Leaders Build Loyalty Into Their Business Model

As growth becomes elusive, retailers are hunkering down to hold onto the customers they have. A recent Aberdeen Group report shows that "customer loyalty programs and similar relationship marketing initiatives are some of the most critical factors that are impacting retailers’ sales and customer retention performance under these current difficult market conditions."

Many store-based retailers have bolted loyalty programs onto their businesses, using points based systems, discounting and giveaways to drive repeat business. Meanwhile, leading e-tailers have created business models that make it so appealing to do business with them that it is too hard or too much bother for customers to go elsewhere. By offering extraordinary service, convenience, quality, or value, these brands have found compelling ways to cement their relationship with their customers and overcome purely price-based competition.

Zappos is a great example I wrote about earlier this week.

Amazon Prime is another great example of an e-tailer achieving loyalty without points or merchandise discounts. In fact, customers pay Amazon $79/year to enjoy unlimited "free" 2-day shipping, discounted upgrades to 1-day shipping and no minimum order size. We buy more from Amazon than any other ecommerce site, and Amazon Prime is the reason. That’s loyalty!

Shutterfly is attempting to increase customer retention by capitalizing on recent decisions by competitors, land-based operators Snapfish and Kodak. Both have announced they will no longer store pictures for customers who have not purchased merchandise from their sites recently. Shutterfly’s CEO, Jeffrey Housenbold, used those announcements as an opportunity to reach out to customers past and present with albums stored on the Shutterfly site and reassure us via email that there will be no forced deletion on his site. Our photos are safe, regardless of what or when we buy. Of course, the hope is that the convenience of having digital photos all in once place will lead to reliance on that site for prints, cards, etc.

Is it a coincidence that all of these examples are e-tailers? I don’t think so. The Aberdeen report points out that brick and mortar retailers are still worried about getting the plumbing right — only 37 percent of store-based retailers surveyed reported that customers can join their loyalty program via the POS system in stores. Meanwhile, e-tailers are free to innovate their business — and loyalty — models.

Millennials & Loyalty – Oxymoron or No Brainer?

They’re between 13 and 30, spend over $20 billion a year and influence another $120+ billion in purchases. We live and work with them…we practically (and actually) raised them! But what makes Millennials tick? And more importantly, how do brands earn their loyalty?

On one hand, lots has been written about Millennials taking the word “fickle” to a whole new level. According to Iconoculture as reported by CNET, "You've got a generation of kids who've had an unprecedented amount of control of their media and they're not going to give it up. It does put out a challenge--for anyone in the media business--of how to keep attention in that media."

Bill Hanifin's latest research shows that "over 62% of global teens are apathetic to traditional advertising messages and 42% make purchase decisions based on the recommendations of their friends." As result, he concludes that "traditional methods to engage and retain best customers may not work with Generation Y" (aka millennials).

They snub well-known specialty retailers like Abercrombie for even more unique stores like Buckle. But trends change and (particularly young) Millennials look more narrowly for stores that resonate with them.

As a Business Week story on younger millennials points out, the challenge lies in striking the right balance in luring teenagers with cool and unique offerings but avoiding the slip toward ubiquitousness. "One of the interesting paradoxes of being a teenager is trying to be unique but not wanting to be singled out in a peer group." May be generalizable to all millennials.

At the same time, some have gained traction with millennials. Take ABC Family’s shift toward “hard-to-reach iPod-listening, Facebook-using, YouTube-viewing women, mostly ages 14 to 28.” As the network’s President, Paul Lee, told Variety "We ended up building a brand that's really resonating with that audience...The millennials consume obscene amounts of media, and the truth is this is a generation that wants to lie back and have great stories told to it."

Though they may be fickle consumers with short attention spans, ink has also been spent commending Millennials for being civic-minded doers. According to an April 14 story on AARP’s website (how ironic!) referring to Millennial Makeover co-authored by Morley Winograd and Michael Hais:

“Young adults who grew up in the shadow of the 9/11 attacks and saw the wreckage of Hurricane Katrina are volunteering at home and abroad in record numbers. The generation that learned in school to serve as well as to read and write, the Millennials were the first global Internet explorers even as they pioneered social networking for favorite causes at home. This civic generation has a willingness to put aside some of their own personal advancement to improve society."

So, which is it - fickle consumers? Loyal supporters of one or more causes? I think Millennials are both.

