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.

Recession Redirects Retail Innovation

The economy has been tough for lots of retailers. Personal bankruptcies are running high, and consumers have been reluctant to open their wallets regardless of the great deals being offered to tempt them.

Teens and young adults have been two of the few bright spots that have gotten a lot of press, and so have retailers that cater to them. While the rest of us have been preoccupied with what happens to the Dow on a daily (or more frequent?) basis, millennials had no stock portfolios to speak of, so the market turmoil has not affected their sense of financial security.

However, it looks like the Millennial retailing innovation engine may be losing some of its steam. According to a March 13 story in the WSJ, several retailers have decided recently to drop their millennial-focused new concepts. Pacific Sunwear, Quiksilver, American Eagle and Aeropostale all announced plans to take charges to earnings and close chains aimed at this demographic.

A closer look at these concepts suggests these closures may actually be a rejection of the strategy of slicing the Millennial market into ever finer niches. The Long Tail got a lot of press when it came out in 2006, and led retailers and others to attempt to sell less of more to increasing numbers of niche markets. Seems Millennials don't respond well to slicing and dicing.

Hot Topic and The Buckle are examples of Millennial-focused retailers that are thriving. Unlike the retailers mentioned above, these two have not been chasing new niches. Instead, they have stayed the course and continue to aim at a broad segment of the teen and twenty-something markets.

Winning retailers know innovation is key to continued relevance. Rather than go for line or concept extensions, they’re focusing on merchandise innovation within their existing footprint and formula. Forbes reported last week on an RBC Capital Markets analyst’s comments that "As we walk the malls and listen to companies report sales and earnings, it's clear that where there is exciting merchandise, there is outperformance on a relative basis."

In addition to merchandise innovation, the other area of innovation that is driving retail success with Millennials these days is the in-store customer experience. S&P reported recently that “an engaged sales force and layaway program that allows youths to buy designer denim” are a big part of Buckle’s success.

So, it’s back to basics when it comes to retail innovation. More than ever, with prices down everywhere, it’s about the product and the customer experience. Retailers whose merchants have budgets to experiment with new products and sources and who have the ability to hire and upskill their sales associates will win.