While many marketers have implemented loyalty programs, few have fully understood the complex nuances and challenges involved. Indeed, there are several widespread misconceptions about the design and implementation of such programs. Following is a list of some of these misconceptions as well as suggestions for avoiding them.

A good loyalty program can virtually run by itself. Once you've set it in motion, you can sit back and enjoy the ongoing incremental revenue stream. In reality, we've found that programs should be continually modified based on consumer needs, wants and expectations. For example, to this day, a leading retailer has been continuing a "deferred- gratification" program established decades ago in which customers get a payment based on a percentage of their year-to-date purchases. Of course, both the world and consumers have changed since this program was launched. Not surprisingly, research showed that a majority of their customers desired to have rebates they could immediately apply to full-price and sale purchases, rather than getting a yearly payment. Research also revealed that a majority of their customers desired free shipping for online orders.

The lesson here is that consumers should be continually polled about their needs and desires using both qualitative and quantitative research. You shouldn't second- guess what consumers want or what they consider valuable in terms of rewards. Creative solutions are sometimes required to adapt the features and benefits of ongoing programs to fiscal realities. One proposal for this retailer was to provide free shipping to customers spending far above the average amount, thereby offsetting the additional cost. Of course, if you do change the structure of your program, you want to do it in such an evolutionary way that you don't alienate your current franchise.

You can be fairly certain that your loyalty program will reward the "right customers." With the exception of the airline industry, marketers have observed that many of the best participants in loyalty programs are the least profitable customers. These fickle customers bounce in and out of your franchise just to take advantage of your freebies or limited-time promotions and then go wherever the next enticing offer is. They don't buy much from you and cost a lot to service and support.

We believe that all CRM initiatives should be based on a foundation of customer intelligence. Start on the ground floor by calculating the value (profitability and lifetime value) of your customer base and identifying tiers of customer segments. Then customize your loyalty program for each segment. For example, you might offer admission to exclusive sales events for your high- value customers, and gifts to your low-value customers if they exceed relatively high spending levels.

Most marketers use the right metrics at the right time to assess the impact of their programs on customer loyalty. This statement is false for several reasons. First, loyalty is more than just behavior or financially based metrics. It's a multidimensional construct that embodies attitudinal, behavioral and motivational components. To fully understand the dynamics of loyalty, we recommend including measures of satisfaction specific to the value proposition (the attitudinal component), share of wallet and lifetime value (the behavioral component), and future intentions of purchase or usage (the motivational component). Any one of these alone may not adequately measure loyalty. Satisfaction surveys must adequately measure customers' satisfaction with the value proposition you offer – satisfaction with service alone will not keep them from going elsewhere.

Second, we've found an emphasis on one-shot, one-point-in-time measurement. Given that loyalty is a phenomenon that unfolds over time and is affected by marketing interventions of both client and competition, we maintain that a best practice requires ongoing measurement of loyalty over time via a tracking study rather than "one-offs."

We've also found that internal metrics – those that examine the performance of operations, service, tactical or delivery function areas – have been given short shrift. Accordingly, another best practice includes such metrics to assess the quality of program delivery.

The basic principle behind any loyalty program is merely to provide a reward to maintain ongoing purchase and usage behavior. Loyalty programs are not as simple as they appear to be. This point speaks to the underlying rationale or strategy of your program. Do you wish to move customers up along the value chain, incent a specific behavior or strengthen your competitive advantage? Whatever strategy you adopt should affect the anatomy and physiology of your program. Once again, best practices dictate that you use qualitative and quantitative research to design your program by directly tapping into the voice of your customer. You may find that reinforcers vary by customer tier or segment.

Finally, we've found that customers are most appreciative when they have control over how they use (or bank) the rewards they've accumulated in your program. Of course, this may require greater operational effort and expense, but the benefits may offset the costs.

When executed correctly, loyalty programs can be an effective way to create and maintain relationships with valuable customers.

This month's column is contributed by Tony Dubitsky, senior consultant, Jill Hunter, consultant, and Sue Smith, senior consultant, with Nykamp Consulting Group. Nykamp Consulting Group can be reached at (630) 725-0500 or www.nykamp.com.

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