The Marketing Bureau

From Michael Carney’s Marketing Week

As noted by TheWiseMarketer.com: the Cornell Center for Hospitality Research has just issued a report highlighting ten principles that make it more likely that loyalty programmes will actually develop loyal customers. The report is specifically tailored to the hospitality industry but the principles involved are relevant to almost any business planning or already operating a loyalty scheme.

According to the report, entitled 'Building Customer Loyalty: Ten Guiding Principles for Designing an Effective Customer Reward programme', stronger loyalty programmes can be developed by paying attention to customer psychology and desires.

The research shows that the ten most successful methods of improving loyalty programmes are to:

1. Foster Customer Engagement
Loyalty is more than repeat purchases, and programmes must evolve to foster a deeper emotional connection between the customer and firms. That's easier to say than to do, of course: this type of connection only comes from repeated positive interactions and experiences with a brand.

The researchers suggest that programmes that are designed to reward a broad set of "loyal behaviours" like engagement activities should see stronger involvement in the programme and an increase in both attitudinal and behavioural loyalty among its members.

For example, at the basic level, customers could be provided rewards for simply updating and confirming their contact information as part of annual programme maintenance.

A simple effort like this one ensures accurate data and creates a reason for customers to visit programme websites, receiving a direct membership benefit for doing so and thus reinforcing their positive relationship with the brand.

2. Establish a Win-Win Value Proposition
Design your programme so that it offers rewards that provide high value to the customer yet carry low internal costs.

For example, in place of a monetary discount on an existing or future hotel stay (low customer value, high cost), the hotel might instead offer that customer free use of a service for which the hotel usually charges (e.g., fitness facilities, wifi). This can provide high customer value at relatively low cost.

The challenge with this principle lies in implementation, because it requires knowledge of customers' preferences. Not all customers will place equal value on all activities.

3. Capitalise on Customer Data
Think of loyalty programmes as irreplaceable market research: marketers can capture data on their consumers that can be used to better meet those customers' needs. Loyalty and research initiatives should be integrated to use customer insights not just for marketers' loyalty programmes, but for the broader business operations as well.

4. Properly Segment Across and Within Tiers
The tier structure of loyalty programmes must work for your customers. Most reward programme tiers are copied from those of long-standing programmes, and often represent out-of-date or inappropriate segmentation strategies.
For instance, one well-known hotel chain offers their first reward tier after customers stay a minimum of 10 nights. While this reward is relatively easy to earn, the next upgrade occurs when the traveller reaches 50 nights in 12 months.

Do these tiers sufficiently differentiate the chain's customers according to their potential value to the organisation?

Chances are that the customer who stays 10 nights or less is fairly similar to the customer who stays around 11 nights. However, those who stay up to 49 nights are likely to have distinctively different needs and desires, yet are earning the same rewards as much less committed customers.

In addition, the gulf from one reward status to the next is so great that when a customer achieves the first status level she will likely conclude that the next level (40 additional nights) is not attainable. That customer is likely to shift her spending to the competition for the balance of the reward period in an effort to manage her "portfolio of rewards" for her lodging patronage. Thus, this tier structure provides an unintentional incentive for customers to shift to another hotel brand so that the customer can then earn rewards from multiple brands.

Businesses should consider the opportunities for segmenting programmes based on factors other than spending. For example, US pharmacy chain CVS recently launched a spin-off from its standard ExtraCare programme exclusively for diabetes patients. By making subtle changes to the rewards that are offered and to its supplemental services, the pharmacy may have discovered a simple way to differentiate its programme among diabetes patients by simply recognizing their needs and offering rewards that better align with those needs.

5. Develop Strategic Partnerships
Loyalty programme partnerships involve one firm providing their customers with the option of exchanging their rewards for offerings from firms in other industries. Administration of such arrangements are typically outsourced to a third party or are structured as one-way agreements, where one provider simply compensates other providers for their inclusion in the rewards offerings.

The partnerships should strike a balance between offering a broad set of rewards and overwhelming customers with too many options.

6. Develop Surprise Rewards
As noted under Principle No 4 above, once customers achieve a tier reward, if they conclude that they will not be reasonably able to reach the next hurdle, they can shift their business to the competition to solidify their rewards from that competitor's loyalty programme.

One effective alternative strategy  to offer relatively small rewards (possibly undocumented and apparently random) between the major tier milestones to encourage continued customer loyalty and deter switching.

These strategies are based on the basic tenets of reinforcement schedules, where providing a mix of continuous rewards in conjunction with each transaction in combination with seemingly spontaneous, higher value rewards may have the biggest impact on behaviour.

7. Cater to Customers' Desires for Choice and Fairness
Customers love choice and control, so effective loyalty programmes provide customers with flexibility in their redemption intervals and choices.
Such flexibility may build engagement from customers when they feel that they have control over the benefits they receive in the program.

A simple example of this strategy is US electronics retailer Best Buy's Premier Silver program. Among other features, programme members can choose when they receive rewards as well as the medium by which the rewards are delivered (i.e., via the programme website, via email, or via snail mail), rather than simply mailing rewards at pre-established set intervals.

Best Buy also offers customers the opportunity to "bank" their rewards, which provides customers control over their programme benefits and may even assist customers in setting upgraded purchase goals.

Customers also crave a feeling of fairness in their exchanges. Put simply, customers want to feel that they have earned their rewards, in part because achieving a reward tier is a matter of some distinction. When rewards appear "too easy" to earn, the prestige associated with programme and tier membership diminish, along with the allure of the programme itself. As a result, managers must carefully develop a rewards mix that aligns with the effort required to earn them.

8. Avoid Commoditisation by Differentiating
Programme differentiation may be the single biggest challenge currently facing loyalty programme managers. There are only so many ways to differentiate a programme when all the details of programme structure and tiers are completely transparent.

Some successful programmes are differentiated by experiences or service benefits that complement the standard "monetary" rewards. These supplements could be as simple as prioritized service, exclusive events, direct access to and consultation with employees, and flexible programme management. Supplementing a programme with value-added offerings not only helps with differenting the program, but it also encourages more interaction between the customer and firm, creating an opportunity to foster deeper feelings of loyalty.

9. Avoid the 'Price Sensitivity Trap'
Another reason to differentiate your programme with non-monetary rewards is that it's important not to focus your programme too heavily on price concessions. Many reward programmes are still based on a simple design that provides customers with future discounts as a reward for current spending. While these programmes have demonstrated some value to firms, they carry a substantial risk of converting traditionally loyal customers to price sensitive ones.

10. Embrace New Technologies
Loyalty programmes should take advantage of technology advances. The days of the punch card or even plastic loyalty cards are quickly vanishing. Products like FourSquare and other PDA-enabled programmes offer the potential to reward customers in real time.

Having the ability to know what your customers are doing at any time can allow managers to anticipate customer needs and preferences thereby increasing customer satisfaction and differentiating their product from that of their competitors.

Finally, above all else, the most important strategic investment in any programme is customer research. By understanding your customer base and loyalty programme members, managers can make informed decisions on how to advance their programmes.

You may contact Michael at: editor@MarketingWeek.co.nz