This was updated when I got the final part of the story in my e-mail today…..
Sperry, Hutchinson, and the Hotel, Part I.
Are customer loyalty programs a good thing for retail? Should you have one? Do you participate in any? In part two of this article, I’ll tell you a story about a hotel’s loyalty program from my own experience, and share with you both rational and emotional conclusions.
You will, of course, decide for yourself.
My story starts with a hotel in Austin, but the story of loyalty programs goes back to 1896, when Thomas Sperry and Shelly Hutchinson came up with an idea to improve retail cash flow.
Sperry and Hutchinson sold S+H Green Stamps to retailers, who gave them to customers that paid in cash instead of using store credit.
The First Loyalty Program
Customers flocked to stores that gave stamps. Filling stations, gift shops, and grocery stores gave them as bonuses with every purchase, based on the dollar amount of the purchase.
Eventually shoppers saved up books of stamps and redeemed them for gifts from the S+H Green Stamp catalog. Stamps could be redeemed for anything from furniture, to appliances, to life insurance. During the 1960s the S+H catalog was the largest publication in the US, and the company issued three times as many stamps as the US Postal Service.
S+H made money selling the stamps, and even more money because so many stamps were never redeemed. (Note to loyalty program planners: paper gets lost. Computer records don’t).
During the recession of the 70’s when customers were afraid that each dollar they spent might be the last for a while, and retail sales were taking a beating, retailers cut every available cost of operation. The ongoing expense of Green Stamps became hard to justify. When the competition dropped the stamps and lowered prices by the same percentage, thrifty shoppers voted with their feet to forgo the reward and take the lower price.
By the time Sperry’s and Hutchinson’s heirs sold the company in 1981 only about 100 stores were still offering the stamps.
Why is Customer Loyalty Important?
Fred Reichheld, author of Loyalty Rules, says an increase of customer retention of only 5 percent can result in a 75 percent improvement in customer value.
Reichheld cites other values from customer retention including greater sales, higher profitability, better word of mouth, and the ability to identify service problems earlier.
It’s no wonder that retailers are so enamored of customer loyalty programs.
The simplest loyalty program is the wallet-sized card which can be punched or stamped with each purchase. Buy eight sandwiches and the ninth is free. Stay a dozen nights in our hotel and the thirteenth is on us. Sorry… the hotel story helped to shape my view on loyalty programs, but I’m not quite ready to tell it, yet.
A variation of the punch card is the magnetic card which gets swiped in the credit card reader. It provides discounts on selected items to members of the store’s loyalty club. At least, that’s what they want you to believe. The actual purpose is to record data on your personal purchase habits, in order to tailor future offers that you’re more likely to respond to.
Improve your punch card response rate.
Professors Xavier Drèze of Wharton, and Joseph Nunes of USC’s Marshall School of Business have concluded in a paper titled The Endowed Progress Effect that people are more likely to buy eight sandwiches to get the free one if you increase the total required to ten, but give them three punches on their first purchase.
To quote the study: “By converting a task requiring eight steps into a task requiring 10 steps, but with two already complete, the task is reframed as one that has been undertaken and incomplete rather than not yet begun. This increases the likelihood of task completion and decreases completion time.“
Are you rewarding the wrong customers?
Many credit card companies are now offering airline miles when you apply for, and are granted their card. It’s a variation on those first three punches on the ten punch card.
But again and again it’s been statistically shown that the least loyal customers are those who are drawn to you because of special pricing. The special pricing usually kills profitability. The last thing you should attempt is to make an unprofitable customer loyal.
Does this hotel offer airline miles?
Are you a member of any airline’s frequent flyer program? Several of them? Do you use them all? So, which of the airlines are you loyal to? Or, like most of us do you shop for best price and purchase that ticket?
When all of the competitors use the same rewards, we’re back to a level playing field. Frequent flyer miles are now part of the airlines’ cost of doing business. Having one won’t increase sales, but not having one may actually decrease them.
Can you buy customer loyalty?
Or, more specifically, can you purchase customer loyalty with premiums and discounts?
