The Do’s And Don’ts Of Loyalty Programs
By Joan S. Adams <adams@pierian.net> +1-212-366-5380
Beware of simply “giving stuff away” to make customers happy.
Many companies offer some kind of benefit to those customers they consider loyal. A local coffee shop might give customers a punch card. The premise is simple: Buy 10 cups of coffee and get the next one free. Other companies offer points, cash back, discounts, special services, etc.
Organizations like the U.S. Tennis Association (USTA) and U.S. Golf Association offer members the opportunity to purchase tickets to events like their respective U.S. Opens before the tickets become available to the public. (If you ever wondered why some events are sold out before the tickets even go on sale—that’s why!) These programs are brilliant. They don’t cost any money. They increase membership and they “reward” loyal customers by giving them first dibs.
There are all sorts of different customer reward/loyalty programs. Many are no-cost or low-cost ways to reward loyalty, while others are giveaway nightmares that cost a lot of money and don’t engender any kind of loyalty.
Let’s take a look at one of the worst examples: The airlines. If ever there was an industry that is constantly in trouble, this is it. Their customers universally HATE them. Service is viewed as poor to rotten. Everyone has air travel horror stories to tell. Folks pretty much hate everything about the airlines. They hate the food, the reservations service, the check-in people, they truly loathe the baggage handlers and I could go on. But here’s the kicker. Most people hate the mileage programs that supposedly give them free trips. Complaints range from too many rules, too many blackout dates, and there are never seats available. Then there are all these little annoying fees to pay in order to get the “free ticket.” The number of points needed for a free ticket keeps going up. The seats are always at the back of the plane next to the restrooms.
It started out as a great idea. The old Western Airlines invented the first frequent flyer program in 1980. Their ad agency thought it would be a good way to encourage customer loyalty. It was a very simple plan (totally different than today’s nightmarish frequent flyer programs with almost as many rules as the U.S. tax code). Like the local coffee shop, Western gave passengers a punch card. Every time they flew the San Francisco-Los Angeles route they got a punch. After 10 flights they got a $50 coupon. They could cash this card in anytime when purchasing tickets on Western Airlines. Think about it—no blackouts, no complicated rules, no fees, no nothing. 10 trips = $50 coupon. Ah, simplicity.
A year later American Airlines created its own frequent flyer program. Delta quickly followed suit, and in a very short period of time no airline felt it could be left behind. People expected air miles when they flew on either business or pleasure. For the airlines, frequent flyer miles became an increasingly onerous cost of doing business.
Now the airlines are stuck. These programs cost them way too much money already, and there are not enough airplanes and routes to accommodate everyone who wants to cash in miles, especially for the most popular destinations and seasons. They can’t afford to keep giving away more miles but can’t afford not to. All they can do is slowly but steadily rein in miles by increasing mileage requirements and partnering with merchandisers to use them up. But they can’t shut down their frequent flyer programs without totally enraging people who are already pretty unhappy.
How on earth did a loyalty program turn into the bane of their existence? The short answer: No one thought this through. No one did the math.
A well-thought-out, well-executed program should cost little to nothing and, more important, it should pay for itself over time by keeping customers loyal. Beware of simply “giving stuff away” to make customers happy.
Once you start to “buy” your customers, they will quickly expect to be bought. To be sure, these various giveaways make them happy, but astonishingly soon your customers will come to see these freebies as their due. Before you can say “Frequent Flyer Miles,” you are stuck in a cycle of giving away more and more, just to keep your customers from being angry, which is pretty much where the airlines are.
Or, consider the U.S. automakers with their rebate programs. Originally intended as one-time shots to stimulate sales, they have become so common that consumers wait for the rebate programs to kick in before buying a new car. Car sales lag in between.
When you decide to develop a loyalty program, the first rule is: These programs are not created in order to give stuff (or services) away. Loyalty programs must be created to reinforce certain behaviors of your good customers. Loyalty programs should give these customers some kind of benefit—but only if they behave a certain way.
The USTA program was astonishingly simple. Their proposition: Join our association and you get first dibs on tickets. I understood it immediately. I joined and received the benefit. Instantly, I became a loyal customer. Now, I will join every year. Gee—that was easy! And unlike the airlines, I like the USTA!
The simpler the program, the better. It is better for you because the program will be easier to manage and measure (does this program make customers more loyal?). It is better for the customer. He will easily see the benefits of being loyal and respond accordingly by purchasing from you at every reasonable opportunity.
The place to start is to ask yourself: “What kind of behaviors would I like to encourage and thus reward in my customers?” (As opposed to asking: “What stuff can I give away to make my customers happy?”)
Encourage Larger Orders
If I were running a supply house, I would like my customers to order on a regular basis and to increase order size. Studies done by the American Supply Association show that increasing order size is even more important to distributor profitability than boosting gross margin percentage. So create incentives designed to boost the number of line items per invoice.
I also would like customers who want regular deliveries so I can set up a schedule. (I would also actively discourage the “every order is an emergency” customer.) I would like customers to order online, to pay up front (credit card) or at time of delivery, or at least to pay on time. Historically, the PVF industry has offered incentives for the latter, by offering a standard 2% discount for bills paid within 10 days. Maybe it would be worthwhile jacking that up a point or so for immediate payment.
Once you know what you want from customers, start designing reward programs that will nudge (or if you want to be aggressive—shove) customers in the right direction. Reward order sizes larger than “X.” Give some small cash discount for early payment. Think punch card—think simple, think small. Every day give your good customers a little pat on the back for being good customers and for behaving the way you would like them to. Customers will be happy and loyal, and you won’t go crazy in the process. That’s how a good loyalty program should work.