June 15, 2008

What is Loyalty Marketing today? Over 75% of the consumers we know and love participate in one or more programs (Source: Jupiter). Our parents' loyalty programs were simple programs with simple rewards: you buy something, and there was a degree of personalization in the product buying experience. Today virtually everyone has a credit card they are building points on, an airline, hotel, rental car, book club, coffee shop, but most of the larger loyalty programs were driven from service-based businesses with perishable products or services. Today, it is confusing to define a loyalty program.

There are loyalty programs that have no redeemable value (Source: Yahoo Answers). But there is no denying the value of a loyalty program. One study, "Exploiting the Installed Base Using Merchandising and Category Destination Programs," showed that loyalty in a "baby club" increased the sales of products by 25% (both average order value and store traffic).

I asked my team a few really broad questions, not only to see what they knew about loyalty programs and their personal experiences, but how they'd frame their arguments when creating such a program. In the marketing world, one size does not fit all, yet how you justify your hypothesis is almost as important as your idea. Here are the questions I asked and some answers from the team:

What are the keys to a great loyalty program?

- Good customer service

- Create a value exchange between the business and the consumer -- the only way perceived value and loyalty make the connection

- Does not deflate the value of the brand through arbitrary discounting and rewards

- Keeps users informed of their "status" and how this translates into experiences (rewards)

- Creates buzz within social circles

- Provides lots of opportunities to redeem (quick wins and long term)

- Provide unique services and/or experiences

- All great loyalty programs should appeal to the identity of the participant

- Should create some form of exclusivity

While the list can go on for days, there is a fine line between what is a reward, and what is a loyalty program.

We can all associate with some form of a loyalty program today, be it an airline, shopping, dry cleaner, coffee club, book club or running/biking club. Do they create long-term value and keep us coming back? As we evolve Web 2.0 to Web 3.0 (whatever that is), has the traditional sense of a loyalty program changed -- or will it? Will it become more expensive to administer a program that rewards your best customers and prompts them to buy more often, or are you simply giving away margin?

The next question I asked the team was to project all the trends that are happening in the interactive marketing space and tell me what they felt the future of loyalty programs would be.

- Making the customer feel they're still getting personal attention when we get increasingly digital.

- They will be very niche and appeal to smaller groups rather than broad appeal.

- They will be time-sensitive and have a more concrete evolution as customers dive in and out of your business/consumer lifecycle.

- Loyalty will not be measured not purely by satisfaction or volume of spend; it will be measured by profitability and reach. The cost to acquire, maintain and channel preference will be a stronger prediction of loyalty than spend patterns and customer satisfaction scores.

- They will need to be more differentiated based on past spend and behavioral patterns.

While there is no denying that loyalty programs have value, do they have long-term value -- or are you simply bidding for the highest spender? There is no denying that members of loyalty programs spend more than traditional customers, but it the spending pattern due to this loyalty program -- or are big spenders traditionally migrating to programs that have rewards so they can reward their own spending patterns?

by David Baker
David Baker is vice president of email solutions at Avenue A/Razorfish. Visit his blog at http://whitenoiseinc.com
Courtesy of http://www.mediapost.com

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