Loyalty reprogrammed

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Illustration by Derek Bacon
Illustration by Derek Bacon

Have points-based loyalty programs lost their pull in a world where plugged-in consumers broker the best offers in minutes on their mobile phones? A growing need to weave loyalty initiatives into an integrative marketing approach has some marketers reconsidering how best to foster customer loyalty among consumers.

The sun hasn't set on frequent-buyer programs, to be sure, but there are high-pressure zones building around them in the form of powerful and jaded consumers, and there is new light shining on them through the clouds of Big Data. Dawning now is an age of loyalty in which legacy marketers and brash upstarts can access reams of data to help segment loyalty program members who may not be their biggest customers, but who may represent significant incremental business.

“Forward-thinking companies are taking what was their loyalty framework and busting it out to every customer,” says John Bartold, VP of loyalty solutions at marketing services provider Epsilon. “There's more data to understand how different consumers can act with us, so we can do more things with people who aren't our best customers and still not upset the value proposition,” Bartold explains.

At Teradata's PARTNERS User Group Conference & Expo in October, Kelly Cook, SVP of marketing at DSW, revealed that 90% of the shoe retailer's transactions come from loyalty program members, providing the company with such rich insight into its customers that it has segmented them into 10 distinct behavioral groups; this allows DSW to target those customers based on their shopping habits and spending tendencies, instead of simply using basic demographic information. “Shoes are very personal,” Cook said. “I need to make sure we target people based on how they behave and not put them in a role where they don't belong.”

Customer behavior informs United Airlines' MileagePlus program, as well. United's program, while one of loyalty's old guard, uses technologies to react in real time to present deals to MileagePlus members—based on their traveling circumstances—designed to benefit both consumers and the airline's enterprise partners. “When we see someone is traveling, we can put offers in front of them to stay at a hotel chain. At the airport, we can sell them ancillary products and services,” says MileagePlus Managing Director Mark Krolick.

United works with Acxiom on the hygiene of its consumer mobile data, as well as the airline's other customer databases, to create a more holistic view of each customer. This allows United to turn transactional services into revenue drivers, Krolick says.

It's a self-replicating cycle: an effective loyalty program requires stores of high-quality customer data, which in turn can provide information that help brands boost customer loyalty. And while data is the critical underpinning of enterprise loyalty, the business goals those programs are designed to satisfy range across the board, from customer segmentation for improved targeting to successful upsells of products and services.

Bartold notes that some loyalty programs are “the old model of frequent-buyer programs.” He agrees with Bryan Pearson, president and CEO of marketing services provider LoyaltyOne and author of The Loyalty Leap, who says that companies can't truly connect with consumers in today's digital world without knowing those consumers intimately, and the best way to do that is through a loyalty program.

Pledging allegiance to everyone

That reality has resulted in a loyalty overload in the marketplace. “The Billion Member March: The 2011 Colloquy Loyalty Census” counted more than two billion loyalty memberships in the United States, or 18 programs per household. That's double the numbers that were on the books in 2000.

Program proliferation is one of the key challenges facing both new loyalty players trying to get noticed and legacy programs attempting to stay current. “We no longer just have competition from other airlines. It's hotels…, it's banks,” says United's Krolick. “This growth of loyalty and virtual wallet and mobile devices is converging to create a more challenging environment.”

At the same time, customers themselves are more tuned in to the value of loyalty, intensifying the challenge for the companies that would have them as “honored guests,” according to Jeff Diskin, who, as SVP of global customer marketing at Hilton Worldwide, oversees the 34-million member Hilton HHonors program. “Customers today really are thinking about which loyalty programs they should be members of, and why, because consumers today are acutely aware that their loyalty is really an investment,” he says.

Forrester Research Analyst Emily Murphy sees an “explosion” of loyalty initiatives—both new and revamped legacy programs. But an increase in programs doesn't necessarily correlate to an increase in loyalty effectiveness. Though U.S. households enlist in an average of 18 different programs, they're active in only 8.4 of them.

