Demystifying the Process of Building Loyalty

“Loyalty” is the buzzword that has been sweeping through e-commerce and online media Web sites like Attila the Hun through Gaul.

All the major online research firms recommend some form of online customer loyalty program to amortize acquisition costs. Industry trade shows and conferences are rife with seminars and tutorials on the subject. Online loyalty even makes the nonfiction best-seller list in the form of books like Mary Modahl’s “Now or Never” and Seth Godin’s “Permission Marketing,” both of which are essentially about identifying, acquiring and keeping valued customers — i.e., making them loyal.

The reason behind all the loyalty commotion is simple: Too many nascent e-commerce and media sites have been spending with reckless abandon simply to acquire eyeballs or one-time users.

According to Jupiter Communications, New York, 93 percent of all retail sites currently run promotions, with only 26 percent bothering to track repeat customers. In other words, the vast majority of sites have been driven, often by investors, to grab as many unique users as possible, and leave the tracking until later.

Those times are clearly over. The problem, of course, is companies are spending much more to acquire customers than can be justified by purchase or viewing levels. Sites find themselves in price-driven environments in which customer disloyalty is rampant. Nearly three-quarters of all satisfied Web buyers indicated a willingness to switch e-tailers, according to Forrester Research, Cambridge, MA.

As a result, sites are scrambling for ways to create programs to drive some fuzzy notion of loyalty. What they really need, however, is to step back and realize their real objective is to drive consumers through the customer life cycle and recognize the parameters therein. Why is that important? Because it has been proved that loyal customers deliver higher long-term purchase patterns or viewings, vital referrals and higher margins.

Not surprisingly, the market today is flooded with online loyalty companies and experts, all claiming oracle-like understanding of the subject. You can choose from companies offering tack-on airline miles, points programs, sweepstakes, e-mail campaigns and dozens of other promotions. In addition, a growing number of online loyalty software programs offer Internet-enabled solutions to track, profile and personalize communication with customers, and nearly all of them offer some form of consulting. So, what works?

The answer is all and none of it. Too many sites have run into the arms of one particular loyalty solution or another without first understanding what they need and what they’re getting. Nearly all the available loyalty alternatives can provide value if they’re used strategically, with a clear understanding of the target customer, and within the context of an ongoing campaign that happens online and offline. Yet few sites apply these simple marketing maxims, assuming instead that one-off promotions or network currency programs alone deliver loyalty.

The source of the problem lies with a fundamental misunderstanding of what online customer loyalty is and how it differs from retention. Essentially, retention is about driving behavioral change so someone comes back to your site again and again to earn points, play a game, whatever.

Loyalty occurs when consumers accept the site and its products as important. They not only come back to your site but also tell friends about it and bookmark it. Understanding these basic differences between loyalty and retention greatly influences the structure, tactics and objectives of any loyalty-marketing program.

The next step is to do some top-line analysis of your online customer base. Conducting proprietary customer loyalty research is the best alternative; although, much information can be gleaned from existing research and site data. Forrester Research provides useful online consumer behavioral segmentations that sites can blend into relatively inexpensive Web survey and data gathering techniques to create increasingly honed loyalty marketing programs.

This knowledge of the online customer is critical since it may provide a strikingly different profile from that of customers offline and is vital to creating cost-efficient strategies and tactics to achieve repeat purchase and branding objectives. Without it, sites are shooting in the dark in terms of loyalty marketing dollars.

Next, look at the business model. If you’re a car company with a long purchase cycle, your online loyalty tactics will be quite different from that of an online newspaper trying to drive page views. In the first instance, you’re about lifestyle and building relationships, or attitudinal change. It is largely a branding exercise in which loyalty is paramount, implying all sorts of unique tactical possibilities.

In the case of a newspaper, branding is certainly a priority, particularly when translated into churn rate, but a media site also has keen interest in simply driving repeat visitors, regardless of how intrinsic the site is to their lives. As a result, a newspaper loyalty marketing campaign will have its share of loyalty components but will have a much larger number of retention tactics. The primary objective is clear: repeat traffic at a high volume.

The point of this is that once you truly understand your online customers, your online business objectives and the difference between acquiring customers, keeping them and making them brand-loyal, you will have the tools to create a loyalty marketing program with a return on investment that should easily justify up-front costs.

There’s obviously no secret to the process: It’s simple, good business sense based on common offline practice. Nevertheless, it seems to be a difficult lesson for many Internet ventures. Even many major offline companies that conduct large-scale consumer behavioral studies sometimes fail to segment the online population from the rest.

Certainly, this data chasm will close as Internet marketing matures, but in the meantime, large numbers of companies will continue to sell on the Web with little or no idea of who their consumers are. They will try to glom onto some form of an idealized loyalty program, when what they should do is a simple evaluative exercise and some homework.

Online loyalty is not rocket science, but it does require some basic groundwork to make it successful. Hopefully, more and more companies will realize this and stop wasting their loyalty marketing dollars.

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