This is the basic flaw in the whole concept of customer loyalty programs, and a hint of the conclusions to expect in Sperry, Hutchinson, and the Hotel, Part II.
Sperry, Hutchinson, and the Hotel, Part II
We ended Sperry, Hutchinson, and the Hotel, Part I with a promise of Chuck’s personal hotel story, and posed this question: Can you buy customer loyalty?
Let’s start with the hotel story.
I have business in Austin every few months. A couple of years ago I started staying at a hotel on South Interstate 35. It was convenient. The staff was always nice. And they had free, high speed wireless.
Now truthfully, their wireless had issues. At one point I had to explain to the night auditor how to re-initialize the router. But, as I said, the people were nice, and it was close to the places I needed to be.
As I checked out at the end of my third stay, the desk clerk handed me a punch card with three of twelve punches already marked for the three nights I’d been a guest this trip. He told me they were implementing a new loyalty program, and explained that after twelve paid nights, the thirteenth was free.
Remember, the card was not a factor when I decided to stay. I was satisfied with my previous visits, and would have chosen this hotel again anyway.
But, there is something powerful about the word “free.”
I kept the card.
Last month at the conclusion of another Austin trip, the manager on duty ran my Visa, printed the receipt, and informed me that since I’d booked this stay on-line they couldn’t punch my card.
I swear, until that very moment, the card had been of minor consequence, but she was taking away my punches. I got indignant. I informed her that I had booked online every time I stayed at her hotel. I wondered why this had never been an issue in the proceeding three years.
She told me it was “policy.”
I understand that I’m being petty. I know this is an emotional reaction, rather than a logical one. But truthfully, I feel that I’ve been wronged. And much as I’d like to think I’m above making purely emotional decisions, until I get an apology (and my three punches), there’s an excellent chance that I’ll be looking for a new hotel for my next trip to Austin.
Loyalty program? I had chosen the hotel before they even started their loyalty program. I made the choice without any additional incentives.
Hotel incentives are common. They range from free continental breakfast to refrigerators in the room. And once those incentives have been offered, they become part of the negotiation. They were what the hotel was willing to do offer in order to get your business, and what you can expect them to deliver when you accept their offer.
Consider a couple of this hotel’s competitors.
Motel 6 offers a clean, comfortable room, with free color TV and free local calls.
AmeriSuites promises that every room will be a suite. They commit to a microwave and refrigerator in each room, high speed Internet access, free hot breakfast, and available meeting rooms.
If you accept the Motel 6 offer, you won’t expect a microwave and refrigerator, or high speed Internet, or hot breakfast. You won’t even expect to find a hair dryer or clock radio. Will this disappoint you? Probably not. Motel 6 never promised these amenities.
But since they did promise television and telephone, you may justifiably feel that you didn’t receive all you had been promised if you check in and don’t find them. (Translation: “I have been cheated.”)
Remember in Sperry, Hutchinson, and the Hotel, Part I we noted that since all major airlines now offer frequent flyer miles, and since none of those airlines dares to eliminate their frequent flyer program, they’ve effectively become trapped into a “keeping up with the Joneses” marketing program that doesn’t promote loyalty.
Frequent flyer programs not only don’t lead to additional future sales, they don’t even induce additional current sales.
Do any loyalty programs work?
Perhaps. How should we define “loyalty?” By the time we’ve eliminated sentiment and devotion to family or sovereign, the dictionary leaves us with “faithfulness to commitments or obligations.”
Humm. Is a customer ever obligated to do business with us? Perhaps loyalty is the wrong term.
The original loyalty programs did what they should have. They rewarded the company’s best customers for continuing to do business with the company.
Sperry and Hutchinson’s Green Stamps rewarded cash payments. The bigger the payment, the bigger the reward. Frequent flyer programs originally rewarded the airline’s most profitable business travelers for flying that particular airline.
But as soon as programs like these become commonplace, they no longer differentiate your business. They no longer attract your most profitable customers. Instead, they allow your least profitable customers to sell out your least profitible services. They become just another cost of doing business. And make no mistake; loyalty programs cost a lot to maintain.
