Ari Buchwald, associate consultant, and Tony Dubitsky, senior consultant contributed to this month's column.

Conventional wisdom dictates that the best way to enhance customer loyalty is to implement a loyalty (i.e., a frequency, relationship or membership marketing) program. Critics of loyalty programs maintain that they are just bribes for purchases or that they are attempts at miraculous quick fixes to boost sales. But loyalty can't be bought ­ it is earned and developed over time. The most damning criticism of loyalty programs is that most are not integrated with other service offerings or benefits.

Another problem is that many loyalty programs are reactive rather than proactive and fail to capitalize on customer intelligence-gathering opportunities. Ideally, loyalty programs should actively solicit relevant and appropriate information from a customer at every possible opportunity. Each interaction with customers should become a loyalty-building occasion. Furthermore, relevant and appropriate customer intelligence should be gathered at each interaction across all points of contact between a company and the customer. This intelligence should be leveraged to optimize or enhance a customer's experience. If the program only rewards customers for business that they would already have given to the company, the program has failed before it has begun.

Some key considerations for loyalty programs include the following:

  • Ask customers what they want or like ­ poll the customer on preferences for rewards, service levels, variety, convenience, price, frequency of contact, permission to use various channels such as e-mail, etc.
  • The program should not be the centerpiece of a marketing plan, but it should be closely aligned with the overall marketing objectives.
  • Good programs award for interaction, not just purchases. Show that you know the customer and refer to their past interactions.
  • Establish appropriate intervals for relevant communications such as e-mail, newsletters and offers.
  • Recognize that rewards may not be the incentive of choice for your best customers; these customers are often more influenced by exclusive service or access to special events or programs, or special gold-members-only service that provides added convenience.

Loyalty Programs Are Not Enough

Although a customer loyalty program may enhance customer relationship management (CRM), it does not replace CRM as an integrated effort across marketing, sales and service organizations. Many of these programs are icing on the cake ­ they're not the primary drivers of retention, profitability or satisfaction. In fact, most customers rate customer service, variety of selection and ease of returns higher than loyalty programs.

As mentioned, customer knowledge should be used to enhance or optimize the customer's experience at every touchpoint; but what aspects of the customer's experience should be optimized? How should such aspects be optimized? The first step is to understand the negative and positive drivers of customer loyalty. How important are these drivers? How does the company perform on them versus its competitors? Further, how does a company translate this information into an enhanced customer experience? How does a firm assess whether this enhancement is cost-effective?

Step 1

Ask Customers What's Important to Them. Begin by using qualitative research to get inside customers' heads, listening for your customers' moments of truth ­ the touchpoints of interaction between them and the company's products, services and communications. Understand their values and use this understanding to design products, services and communications, as well as to provide the kind of customer service they want. At this point, it would be useful to conduct separate focus groups of key customer segments such as active customers, inactive customers and lost customers (or whichever segments are most meaningful to your business).

Information gained in these groups will aid tremendously in developing a survey questionnaire for quantitative research that uses these moments of truth to measure the degree of customers' loyalty to the company, the brand, services and products. Of course, such a survey should be administered to the key segments used in your qualitative research.

Step 2

Build the Vision. Insights from the quantitative research can be leveraged to identify opportunities for enhancing customer experiences at every touchpoint across the organization. Present key learnings to the most creative internal people from all areas of the company. Hold a brainstorming session to identify opportunities to customize products or customer service in ways that will influence customer loyalty. Then, pinpoint the most practical, quick-to- implement solutions and prioritize them. For example, Virgin Megastores proactively distributed

personal digital assistants (PDAs) to encourage interaction with their Web site. These PDAs were specially configured to log on to the Virgin Web site automatically whenever the user was checking e-mail. This type of personalized service encourages interaction and also creates added convenience for best customers. At this point, you're well on your way to creating a true customer differential that will distinguish your products, services and communications from those of your competitors.

Step 3

Execute. Implement initiatives, offers, communications and programs (even beyond marketing, sales and customer service) that will enhance customers' value perceptions, build loyalty and, most importantly, be cost- justifiable. To ensure financial accountability, develop sound business cases with appropriate return on investment (ROI) and net present value (NPV) metrics.

Step 4

Track and Measure. Collect information on the performance of the new initiatives, offers, communications and programs. Through empirical evaluation, you'll be able to understand which of these components work best with which customers.

Working through this four- phase process will build loyalty by differentiating offerings in a relevant way to key customer segments. Doing so will provide value to customers who will, in turn, maximize their value to the corporation.

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