring and monitoring your efforts so that you can tweak or adjust later, if necessary.
Step Five: Construct Your Program
Aside from building the ins and outs of how you’ll recognize and reward your customers, you need to think about how you’ll structure your program. For example, questions might include:
• How and when will you enroll customers?
• Will there be a fee to join?
• What will new members receive?
• Will you have ongoing communications and/or promotions?
• Is everyone automatically a member?
Sometimes everyone who makes a single purchase automatically becomes a member of a particular club. Here’s an example: I bought a new Audi. A month later, I received my first copy of the car’s official magazine. It was chock-full of value—this is what you call great content supported by character and community! It took me well beyond the transaction of simply buying a new car. I read the magazine from cover to cover.
A few months later I received another package in the mail. I opened it to find a beautiful, full-color folder with a black VIP card and a personalized letter from the company. The letter asked me how I was enjoying my vehicle and if there was anything the automaker could do for me. The materials told me all about the benefits of the black VIP card and how I could use it for complimentary roadside assistance and a number of other perks. In this case, I was automatically enrolled into the “VIP” program. The program was carefully designed to gain further emotional attachment from me to both Audi’s character and community. This is an example of a well-constructed loyalty program. Does it give you any ideas for how you might construct yours? I hope so.
Step Six: Surprise Your Customers Constantly
The problem with building a loyalty program that’s structured based on rewards, or even levels of loyalty, is that it gets stale rather quickly. Most of these programs do. As big a fan that I am of the Starbucks loyalty program, it’s gotten somewhat boring. I already know what gold level gets me. There’s no surprise. It’s the same old, year after year.
From time to time you need to refresh your loyalty program and the benefits associated with it for your customers. Of course, if a customer expects to receive a certain reward that you’ve stipulated, then it’s not worth changing that reward at the expense of upsetting the customer. I’m simply talking about adding unexpected perks from time to time. Customers should constantly be surprised. Imagine the delight if your top-tier customers (say, your top 20 percent) received Christmas cards with a handwritten letter and small gift card as a token of your appreciation. However, this idea might not work in New York City (or any other metropolitan hub that embraces a religiously diverse population). In this case, imagine if your CEO (who might just be you!) personally called ten of your best-spending clients? Would they be surprised? Or what if you invited twenty of your highest-spending customers to a lavish breakfast event at the Trump SoHo New York? No matter where you do business, don’t you think any one of these ideas would be a better investment of your marketing dollars than simply blasting your entire customer base with some generic promotional message?
However you choose to enhance your loyalty program, just remember what I’m going to call “the Starbucks Rule.” (I’m using this term somewhat tongue in cheek, since Starbucks didn’t follow this rule.) Never discredit your top-tier and most loyal customers or, heaven forbid, take them for granted. Far from it. Use your loyalty program as a profit-generating tool to increase the value of your less frequent and less valuable customers, sure. But also use it to increase involvement from and connection with your evangelists.
Thankfully, you didn’t need 6 million members to give you that insight. I’m glad I could be of service!