LOYALTY Part of the strategic plan

Today's loyalty marketer is challenged to inspire incrementally profitable customer behavior in rapidly changing economic and competitive markets. Loyalty program managers must improve customer and partner value without spending much money and differentiate themselves from a myriad of competitive programs.

There are no simple answers. But in general, successful loyalty strategies must assume a more comprehensive role in the overall marketing plan-one that seeks to identify and leverage the current relationships between a company and its customers, then extend that equity to achieve a competitive advantage based upon that relationship. Along the way, practitioners of this new model likely will encounter some or all of the following trends:

Volume, clutter and noise are accelerating. Several quantitative studies put the segment of Americans participating in at least one loyalty program between 50% and 83%. Consumers can earn frequent- flier miles while they eat, pay their mortgage, talk on the phone, even sleep on a particular mattress. The only downside to this incredible penetration for loyalty marketers is that ubiquity and commodity are related. Loyalty marketers have only themselves to blame.

Most loyalty reward charts are virtually indistinguishable from one other, resulting in feature gridlock. Members are bombarded with "exciting offers just for you" featuring the same dining, retail, merchandise and travel offerings. Awards often are stripped to a simple dollar value (in as little as $10 increments), reinforcing the very discount-driven mentality that promotional currency was created to eradicate.

Simply having a loyalty program is no longer sufficient, acceptable, wise or profitable. To simultaneously lower the cost of operation and increase the profitable behavior among the customer base, loyalty marketers should:

* Invest in brand-driven recognition benefits that cannot easily be duplicated;

* Channel other people's money (partner money) into closed-end redemption options that are unique and proprietary; and

* Remember to communicate, communicate, communicate.

Effective loyalty marketing merges the best of online and offline realms. What we have learned from the rapid experimentation of Internet-based loyalty programs is that:

* Communications costs can be reduced by taking a program electronic, but only after the customer has engaged substantially with the program and demonstrated a willingness to modify behavior.

* Personalization is an effective strategy for increasing the perceived relevance of the message, but it is not a substitute for relevance itself.

* The core of the brand relationship is the proper place to root the loyalty program. If the program is the core, it will be short- lived.

* Technology enables but should not rule. Aided by ever more powerful technology and sophisticated analytical techniques, loyalty programs that can deploy a personally relevant value proposition in real- or near realtime have the potential to leapfrog many of the established, batch-based solutions.

Loyalty and CRM are cousins, not strangers. Loyalty is the tangible first step in the CRM discovery process. It provides a means of learning the identity of the best customers, even in industries in which transactions are often blind. It also creates a natural common interest (the promotional currency) between company and customer upon which to base a dialogue.

Marketers need to gain customers' permission and establish themselves as the mostfavored providers in their category. To do this, they need look no further than a loyalty program-a CRM program in disguise. The personalized and relevant communications afforded by a loyalty program significantly deepen relationships with best customers and provide a conduit for encouraging incremental desired behaviors.

Loyalty programs are becoming wider in scope. Successful loyalty program managers are strengthening program branding and enhancing value by "widening" customer benefits and earning opportunities via new markets and partners.

New markets: The lines between the public and private sector may be blurring. For example, the new UPromise program allows members to patronize any of more than 30 companies and then put their program earnings in a government-sponsored, tax-deferred education account. Not-for-profits and large associations also represent potentially exciting brand-building opportunities because these associations cater to specific interest groups. There is hard value to be gained.

Partners: Partners can add vitality, relevant and aspirational rewards, and greater earning opportunities to a loyalty program. Partner relationships can evolve with the portability not only of currencies but soft benefits. In essence, these partnerships feature community benefits. Members can carry their relationship with company A into their dealings with company B. American Express does a good job of this with its Gold card members, allowing them to use their points to reach elite frequent-flier tiers that shower members with recognition-focused perks.

Another variation on the theme is the cooperative partnership. Sainsbury's, the UK. grocery chain, now includes mini drugstores by Boots the Chemist in its stores. Shoppers receive loyalty points from both Sainsbury's and Boots' programs, and Sainsbury's wins from the alliance that extends beyond crossredemption to attract and motivate a shared customer base.

Coalitions are on the rise. A loyalty program can increase the frequency and effect of communications at the same time as it radically reduces the cost of message delivery. Recognition and reward can be boosted to five times their current rate without a similar increase in funding rate. The same program can generate a steady flow of new customers at an acquisition cost that is a fraction of what other programs pay now. Such compelling economics are just part of the persuasive case to be made for coalition loyalty programs, in which several companies share a program, pool budgets and customers, and share expenses and leverage opportunity.

In the United States, momentum for coalitions is building and obstacles are being overcome. For example, corporate consolidation is changing the U.S. market structure by reducing the number of competitors in several industries and making it easier to devise a short list of partners to fit a given category.

If you are serious about enhancing the effectiveness and efficiency of your loyalty program in today's marketplace, you need to be able to cover a tremendous amount of strategic landscape without losing sight of the simple correlates of success:

* Build off the brand, not in place of it.

* Blend recognition with reward.

* Communicate often and with relevant offers.

* Engage customers in dialogue to uncover unmet needs.

* Look to loyalty to spark a broader CRM strategy.

* Plan technology needs around strategy, not the reverse.

* Look for value in partners, not just money.

* Have a plan for the coalition era.

Patrick LaPointe is senior vice president of Milford, Ohio-based Frequency Marketing Inc., a firm that designs, implements and manages loyalty marketing programs, and is a contributing editor to Colloquy, a publication on relationship marketing.

Copyright American Marketing Association Oct 14, 2002

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