Question: I am trying to convince my business partners to develop a customer reward/loyalty program. Some of them think that rewarding customers is just a fad and are not very responsive to the idea. Do you have any information about the success of these programs?
Answer: While the influx of coupons, special sales that reward patronage and other "frequent buyer" programs may be at an all time high, the concept is certainly not new. In fact, one of the oldest examples is a baker’s dozen, started hundreds of years ago.
Those that offer such programs report varied results, depending on the measurement systems they have in place. Most successful programs consider employee retention integral to customer retention. To determine whether or not loyalty programs are successful, you need to consider the cost of customer and employee defection.
Here are a couple of statistics that may surprise you: On average, U.S. companies now lose half their customers in five years, half their employees in four years, and half their investors in less than one year. It costs, on average, five times as much to attract a new customer as it does to keep an old customer. No wonder so many companies place value on loyalty programs.
If you decide to implement such a program, consider the following guidelines. A good loyalty program has four key elements, and they all have to be in place if the program is to provide maximum return on investment. They are: a communication plan, rewards and benefits structure, customer behavior tracking and measurement.
Let’s review each.
1. A communication plan – That means a plan that not only communicates your program to customers but also communicates it internally. Every employee needs to be involved in the program, understand the program, and be able to explain it to customers. Make sure that employees understand why the program is important to customer loyalty and ultimately what that means to them as stakeholders in your company. Most loyalty programs breakdown when employees don’t understand why the program exists or why it is important.
2. Rewards and benefits structure – Most companies that offer loyalty marketing have some kind of reward system in place. Do a certain amount of repeat business with those companies, and you get a reward. Do more business, and you get a greater reward. But most programs stop there. Why not reward customers for bringing you more customers? What is the behavior you want from customers? From employees? Define it and reward it.
3. Customer behavior tracking – This is the toughest part of the program, gathering the demographics. Who among your customers uses your loyalty marketing program? Has your program modified the purchasing behavior of your customers? Can you use the customer loyalty data to do customer modeling?
Customer modeling is a process of defining the ideal customer, then putting processes in place to find such customers. Here are the types of customers that loyalty based companies look for:
First, customers who are inherently predictable and loyal, no matter who they are doing business with. They prefer stable, long-term relationships.
Second, customers who are more profitable than others. They spend more, pay promptly, decide to buy quickly and require less service.
And, finally, customers who find your products/services more valuable than your competitors’ – for whatever reason. Your particular strengths meet certain customer’s needs best.
4. Measurement – Does the program have a significant return on investment? Is the program justified? Does the program need modification? How do the successful companies, I’ll call them loyalty leaders, do it?
First, they avoid what I call "snapshot" accounting. Anyone can improve a business financial picture for a short time period, just cut. Cut the staff, cut inventory, cut everything. But long-term, that may severely hurt the business.
Loyalty leaders look at the human asset for the long term. The business pictures they study are time exposures. They see people as assets rather than expenses, and they expect those assets to pay returns over a period of many years.
Loyalty leaders choose human assets carefully and then find ways to extend their productive lifetimes and increase their value. In fact, loyalty leaders design all their business systems to make their human inventories permanent.
They view human asset defections as unacceptable value-destroying failures, and they work constantly to eradicate them.
By improving value and reducing human asset defections, loyalty leaders have lowered their inventory losses to a minimum amount, and their resulting performance, by comparison to competitors, is astounding.
By decreasing defection rates in all three groups; customers, employees and investors, they achieve tremendous growth in profits and cash generation.
They have discovered that human capitol, unlike most other assets, does not depreciate over time. Rather, like good wine, it actually improves with age.
Marcia Gauger is the president of Impact Sales, a performance improvement and training company with offices in Wisconsin, Florida and Arkansas. You can contact her at 262-642-9610 or email@example.com. Her column appears in every other issue of SBT.
Jan. 9, 2004 Small Business Times, Milwaukee