Nordstrom upgrades loyalty program experience

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With the average U.S. household belonging to 12 customer loyalty programs, many best-of-breed retailers are revamping their retention efforts in order to stand out from the crowd.

Nordstrom, which launched a new loyalty program in April, is just the latest multichannel merchant to realize that offering cash back on purchases to frequent customers isn't enough to build the elusive quality of "loyalty." Instead, Nordstrom's new program lets customers design private shopping trips to Chicago or San Francisco and gives them access to a 24-hour fashion emergency hotline, among other privileges.

The new loyalty program "puts Nordstrom in the Neiman Marcus category," said Michael Greenberg, vice president of marketing at Loyalty Lab Inc., San Francisco.

Neiman Marcus' renowned InCircle program is 25 years old and considered the gold standard of customer loyalty programs with offers such as the Condé Nast experience. In addition to hotel and airfare, it includes lunch at the Condé Nast headquarters in New York, a visit to the Vogue fashion closet, a private tour of the Metropolitan Museum of Art Costume Institute's fashion exhibit and a $500 shopping spree at Bergdorf Goodman.

"[Major retailers] can no longer go with a basic rewards program - they have to add experiential benefits to stay ahead of all the other options that are in the marketplace," Mr. Greenberg said.

He said many more retailers have formal loyalty programs today than two years ago. According to a new report from customer loyalty research firm Colloquy, the total number of U.S. loyalty memberships in 2006 was 1.319 billion, up from 973 million in 2000.

Nordstrom isn't the only one looking to up the ante on its loyalty program. Saks Fifth Avenue, Borders and Best Buy have all recently revamped their programs, adding new exclusive privileges.

Still another reason for the increase in experiential benefits is that, thanks to all that competition among loyalty programs, savvy consumers are learning to expect more from the businesses with which they interact.

"What we're finding is that what the customer is really looking for is great experiences that money can't buy," said Roger Ritchie, senior marketing manager for Virgin Entertainment Group and manager of the company's new V.I.P. loyalty program.

The program, which was introduced in October and replaced a frequency card program that offered cash back on merchandise, gives customers the opportunity to meet celebrities in Virgin Megastores and earn backstage passes to concerts and instant prizes when they use their card.

"When customers get these kinds of opportunities, it is worth something to them," Mr. Ritchie said. "We've found it to be totally worth the investment - the program is doing well."

He said Virgin hopes to build its customer base with the program.

Retailers are also turning their attention to retention. Customer acquisition is increasingly more expensive thanks to the rising cost of search engine marketing and postage. At the same time, the cost of launching and managing a customer loyalty program has declined, Mr. Greenberg said.

But is the promise of meeting Paul McCartney or being able to shop for exclusive fashions enough to make consumers use their loyalty cards more? According to the Colloquy's report, of the 12 loyalty cards that the average U.S. household belongs to, only 4.7 percent of them are active.

Kelly Hlavinka, director of Colloquy, Milford, OH, thinks that Nordstrom loyalty program will benefit from the new offerings, especially because the retailer hasn't completely done away with more traditional rewards the earning of points that can be used toward the purchase of any Nordstrom product or service.

"When operators blend hard benefits and soft benefits together, that's where we see better participation rates," Ms. Hlavinka said.

For example, in a recent case study with a multichannel retailer, the blend of hard and soft benefits results in a 10 percent increase in annual customer value over the market where the loyalty program offered only exclusive privileges. A 2 percent to 3 percent increase was seen over the market where only rewards were offered.

The retailer's level of commitment to the program, and not just the offerings, also help determine its success.

"There are companies that are doing more sales from loyalty programs and it is usually companies that have incorporated loyalty into their overall marketing," said Mr. Greenberg.

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