This might be symptomatic of the quality of the loyalty program itself. Earlier this year Forrester rated five large loyalty programs—including those run by American Express, Sephora, and Starbucks—on 10 criteria including enrollment, redemption, communications, members' tracking capabilities, and privacy policies. They were scored for each on a scale of -2 (severe failure) to +2 (best practice), with a 10 considered a passing grade. All five failed.

Learning about customers to provide value

While each loyalty program is different—some for products that are frequently top-of-mind, like coffee, whereas others for services that consumers prefer not to think about, like insurance—the central tenet for a successful program is improving the relevancy of the rewards presented to consumers, many of whom are inundated with look-alike offers. “Loyalty isn't something that brands create; it's something that consumers grant based on trust,” says Nada Stirrat, chief revenue officer at Acxiom. “It's about the brand providing authentic engagement that is consistent with the brand.”

However, knowing what sort of rewards offer value isn't always intuitive, which is why brands need better customer insight. “When brands connect consumer data to enable personal and integrated experiences, that sustains loyalty,” Stirrat says.

Forrester's Suresh Vittal, VP, practice leader, customer intelligence, points to insurance provider Progressive's loyalty program as an example. Three of the top five challenges named by 81 loyalty marketers responding to a Forrester survey were answered by Progressive: differentiating efforts from competitors' programs, understanding customer interactions across all touchpoints, and delivering offers with high perceived value.

Because Progressive knew what its customers wanted, it was able to provide rewards that had a high perceived value but at a relatively low cost. This was accomplished through extensive testing and analysis of customer data.

Prior to instituting a loyalty program, the insurer's customer base was weighted heavily with younger drivers who change carriers often to take advantage of better rates. Since costs of customer acquisition run high in auto insurance, policy holders often don't become profitable until they've been with the company for a year or more. A Progressive study found that a one-month increase in policy duration across its entire customer base would mean $100 million in incremental profit to the company. That finding led to a distinct goal: increase customer retention.

Progressive's customer care department, led by Senior Director Bart Blackburn, invested $3 million in a pilot loyalty program focused on one segment of its business over 18 months. Intensive rounds of customer surveys showed that policy holders switched companies after getting hit with rate increases after fender-benders. This was enough information for Progressive to create an enrollment incentive that would be valuable to its customers: it would forgive small accidents without automatically raising rates.

The pilot resulted in a 2% incremental retention rate, which more than covered the program cost. Senior management bought in immediately and now all Progressive customers are automatically enrolled in the six-tiered program offering escalating awards that include young-driver discounts, decreasing premiums, and large accident forgiveness. Due to its proven return on investment, the loyalty program became a core brand proposition at Progressive. To ensure the program's ongoing success, the insurer took action that remains lacking in scores of legacy programs: reinforcement at multiple touchpoints across the organization.

“When we rolled out our customer loyalty program, we spent a significant effort in training our internal employees, as well as our 35,000-plus independent agents,” Blackburn says. “This allows the highest level of service possible to achieve the benefits for our customers and helps the company be more profitable by retaining customers.”

Segmenting loyalty

Unlike Progressive, which knew the customer profile on which it wanted to focus, Vail Resorts needed to better understand the customers it had.

Vail—a chain of seven ski resorts including Vail and Breckinridge in Colorado, Northstar and Heavenly in California, and Grand Teton Lodge in Wyoming—uses a common customer data pool to feed into its various subsidiaries. “We're using modern analytical tools to move us from product to brand,” says Darren Jacoby, director of CRM at Vail Resorts.

Although each of the company's seven properties is responsible for its own business, Jacoby's unit is a shared corporate resource and customer information is cross-pollinated among the resorts.

While not new to loyalty programs, Vail Resorts initially had a different one in place at each of its seven properties. In merging them all into one program, it incorporated technology—both operational and analytical—in a way that altered not only the way it serves customers, but also the very product it delivers to them.