Will embracing social issues like Fair Trade (Starbucks) or shoes for impoverished kids (TOMS Shoes and Timberland) make millennials feel connected to the sponsoring brand, and turn them into loyal customers (and employees)? What about introducing new gizmos and applications to help millennials plan and save money? (Kraft's sponsorship of a new iPhone app that allows people to search for recipes and manage their shopping lists)?

What is the best way to build a loyal following of Millennials? What do you think?

5 Must-Do’s in Building Customer Loyalty

Many executives use loyalty programs to buy customer loyalty, offering discounts and giving away products or services, in the hope that they will make it up on volume. That said, success in implementing these programs and integrating the systems that support them has been somewhat limited.

According to an April 9, 2009, Aberdeen Group report: “Even though 53% of retailers surveyed indicate that customers can join their loyalty program on the retail website, the same is not true at the store POS. Despite the growth in online retail sales, store sales account for bulk of retail revenue and customer traffic. A mere 37% of all retail respondents reported that customers can join their loyalty program via the POS system in stores. This gap between the POS capabilities the retailers possess and POS processes that enable loyalty program implementation show that retailers are not taking advantage of the technology afforded to them."

Given the systems and other challenges in implementing “traditional” loyalty programs where customers earn points and redeem them for products or services, program design deserves careful thought. Here are 5 steps every executive team should take to ensure customer loyalty (and loyalty program success):

1. Know whose loyalty you want
   
   
2. Identify what you can do that will be motivating to them, as well as differentiating
   
   
3. Get clear on internal expectations, roles and responsibilities
   
   
4. Test and learn
   
   
5. Rollout and measure

It’s probably not surprising that e-tailers are the innovators on this front. They tend to have newer systems, integrated databases, and more business model flexibility. Zappos is a great example of a leader and loyalty innovator. Founded in 1999, the shoe e-tailer has 7.4 million total customers, and 3.3 million of them have made a purchase in the last 12 months.

What do they do that’s so special? Zappos has a huge assortment – 230,000 SKUs of branded footwear – and offers free shipping in both directions. That means they have eliminated the downside to buying shoes (or apparel) online — i.e., the fit issue. At Zappos, there is no added cost to ordering multiple sizes of multiple styles and returning the ones that don’t fit. That’s standard for everyone.

What earns Zappos rave reviews and WOM is the way it consistently surprises customers with free shipping upgrades so their shoes arrive sooner than expected. Our work with women shows that shoes are one the fastest ways to her heart, It’s not only the free shipping and surprise upgrades that make customers rave about Zappos.

Employees are clear on the importance of building lasting customer relationships and on their roles in the process. Lots has been written about Zappos culture and the emphasis on delivering a WOW experience. One of the best descriptions is from an interview of Zappos CEO Tony Hsieh that Bruce Temkin of Forrester did last year.

The company has a clear focus on its target customer, knows what motivates her and appeals to that clearly and convincingly. They have employees on board, and use data to improve the customer experience. Delighting customers clearly pays Zappos dividends: Over 75% of purchases come from returning customers, and the company reached $1 billion in sales, generating over 30% comps the last two years, alone!

Loyalty pays. Doing loyalty right pays more.

Drugstores Innovate to Increase Loyalty

Recent conversations with senior executives highlight a huge range of interpretations of customer loyalty and how to get and keep it. For some, it’s about offering discounts or rewarding customers with points toward discounts. For others, it’s about offering free stuff customers may or may not want.

The airlines popularized the the discount version of loyalty programs. American Airlines launched its AAdvantage loyalty program in 1981 and cards and points became the status symbols of the new loyalty. I know people who jump through hoops to fly enough segments to qualify for specific airline bonus programs.

While the programs arguably generate incremental bookings, building positive feelings toward the brand is a big part of the point. So, to see how well these programs have worked, regard for airline brands has to be considered.

Turns out the airline industry as a whole scored the lowest of all 43 industries tracked by the American Customer Satisfaction Index for 2008. In contrast, cigarette companies, wireless service providers, and banks -- not exactly topping anyone's list of favorite industries -- ranked higher than airlines, and were not even in the bottom 3! And airline tickets are a commodity, as the ever-growing number of web tools for finding the best fare demonstrate. So, overall, it's hard to say these programs have worked as intended.

Making it easy to join, and offering discounts for “members” like the airlines and grocery stores do, is one approach to loyalty. Recently, two drug store chains took a different approach by strategically selecting which relationships to invest in. Both have launched new programs that will help promote customer loyalty, even though they aren’t officially “loyalty programs.”

