Loyalty Pays: Hang On To Your Best Customers

Customer loyalty programs are a best practice for direct marketers looking to emerge stronger from the economic downturn

In the past six issues of Inside Direct Mail, a quarter of all our stories have mentioned the down economy in the lede. Direct marketers always must consider the bottom line, but now that line has become shakier than ever. So we continue to write about ways to strengthen direct mail programs during tight times.

In recent months, many direct marketers have said this is no time to overextend your reach with too much prospecting, but instead, a moment to direct a bigger spend and work harder to maintain your most valuable customers.

Loyalty marketing is one of the best strategies to strengthen your organization and hopefully come out of the economic storm as a market leader. Below, experts in loyalty and direct marketing walk through the most effective ways to engage in loyalty efforts and hang on to customers.

Getting Started
Loyalty can and should be an undercurrent that runs through your entire direct marketing program. However, loyalty also can be applied as a specific tactic, with a system of rewards and exchange of value between company and customer. “It comes down to what we call the value exchange; essentially you’re exchanging value for information,” says Rick Ferguson, editorial director for COLLOQUY, a research and consulting firm devoted to global loyalty programs. “You create a loyalty program and put some value on the table and say, ‘Hey, if you sign up for this program, I’m going to give you some stuff … and in exchange for this free stuff, I would like to be able to build a relationship with you,’” he describes.

The goals of a loyalty program are to create a positive change in customer behavior—i.e., increased spend, increased engagement—and improve your chances of retaining that customer in the future. “The fundamental difference between traditional direct marketing and loyalty marketing is in demonstrating that continuity of that relationship and making it more valuable over time,” Ferguson says.

It’s important to remember that loyalty programs are designed to solve specific business problems. “You need to define what the program objectives are. What do you really want to do? Do you want to increase spend or increase interaction?” asks Paul Walczyk, senior vice president of client services for Carlson Marketing, a global marketing services company. Once you define your program objectives, Walczyk stresses the importance of budgeting by creating an economic model around your objectives. “It does always boil down to economics in that … there are some customers who you can afford to spend more money on to keep than other customers,” agrees Gary Hennerberg, creative director and copywriter for Hennerberg Group, a direct mail agency based in Colleyville, Texas.

In terms of up-front investment dollars, a loyalty program can cost a lot or very little depending on the size of your business and the nature of your existing retention process. Ferguson points out that some companies may need to build a database, creative communications piece, website and call center from scratch. Other mid- to small-sized businesses only may need to refresh their current efforts to do a bit more on the loyalty front, Ferguson advises.

Segmentation and Tailored Messaging
Targeted communications are inherent in any loyalty effort—and the way to achieve relevant, customer-centric messaging is through segmentation. “I don’t recommend that you go in and just arbitrarily say that someone who spent $500 is one group and, $300 to $500 is another group, etc.,” Hennerberg says. He instead likes to look at every customer in a database, whether that’s 5,000 or 50,000, and associate each customer with several statistics such as sales per customer, cumulative sales and percentage of sales. Ferguson stresses the importance of accounting for those customers who aren’t your best at the moment but have the potential, based on past behaviors, to become more valuable in the future.

Segmenting can help marketers arrive at clear objectives for their loyalty marketing communications. “You can treat people at different levels by giving them different thresholds to reach in order to get bonuses and promotions,” Walczyk states. “If we had a customer who was spending $100 with us on average but we wanted to see what we could do to get them up to $120 per order, segmentation enabled us to give them a particular offer or incentive when they reached up slightly higher,” describes Hennerberg.

Direct Mail and Loyalty
Direct mail is an integral channel in the loyalty mix, and if you are starting from scratch, Ferguson advises coming up with an identification piece that introduces your loyalty offer and allows potential participants to raise their hands to participate. “You might say you want to identify a certain percentage of customers who are coming in three times a month, and if you think you can get them in one more time a month, that can really make a difference to your bottom line. So send them a direct mail offer for double points or an extra discount for coming in four times a month,” he explains.

Using soft benefits, like appreciation and status, can help retain those customers who already spend as much as they can with your company and may not change their behaviors due to economic incentives. “You want to put an offer on a table that combines that economic value and sense of status, and that’s a very powerful combination, and the best and most successful programs are the ones that execute on that,” Ferguson says. Soft benefits are advantageous when a competitor tries to attract your loyal customers but cannot lure them with lower prices alone. “You know price is important, but really it’s about creating an overall sense of value for the consumer,” Walczyk declares.

Direct Mail Engagement Devices
Tried and true direct mail techniques like surveys, trigger communications and personalization enhance loyalty mailings. “Surveys can be a great way to get attitudinal information, which can then be thrown back into the segmentation strategy. And surveys measure engagement as well,” says Walczyk.

Communications sent out surrounding customer triggers, like a specific purchase behavior or event, also improve loyalty. “The customer gets the sense that, ‘Wow! These people really know me, and they pay attention to me,’” Ferguson relates. Walczyk gives the example of a customer service interaction as a great opportunity to communicate. “Follow up and make sure you get the complaint to a conclusion,” he says.

Similarly, smart personalization, not just calling out a prospect’s name, but using variable printing to tailor an offer, can help move things along. “It’s really about the offer itself and how that’s relevant to the customer in terms of their purchase behavior, age, lifestyle or whatever type of information you have at hand,” Ferguson notes. Walczyk agrees that personalization in loyalty marketing is not just about saying how many reward points the customer has, but recognizing and continuing the relationship with folks at every touchpoint.

Benefits and Results
Three of the biggest benefits of loyalty programs are their measurability, concrete results (behavior changes) and high response rates. “To the extent that you can make your messages targeted and relevant, the response rates for direct mail within the loyalty program membership tend to be a lot higher than direct mail that just goes out to the general population,” Ferguson shares.

Loyalty members have opted in to your program, therefore the open and response rates are much higher than those for regular mass mail campaigns. “If you’re getting a piece of direct mail from your frequent flier program, you are more likely to open it … because you know when you see the name of the airline on the envelope that it’s got some value and relevance for you,” Ferguson explains.

Ferguson refers to loyalty marketing as a science because you can develop a hypothesis, “I can get the customer to spend X amount of dollars,” test and retest it. Eventually, you can tie an offer you sent out in the context of a loyalty program to revenue, Ferguson argues, more seamlessly than you can in most mass marketing programs.

To measure success, Walczyk looks at key performance indicators like acquisition, conversion and engagement, and also measures the strength of the relationship using a Carlson patented relationship strength index. The index accounts for trust (how much do they actually trust the company?), duration (how long are they in, and are they committed to staying in that relationship?) and alignment (how well we recognize people, and how are they aligned with the organization?).

In this economy, there is no question that loyalty programs offer the measurability and results that can add value to your existing customer relationships. “Use best customers to drive any growth that there may possibly be in the marketplace, and really focus on those customers and your core capability in the downturn. While people are actually looking for value, perhaps your company can provide that value,” Walczyk concludes.

(Originally published in Inside Direct Mail, March 2009)

One Response to “Loyalty Pays: Hang On To Your Best Customers

  • My company Sterizon deals with direct marketing primarily in the Restaurant industry. The points mentioned in this blog are very relevant to any consumer facing business.

    Most of the Email Marketing today doesn’t even do any kind of segmentation. Only few of the businesses collect some additional information beyond just Email address (such as zipcode etc). Same holds true with Mobile Marketing, all the businesses care is the mobile number.

    The lack of segmentation and targeted marketing bothers me, as it leads to higher drop out rates than helping the business build loyal customer base.

    We are trying to fill this exact gap in the direct marketing space in the Restaurant and Service industry space with innovative solutions.

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