Feeding the customer data through a suite of SAS analytical tools, Jacoby and his team distinguished five customer Heads, Fresh Tracks Families, and Cruise-Alongs (usually

non-skiers).

“We always got a high open rate on our emails, because people plan their trips far in advance and look forward to them. They love hearing from us,” Jacoby says. “But we now know who they are and what their needs are through segmentation. An A-Lister couple will hear about private ski lessons and spas; families will hear about free skiing for kids 12 and under.”

As with Progressive, Vail Resorts' consolidated customer information allowed the resort to better target customers with offers that delivered genuine value. Moreover, Vail incorporated technologies that allowed it to get customer data when skiers were offline  and actually shredding the slopes. Three years ago the company replaced paper lift tickets with RF tags. This hit its marketers with an avalanche of customer data and allowed the resort to implement several value-added features to entice customers to enlist in its loyalty program and purchase more products.

Sensors posted at several points on ski runs track individuals' progress down the mountain and tally the number of vertical feet each one skis. By signing up for Vail's Epic Mix program, skiers gain access to their distance totals. They can also download free low-resolution photos taken of them skiing past stations where photographers are posted (or purchase high- resolution versions). Avid skiers love comparing stats and posting pictures of themselves on social media sites, so sign-up levels are high.

“Thousands of people log into their Epic Mix accounts and share their pictures,” Vail's Jacoby explains. “We created instant brand ambassadors.”

What role social?

Social is and has been the channel darling of the marketing world and beyond. If Salesforce.com CEO Marc Benioff is right, social will be the mortar for communications both within and without the enterprise, and it will continue to provide an ever-increasing fount of customer insights.

Large, legacy programs for brands with a vastly more varied customer base than Vail's are making obligatory forays into social media, testing their capacity for involving their various segments. Air Miles, a Canadian coalition program managed by LoyaltyOne that counts more than 10 million members and 200 brand partners, conducted a study this year that found that socially engaged cardholders are better customers. It launched a series of social media contests and, during the eight weeks following each event, LoyaltyOne tracked the transactional activity of participants who engaged in the events and compared it with that of a control group of non-participating members. Post-contest, the engaged members spent 15 to 30% more with Air Miles partners than their non-engaged counterparts.

But integrating social into a loyalty program is still in an experimental phase for most enterprises. Currently, the channel is more of a value-add, and marketers continue to rely on traditional communications such as email and postal mail while figuring out where newer channels fit into their loyalty propositions.

“We continue to develop new marketing channels, but email still is our primary direct communication channel with members,” says United's Krolick. “We've moved away from batch mailings and now certain activities trigger emails, like ‘book a flight, get an offer for a hotel room.' We're testing several ways that social media can work as more of a servicing tool, say, as a way to update people on flight changes. So we're looking at ways it can fit into our customer service model. How can we use social media to improve the experience for several different types of customers?”

As marketers struggle to make theirs one of the eight odd loyalty programs the average consumer bothers with, they might ask themselves another question: Am I forced to reconstruct my entire loyalty framework to adjust to a changing customer? It might be that customers want what they've always wanted, and technology is challenging marketers to finally deliver it.

In the book How to Win Friends & Influence People, Dale Carnegie compiled a list entitled, “Six ways to make people like you:”

1. Become generally interested in other people. (Research.)
2. Smile. (Involve customer service.)
3. Remember that a person's name is to that person the sweetest and most important sound in any language. (Personalize communications.)
4. Be a good listener. Encourage others to talk about themselves. (Social media interaction.)
5. Talk in terms of other people's interests. (Relevant rewards.)
6. Make the other person feel important—and do it sincerely. (Prestige versus points.)

The book was published in 1936. Even in a digital world, the nature of loyalty has not changed so much as the tools and resources that marketers have to attain and retain it.

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