Choose the Right Tools by Knowing Your Customers

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The greatest benefit of loyalty marketing is also one of its greatest challenges: the amount of tactical options at your disposal.

A quarter century of theory and practice has given marketers a toolbox full of ways for demonstrating loyalty to their best customers. But which tool to use? Promotional currency? Discounts? Soft points? Dialogue? In-kind or partner rewards?

Having such a deep toolbox is a blessing. But determining which tool is right for the job can be a challenge.

One of a loyalty marketer's most basic tactical decisions is finding the right value proposition to encourage profitable behavior shifts in your targeted customer segments.

Office Depot faced this challenge recently when it prepared the relaunch of its small business loyalty program. Formerly known as Office Depot Advantage, it was retooled and redeployed as Worklife Rewards.

Worklife Rewards enhances the cash-back-based value proposition of Office Depot Advantage - a 5 percent rebate on every $200 spent, up to $50 per quarter - by eliminating the rebate cap while continuing to encourage frequency with the restriction of the 90-day reward period.

Why did Office Depot choose this approach as opposed to, say, traditional points-based currency? The 5 percent value proposition is classically rich enough: A reward typically must deliver 5 percent perceived value to motivate consumer behavior.

The only danger here is that the funding rate is transparent: 5 percent of $200 is $10, period. Rather than earning equity via points to redeem toward small-business-related rewards, which thereby increases the perceived-value gap in the funding rate, program members know exactly how much currency Office Depot is willing to float to encourage consolidation of their business-related expenses with the retailer.

Will $10 back on a $200 purchase be enough to motivate behavior change? Our guess is that Office Depot chose this approach because it knows its customers. Small business owners want to cut to the chase. Perhaps they told the retailer that, rather than keep track of point balances and peruse reward catalogs, they just want a simple reward option for when they shop with Office Depot.

Contrast this with the opposite approach taken by fashion wear retailer Chico's. Its Passport Club lets members secure a 5 percent discount for life after spending $500. There's no hard economic benefit to the program; members must pay out of pocket to enjoy the benefit.

We might wonder about the wisdom of this approach but for the results: Passport Club members reportedly account for 75 percent of Chico's sales. Chico's best customers find value in the recognition inherent in a permanent discount and feel a stronger attachment to the brand. They cheer the value of the "thank you" that a long-term discount provides.

These examples illustrate the importance of knowing your customer base. What are the important characteristics of their relationship with your brand? What offer will motivate them most? With the proper level of pre-launch testing, you can determine what offer is rich enough to encourage profitable behavior while providing solid program return on investment.

If Office Depot knows its customers as well as Chico's knows its own, then Worklife Rewards will strengthen the bond between consumer and brand and prove to be a differentiator. Our only advice: Add a layer of soft benefits to let members feel privileged in the store.

A small business owner who feels rewarded both in the store and through a quarterly rebate will be a loyal customer. It's this juggling of pros and cons of program structures, value propositions and time frames that makes the loyalty marketer's work so challenging - and rewarding.

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