Loyalty program can be an enormresult in the wrong customers getting all of the benefits
BY JESSICA WERB

In a world where consumers are bombarded by an ever-increasing array of choices, it doesn't take a genius to understand why businesses are jumping on the loyalty-scheme bandwagon. Whether it's stocking up on orange juice at the local supermarket, filling up at the corner gas station or ordering a low-fat, decaf, soy cappuccino, consumers everywhere are whipping out club cards, earning points and cashing in on rebates. But when a loyalty program is implemented poorly, businesses may find themselves with an ineffective program that rewards the wrong customers.

Mark Healy, a partner with Toronto-based consulting firm Torque Market Intelligence, cites a paint company for whom he consulted that would regularly reward its highest-spending customers with a yearly trip to Hawaii. "It turned out that they were sending people to Hawaii that were spending the most money, but that were also some of their most costly customers. They were people that beat them down on price over time, demanded special services and called the customer-service centre all the time."

When done right, however, experts say a carefully crafted loyalty program can be the key to succeeding in the modern marketplace. In his research, Healy says, he's found that it is actually five times easier to keep a customer than it is to find a new one. And, as pointed out by Fred Reichheld in his book Loyalty Rules!, a five-per-cent increase in customer retention will result in a 75-per-cent increase in customer net present value (a measure of profit that you expect to get from customers over a period of years, stated as if you received it all today, adjusted for inflation). Add those stats to the classic 80-20 rule - the law of business that states that 80 per cent of your profit comes from 20 per cent of your customers - and the benefits of a customer-loyalty program are clear.

The key to implementing any loyalty program, stresses Healy, is to do plenty of research and know your customer base before moving ahead - something small businesses may neglect. "Some small businesses are so focused on either trying to stay afloat or trying to gain new sales that they don't take a step back and consider that it's a lot easier to keep a customer than it is to get a new one," he observes.

The problem with the paint shop, says Healy, was that the company was rewarding its customers based on a single criterion: money spent. A good customer-loyalty program, he says, should factor in the frequency of a customer's transactions and also and what he terms "recency" - how recently the customer has purchased a product or service.

High-loyalty customers, then, are those who spend a lot, spend often, and have done so in the last couple of days - a loyalty program should drive medium- and low-loyalty customers to increase their spending and visits. The way to do that, says Healy, is to carefully target the message being sent to each customer segment.

When the Shaw Festival in Niagara-on-the-Lake wanted to increase attendance at its plays after being hit hard by the 2003 SARS epidemic and the aftermath of 9/11, Healy carefully surveyed its client base, scoring them on a loyalty index that took into account the factors of recency, frequency and money spent. When those results were analyzed, three natural breaks occurred, dividing clients into high-, medium- and low-loyalty segments.

"In the high end, uniformly they were people that we termed 'theatre lovers,'" explains Healy, who did some market research into each customer tier. "They want to be treated as if they know something about theatre." In the middle, Healy found what he called "faux sophisticates": people who are not particularly knowledgeable about the theatre, but who attend because they want to be culturally involved or be seen to be culturally involved. "The messaging and marketing to these people," says Healy, "is that you want to stay away from technical theatre terms because they don't understand them. You want to play to the sense of cultural involvement."

Finally, the third, low-loyalty group was found to hold two different types of theatre attendees: people who come to the area and visit the theatre as part of the experience of being in Niagara-on-the-Lake, and people who are politically and socially active and are attracted to particular themes of a play being performed.

Each of these groups wants and needs to hear a different message - and what will appeal to one group may not appeal to another. Jill Planche, the Shaw Festival's director of research development, explains how the company has developed incentives that are tailored to the particular needs and desires of the consumers: "Our high-loyalty people are more likely to buy in advance and support us. It's less a question of giving them incentives with discounts than it is to offer them more information and background on the plays… We also offer them earlier ticketing privileges."

To target the medium-loyalty customers, the Shaw Festival started creating packages with hotels, restaurants and wineries in the area. "The majority of those people come because they enjoy things in the area… We provide them with some good value packages so that they can come and have a meal and a show and save," says Planche.

And to engage with low-loyalty, the festival has begun working with a media company to film dress rehearsals and create mini-teasers that can be sent by email. None of this involved signing up customers up for a complicated points system or 'club card,' but rather addressing each consumer with the right language and offering them incentives, such as earlier ticket purchasing or package deals.

Naturally, developing an in-depth analysis and marketing program such as this does come with a price- anywhere from $25,000 to $100,000, according to Healy - and the Shaw Festival was able to take advantage of government grants in order to implement theirs. But Healy says small businesses can use the principles of what the Shaw Festival did to boost their customer loyalty for a fraction of the cost. "A restaurant could do a study for as little as $3,000, and work through the steps with a little bit less formality to them," he notes. "If you run an organic grocery store, spend more time in your place of business talking to customers. In your own mind, you'll start putting people into brackets: 'this person comes all the time, but all they ever buy is a quart of milk. This person is a nature freak and they're really supportive about the organic movement.' Find out about behaviour patterns. Start speaking to people and asking questions." Data collection on buying patterns and surveys (which, when filled out, could earn customers coupons) will give important information that can be used to increase customer loyalty.

For instance, in the case of an organic grocery store, Healy says low-loyalty customers might be people who are aware of trends. To target that group, the store might send out flyers or emails (addresses would have been collected through the survey) promoting a certain product and hyping its trendiness: "If you're having a dinner party, why not try serving X, Y or Z," for example. Medium-loyalty shoppers, suggests Healy, might be health-conscious people who need an extra incentive to buy more products at the store: they could be invited to free, bi-weekly healthy cooking classes that highlight products available in-store. And to reward high loyalty customers, he says, the store could forge a partnership with a local theatre that showcases independent films and invite them to private viewings, or offer free subscriptions to particular publications. "The key," says Healy, "is to create a sense of community between the shoppers, so that people feel a sense of loyalty with each other."

For the Shaw, which implemented a targeted system of marketing in the middle of last season, the results have already been tangible.

"By the time we closed for Christmas, we saw the highest ticket sales we've ever had at that time of the year," she says. "It's definitely been worth it…. Now we're able to go with the right message to the right segment."