Walgreens just announced that it is offering free visits to its TakeCare in-store clinics for the rest of the year for workers who are laid off and have no health insurance. The assumption is that these workers will find new jobs, and when they do, they will continue shopping (and start paying) Walgreens.

CVS is also investing in a strategic group of customers. Though its partnership with Google, CVS pharmacy customers can now download their prescription and medication histories to Google Health accounts. Like downloads into Quickbooks, the ability to download into Google Health accounts may become standard. Google certainly hopes so. For now, CVS is the only drugstore to offer these downloads, and is betting the early adopters it appeals to are upscale customers who value the opportunity to manage their health-related information themselves, and will consolidate their prescriptions (and other purchases) at the drugstore that enables them to do so.

The urgency surrounding health care cost management and health insurance coverage is becoming a potent source of innovation and potentially of loyalty for retailers. Hopefully, health care providers and insurers will be similarly inspired!

The Calculus of Loyalty

Many consumers, including me, have a tall stack of cards from the various loyalty programs they belong to. Between the cards for hotels, airlines, and car rental companies, I got so tired of the bulge they caused in my wallet that I bought a separate zippered pouch to carry them all. The one card that I still keep in my wallet is my grocery store loyalty card because I use it so often.

Loyalty programs aim to get consumers to buy one brand instead of another, or shop at one store instead of another, not just once, but over and over. They are one input into the price-quality-value calculus that consumers do in their heads every time they decide where to shop or what to buy. Different customers do the math differently, and even now, price alone does not always win, even in low-involvement categories.

In recent research with consumers about their preferred brand of canned goods, we saw the price-quality-value equation at work. Canned goods are far from the most innovative or exciting part of a grocery store’s offering. They pretty much define low-involvement in groceries. That said, consumers told us that the graphics on the can, the logo, the colors, all set quality expectations about the product inside and the experience of using or consuming it. Our research showed that the brand they preferred was the one they perceived as most expensive and highest quality. Why? They saw it as the best value.

Our findings are consistent with the just-released 2009 Brand Key Customer Loyalty Engagement Index. Based on research conducted earlier this year, they found that “consumers are not buying based on price alone. Instead, they are relying more on their perception of value when deciding which brands to stay loyal to during the recession.”

Despite the current economy, or because of it, some consumers still prefer (and pay more for) brand-name canned goods and other seemingly low involvement categories. Their loyalty stems from their own sense of what’s the best value for the money.

Store brands compete with branded goods manufacturers for consumers’ attention. Recently, Walmart announced plans to up its game, aggressively expanding and enhancing its own brands in quality and appeal. ALDI did, too.

Retailers have store loyalty programs to help with customer retention. Manufacturers have to find ways to engage customers and make them feel a connection to their brands and products – their own form of loyalty programs. Tools like social media offer an unparalleled platform on which to build customer connections that build loyalty.

Who do you think is doing a good job creating loyalty, and how are they doing it?

Addressing the Big Issues Builds Loyalty

I’ve written before about what multichannel retail, and Walgreens in particular, can teach the healthcare industry about the customer experience. I didn’t consider the ways retailers could teach them about how to build their reputations. Until today.

Today, Walgreens announced a bold move -- to provide health care services to people who get laid off and have no health insurance -- through year-end at its in-store Take Care Clinics nationwide. In contrast to all the feel-good initiatives other retailers have undertaken, most of which I believe are genuinely well-intended, Walgreens is actually making a difference here at home that touches millions of Americans. And by stepping up to one of the biggest concerns facing working people everywhere, Walgreens is burnishing its reputation and creating a whole lotta goodwill and brand loyalty in the process.

Meanwhile, what have category leaders like Kaiser, Wellpoint, and United Healthcare been doing?

On March 7 in San Francisco, Kaiser Permanente gave 26 uninsured people free surgical care, from colonoscopies to hernia repairs to tonsillectomies. Super Surgery Saturday was organized by Operation Access, a nonprofit organization launched 16 years ago to mobilize Bay Area hospitals, community clinics and medical volunteers to donate help to low-income people who need surgery but lack health insurance. A generous act of compassion – but unlikely to cast much glow back on Kaiser’s reputation outside of San Francisco.

As far as I can tell, Wellpoint and United Healthcare are sitting this one out. Clearly, Walgreens wins. Let the big boys take note.