The hotel in my story discovered their loyalty program killed profitability when it was combined with other offers (in this case, on-line discounts). They solved for their poor planning by refusing to honor the agreement. I promise, this will cost them more than one free room night somewhere down the line. I can’t be the only person who books online.
If we don’t call it a loyalty program, can we still keep our best customers choosing to do business with us?
Yes, we can. Some are complicated and require committments to technology. Some are amazingly simple and you should be doing them anyway.
We’ll examine those solutions in the final installment of Sperry, Hutchinson, and the Hotel.
Sperry, Hutchinson, and the Hotel, Part III
In Sperry, Hutchinson, and the Hotel Part I and Part II we looked at the history and common pitfalls of customer loyalty programs.
So far, I’ve been less than enthusiastic. Not about the concept, you understand, but about most of the programs in use as we commonly see them implemented. There are two customer loyalty programs, however, that I believe work well.
One is transactional in nature, and one is relational. They each take a major commitment to massive amounts of work. They each must be customized for your company, and once done will never fit any other company.
As you design your loyalty program. . .
The most important metric you need to track is customer retention. How many customers are defecting? How many keep coming back?
The second most important metric is profitability. Your program should never allow unprofitable customers to become eligible for rewards.
Remember the advice of Michael Leboeuf in The Greatest Management Principle in the World: behavior that gets rewarded, gets repeated.
If you want to retain customers, let them feel rewarded for doing business with you. If you want to retain customers, don’t merely talk retention while rewarding your salespeople for “prospecting.”
The Club Card – The Transactional Solution
Points systems worked well when one company had them and the others didn’t. When everyone has them, they’re just an expensive cost of doing business. But let’s take a second look at those magnetic club cards offered by many of the nation’s grocery chains.
The club member swipes the card through the stores’ credit card reader. This simple act not only identifies the bearer of the card, but also gives the store valuable information about the member’s purchase choices.
Consider the possibilities. The MegaLoMart discovers through data mining that Chuck has no particular preferences when choosing paper towels, or charcoal briquettes, or soft drinks, but he always buys Campbell’s Cream of Chicken soup. Do you suppose that a customized offer of Campbell’s Cream of Chicken at a savings of 30 cents a can might get Chuck back into the store? If I bought six cans under this offer, the store would have given up the profit on six cans of soup in order to get me to spend another $150 on other grocery items.
Would the soup offer work for everyone? No. Only those people who were brand loyal to this specific company are likely to respond. But a well programmed computer system, looking for such predictable choices could find, and customize, different offers for each of the store’s best customers.
And since a program such as this is fully customized, no competitor could offer it – at least, not in the same way.
How much would it cost to individualize offers to your best customers? Perhaps more importantly, how much will it cost to let your competitor do this if you don’t?
The Small Business Model – the Relational Solution.
True customer loyalty is to a differentiated brand. To inspire loyalty, you must stand out from the pack.
True customer loyalty is relational in nature. As relationships grow, we’re more comfortable, and less likely to do business with strangers.
Small businesses will always have an advantage in relationship building. The natural one-on-one help that entrepreneurs automatically offer their customers is difficult for large companies to duplicate.
Relational loyalty isn’t ensured by a rewards program. What ensures relational loyalty is everyday operational excellence.
Don’t stop at learning your customers’ preferences. Learn their names. Learn their children’s names. Learn their birthdays. Learn their sizes, their color preferences, and how often they purchase.
Then, treat them like the valuable people they are. Send them birthday cards. Ask their opinions. Yes, these things cost money. What will they spend with you over the next several years? Most customers not only tend to buy more over the years, they buy more expensive products. The longer they stay with you, the more profitable they become.
As markets mature, the smartest operators will shift their focus from new customer acquisition to building relationships with the good customers whose business we’ve already earned.
And one more thought.
The simplest and most direct way to earn customer loyalty is to recruit loyal customers. If you find the right customers to begin with, your retention rate will increase without spending any more money.
Some customers prefer you to your competitors. Some customers want long term relationships. Some customers are more profitable than others. Some customers spend more and require less service.
Look for customers that have one or more of these characteristics, then earn their business with superior service.