Article

Five barriers to building retail customer loyalty

Loyalty programs should be about companies demonstrating their loyalty to customers, not the other way around.

February 20, 2011

Loyalty is a much-abused word in marketing. Throughout the industry, from boardrooms to white papers, customer loyalty and loyalty programs are catching a lot of attention. "How can we start a loyalty program?" has almost become as popular as the now famous, "Is there an app for that?" Despite all this talk about customer loyalty, most retailers are struggling to launch and manage successful loyalty programs and a rewards structure that can sustain long-term growth.

Addressing the core of this problem requires a shift in the way retailers think about loyalty: Customer loyalty is not about customers demonstrating loyalty to a company, but rather the company demonstrating its loyalty to the customers. In fact, the way a company treats its customers is central to a company’s success because the more relevant the company is to its customers, the more likely a customer is to purchase one more item, one more time.

Many retailers are quick to adopt a loyalty program — a loyalty card, rewards, mobile apps — as a solution within an already established marketing program to raise profitability through customer acquisition. This widespread trend is not the fundamental aim of a loyalty program and has helped to saturate the industry with programs that are off-strategy and ultimately unsuccessful.

However, companies that return to or continue with traditional (store or brand-centric) strategies are placing themselves at a disadvantage. We can probably all think of examples in our daily lives of spam and irrelevant or even intrusive offers. A few months ago, after my annual eye exam, I purchased a year supply of contact lenses in order to qualify for a $60 rebate. I dutifully filled out my rebate form and mailed it in only to get a response that I was ineligible because I was a returning (and loyal!) customer and only qualified for a $25 rebate. The $60 rebate was only for new customers.

This is a great example of how customer acquisition programs alienate a company’s already established, loyal customer base. It typically takes 12 to 20 new and uncommitted customers to make up for the loss of just one highly committed customer. With that in mind, does it make sense to reward new customers more?

Once companies realize the importance of focusing on existing customers, their whole understanding of loyalty changes. This is a critical change in philosophy for most retailers, and the first step in taking a loyalty approach. Even with this foundation, retailers are faced with barriers in their quest for customer loyalty. The following barriers highlight five misconceptions commonly plaguing loyalty programs from achieving real success:

Barrier #1: A Loyalty Program is a Loyalty Approach

A loyalty program is a mechanism by which customers identify themselves on each purchase occasion and there is some form or exchange of value as a result. A loyalty program can be one part of a loyalty approach but a loyalty approach is not simply a program, it is a way of doing business. A loyalty approach engages the entire organization in rewarding and delighting customers with products and experiences that meet their wants and needs. In fact, a loyalty approach is not a tactic - it’s a long-term strategy that makes the customer the focal point of business decisions and objectives. Although loyalty programs help retailers in the collection of customer data and can provide a strong foundation for a loyalty approach, the success of a loyalty program is dependent on the adoption of a loyalty approach throughout an organization.

Barrier #2: Loyalty is the Responsibility of the Marketing Department

Many companies start a loyalty program by determining it as a responsibility of the marketing department. However, in companies with proven success in customer loyalty, the vision and direction is owned by the CEO who embraces his or her role as the champion of the customer. A loyalty approach requires significant organizational change spearheaded and supported by executive management. Only the CEO can establish a customer-centric organization by placing the customer at the center of each business decision.

Barrier #3: Customer Profitability is Key Indicator

The best way to understand and deliver relevance to a customer is to get to know how they are loyal. Customers do not determine or know their profitability, the retailer does. Relying on the profitability of a customer to determine their value is a scale that is meaningless to the customer and often an inaccurate measure. For example, is a customer who visits an electronics retailer once within two years to purchase a TV on promotion for $1,999 more or less valuable than a customer who visits a dozen times during the same period buying a range of products for a total of $950? Chances are the second customer, despite spending less than half the value, is more likely to choose that retailer again for major purchase while the first displays no real loyalty.

Relying on sales and profit data can simplify and misrepresent the customer’s intentions and behavior. Instead, an understanding of customer behavior can be used to drive profit. Behavior can provide insight on how to be consistently relevant to customer’s wants and needs, therefore improving business.

Barrier #4: Build a Program, the Data Will Come

It is easier to give people what they want when you know what that is. While many companies collect data, collecting data that is representative of the customer base rather than bias to one segment or another can be a challenge. If the loyalty program fails to fully engage the core customer — making it difficult to sign up for the program, use the card, etc. — the customer data and insights will not form a complete picture of the customer.

Capturing end-to-end behavior will further inform that picture of the customer and can be accomplished by embracing a multi-channel approach. Collecting customer preferences should also be subject to relevance. For example, if you are ask a customer if they want to be communicated to in Spanish, it should not be written or spoken in English.

Barrier #5: Technology Makes It Easy

When leveraged correctly, technology can strengthen relationships with customers and, if designed properly, can reduce total cost of the program. In an effort to minimize cost, some programs are relying on email as the only form of communication, requiring the customer to keep track of their own rewards online. The role of technology should be to make the program simple for customers to interact with the retailer. Recent developments in technology provide an unprecedented ability to personalize communication strategies and bring to life true one-to-one relevance. In the spirit of being loyal to customers first, retailers should leverage technology to collect and use customer preferences, not limit relationships because of the reduced cost associated with adopting digital-only programs.

Successful companies approach loyalty by asking, "How are we loyal to our best shoppers?" Similarly, a successful customer loyalty program needs to be managed as part of a company’s loyalty approach, putting the customer at the core of company’s proposition and understanding the key drivers to success:

• Loyalty is a way of doing business, it is not a program.
• Loyalty strategy is owned by the CEO and requires organizational alignment.
• By focusing on the customer, the outcomes (revenue & profit) will come.
• Capturing the right information is necessary to be relevant.
• Technology can be a key ingredient of a loyalty program, but do not eliminate customer choice.

Keith Colbourn leads the global loyalty practice at dunnhumby, responsible for developing and growing solutions in regards to customer loyalty and rewards programs for clients including The Kroger Co., Tesco, Shell, Macy’s and Ruby Tuesday. (Photo by joelogon.)