Small Biz Has Big Loyalty Potential

Loyalty marketing programs, a strategy once embraced only by big consumer marketers to recognize and reward best customers, are cropping up all over the business-to-business arena. Unfortunately, however, though the potential exists to copycat the systematic approach to improving share of customer in the small business sector, big business continues to disregard it.

It is a missed opportunity no matter how you look at it. With a growing community of nearly 24 million businesses each with fewer than 500 employees, few other markets are as primed for loyalty strategy.

Suppliers traditionally have not recognized the need to market to small businesses differently than they do to big businesses. Small business owners participate in loyalty programs aimed at consumers in the dearth of supplier understanding of the segment. There is no excuse for this ignorance. The Paredo rule is most applicable to BTB activity. Eighty percent of a company's clients are small businesses whose orders account for 20 percent of the company's income.

Here are some of the ways loyalty works for small business:

· Purchase value and frequency are significant. Because a business purchase often carries a high price, there is higher value to the seller per transaction. The buyer may be purchasing less because it is a small business, but what it buys is not inexpensive. Small businesses also have high frequency of purchases, probably because of cash flow, high inventory costs and space considerations.

· Small businesses may have shallower pockets than their overgrown cousins, but companies that sell to them have the opportunity to capture 100 percent share of their business easier than among multibillion-dollar players.

· Account for smaller transactions and possibly sporadic spending patterns. Tailor point schemes accordingly or risk losing small business owners out of frustration over the time it takes to reach an award level.

· Small businesses typically mistrust suppliers' focus and complain that they are neglected and ignored because of their size. Most will never be mega-companies, and their experiences have taught them to forget about special recognition.

· A loyalty program reverses this perception. Account service is the priority, and the relevancy and frequency of communications delivered through a loyalty program will improve sales coverage of smaller accounts through many media outlets. An online presence, for example, increases the dialogue between buyer and seller and is data-driven. Sales histories, if nothing else, are ample fodder for launching customization and beginning to realize incremental growth.

· Loyalty program sponsors generate incremental margin returns. If incremental revenues can be pulled from the small business sector without any increase in sales, general or administrative expense, a substantial incremental margin results. Greater incremental margin return translates to a high return on investment on the loyalty program.

· Reward funding rates are substantial. There is more margin to play with in business loyalty marketing than in consumer strategy, so program operators are able to set higher funding rates.

· Rewards benefits attract new customers. According to Warrillow & Co., Toronto, 34.3 percent of small business owners do not use the services of a loyalty program sponsor before becoming members of the program. After joining the program, 16.3 percent use the program sponsor exclusively.

The fourth edition of Warrillow & Co.'s small business report — “The Impact of Loyalty Programs on the Buying Behaviors of Small Businesses” –is based on interviews with 400 small business owners in North America who use loyalty programs and define what features they want for personal use, business use or both.

Sixty percent belonged to more than one loyalty program. Most were associated with co-branded credit cards. Reward additions from giant financial services institutions are generally weaker than stand-alone loyalty concepts. Small business owners, however, do not have the choices that consumers have. They seldom have the option of spending on a private label card that rewards them with goodies they prize. There is no equivalent to Neiman Marcus' InCircle for the small business owner.

Reasons to shift loyalty activity from consumer to small business programs must be communicated to small business owners.

Huge credit card issuing banks faced this challenge. It was chiefly one of structure and communications. Small business credit cards offer different advantages, including larger lines of credit. Small business rewards programs, such as those from American Express, enable the account holder to use rewards for business or pleasure, and within business, for the business owner, employees, clients or prospects. American Express settled on these benefits after researching the small business market. MasterCard recently conducted its own research and boosted the pluses of Business Bonuses membership.

And because small business owners have been neglected by business marketers, are growing in number, are increasingly competing with one another and face challenges so different from consumers or larger firms, they are crying out for true loyalty relationships not rewarding on purchase activity alone.

Best Practices for Building Loyalty

Create the perfect blend of hard and soft benefits. Hard benefits are the tangible, an economic value or reward such as a promotional currency. Soft benefits are the emotional recognition aspects of a loyalty program, including special information, access and services. A combination of these rewards will diminish the distrust among small businesses by giving them something valuable for free and providing the recognition and personalization that shows them they are important. The latter is difficult for competitors to copy.

One U.S. telecommunications company excels in this area. Facing deregulation that would open its markets to competitors, the company launched a loyalty marketing strategy to retain small business customers. The points-based program rewards customers in relation to their spending. Points are redeemed for credit on their telephone bills or business-related products and services. Soft benefits include exclusive events and partner offers.

Do not rely solely on data. Build a dialogue where the data leaves off. Any business hesitates to offer a lot of data about how much and with whom it spends. But when companies are offered something in return for their patronage, they are more likely to discuss their buying behavior. A small business, for example, may reveal its plans for expansion or intention to change its equipment.

Gain permission for strategic advantage. A loyalty program by its nature allows for the integration of customer databases across channels. Using the data collected puts the big company at an advantage in increasing its share of customer.

In the telecommunications case, all information from the dialogue between the buyer and seller is linked to member accounts so the program's sponsor can address the needs of each business customer and strategically influence buying decisions.

Pursue continual customer development to increase share of customer over time. Do this by:

· Uncovering drivers of current behavior such as when, why, what, how and from whom they buy.

· Identifying obstacles to desired behavior, such as price and account service.

· Blending hard and soft benefits to create incentives that overcome as many obstacles as possible.

Because the small business sector historically has been underserved, there is often insufficient data to segment and launch a program. Begin with the available transactional information and debut a program with a compelling value proposition. Customers respond to recognition and reward by disclosing more about what they need so businesses can do more for them to earn their loyalty.

Small business owners are not the only ones to bring into the loyalty marketing fold. Even though expanded sales coverage is a byproduct of a loyalty program, it is a must to presell the program to the sales field. Springing it on a sales force without warning may cause them to think their volume is being taken away.

Contract pricing, payment on credit and regulatory issues may interfere with the success of a loyalty marketing strategy, too, and must be given serious consideration. It may be necessary either to introduce a program without renegotiating price contracts or refrain from launching a program altogether.

If the decision is made to proceed with the program, realize that decision makers within the target companies may change, though probably with less frequency than at a big company. Keep track of management changes within the customer's organization, especially as it grows.

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