Setting Up a Customer Loyalty Program

As we've mentioned, it costs considerably more to attract new customers than to service existing ones. Loyalty programs can therefore help to reduce the overall cost of sales. They also offer opportunities to increase the value of individual customers by encouraging them to purchase more—in quantity and frequency—from your company.

You must ensure that quality and service must be satisfactory before you even think about a loyalty program. If you don't attend to these first, the best you can expect from a loyalty program is a temporary rise in sales. If quality and service are satisfactory, loyalty programs can add an extra dimension to your marketing effort.

You could simply offer customers rewards for staying with your company and making occasional purchases. However, maintaining the data from loyalty programs enables you to analyze your customers' purchasing patterns, which can help you develop more effective marketing and service programs.

Customers who are satisfied with the level and quality of service they receive are likely to continue buying from the same company. Their loyalty can be reinforced with rewards for purchasing. Rewards can range from simple concepts such as discounts on repeat purchases and incentives for multiple purchases to more complex frequent-user programs that provide multilevel rewards.

Loyalty programs meet a number of marketing objectives:

• Keep customers for the long term.
• Retain high-value customers and increase their purchases.
• Tailor products and services to customer preferences.
• Cross-sell products and services.
• Differentiate your business from your competitors.

You must be certain that the benefits offered by the program are relevant and build the right perceptions about your business. Ideally, benefits should reflect customer needs identified through research, reflect appropriate standards of service, and have a degree of exclusivity. They also should add value to the basic product or service.

Running a loyalty program can represent a significant investment. The major cost areas are:

• recruiting members
• initial and ongoing offers
• administration
• marketing costs
• full- and/or part-time staff and overhead
• database management
• cost of interaction, such as a helpline.

A loyalty program requires careful management and staff training to make sure that customers receive the highest standards of service. The key tasks are:

• identify the benefits of the program
• assess the cost
• appoint a program coordinator
• research customer requirements
• introduce the concept of the program internally to build commitment
• implement the practical requirements of the program
• implement any training required to deliver quality service to customers in the program
• develop a launch program to guarantee high levels of awareness among prospects and customers;
• maintain the program to make sure that members continue to receive high levels of benefit.

Make sure that you capture basic data about customers when they join your program and that you track their purchasing patterns and responses to your offers. This information can help you tailor and cross-sell products and services and target your offers more effectively.

Many retailers offer a "smart card." Customers accumulate points on the card with every purchase, which builds their loyalty and also yields purchasing data that the retailer can use to structure special offers. The best-known rewards programs are offered by the airlines for frequent flying. Customers earn various rewards every time they fly, and the airline gathers important data on customer preferences.

Although a loyalty program offers powerful benefits, it may not be the only solution. Consider the following points carefully before committing resources to a program:

• Has customer research highlighted the need for a specific change to the product or service?
• Would such a change help to improve sales and market share?
• Would a loyalty program strongly differentiate your product or service?
• Do your competitors offer a similar program?
• Do you have the resources to establish and operate an effective program?
• Would the benefits (such as collecting customer information) justify the operating costs?

You must offer real, long-term benefits that customers value. If the benefits you offer do not maintain customer loyalty, the investment will be wasted; customers will take their rewards before moving on to a competitor's program. By continually researching customer needs, getting feedback from customers, and monitoring program performance you will help to maintain your program's success, and retain customers over the long term.

A loyalty program as described above is just one approach to customer retention. If you provide poor product performance or poor customer service, any time and money spent on a loyalty program will be wasted. Before starting, research customer attitudes toward your products and your standards of service. Any problems must be rectified before you consider a reward program.

A loyalty program can provide large amounts of valuable data on customer preferences and buying patterns. These data should be used creatively to build customer profiles, create targeted offers, and identify and remedy any recurring problems in product performance or customer relationships.

A loyalty program is a long-term investment. This means ongoing commitment in terms of people and funding and rewards that will maintain members' interest over time. One way is to offer members increasing levels of benefit as they do more business with you.

Denove, Chris, and James D. Power IV. Satisfaction: How Every Great Company Listens to the Voice of the Customer. Portfolio, 2006.

Reichheld, Frederick. The Ultimate Question: Driving Good Profits and True Growth. Harvard Business School Press, 2006.

Vavra, Terry and Timothy Keiningham, Lerzan Aksoy, and Henri Wallard. Loyalty Myths. Wiley, 2005.

1to1 Media, Peppers & Rogers Group, and Carlson Marketing: www.1to1.com