Loyalty programs: what works, what doesn’t

April 15, 2010 at 8:00 am (News)

By Jarrett Paschel, Ph.D.

It really is quite enlightening to head to Wikipedia and look up the various definitions of loyalty.

The first entry under loyalty reads: Loyalty, also called allegiance or truth, is faithfulness or a devotion to a person or cause.

In the second definition, before discussing weighty topics such as Loyalty and ethics and Loyalty in the Bible, we find Loyalty and Marketing, which is defined as follows:

The practice of providing discounts, prizes, or other incentives to encourage continued patronage of a business. Generally, loyalty programs are considered less expensive to maintain than allowing customer defection or “churn.”

Sandwiched somewhere between allegiance or truth and the philosophical foundation to ethics we find the marketer’s version of loyalty: “Hey Tommy boy, toss a couple of coupons her way so next time she might think about, uhh, you know, coming back!”

In other words, loyalty programs are thought by many to be the least costly method of trying to get your customers to come back. Perhaps not surprisingly, the least costly methods are often the least effective.

We’ve been listening to frustrated consumers complain about retail loyalty programs for years, so we were not surprised that our recent research confirmed this position. Looking at the chart we find that 74 percent of consumers somewhat or strongly agree that “retailers need new and better ways of rewarding loyal customers.” Moreover, the statements below that received scores above 40 percent, only two of the seven are positive.

Clearly something needs to change.

But what should change? And how?

From our perspective, consumer loyalty strategies in the retail arena should be defined as follows:

A unilateral and selfless acknowledgement of your organization’s appreciation for your customer’s continued patronage and support with a gift or service of substantive or meaningful value. Ideally, such gifts should be usable or consumable immediately or in the near-term future—as opposed to a carrot dangling from above.

These gifts or rewards need not be obviously monetary in nature, such as granting your customers access to expedited security lines at airports. But the bottom line is that true loyalty is driven by something beyond regular discounts or reward points (i.e., airline miles). True loyalty is about making your customer’s life better in a meaningful way, however small or large the gesture may be.

We believe current loyalty programs can be roughly sorted into three categories:

1) Routinized:

These are the expected discounts based on commonly held consumer beliefs regarding the nature of economic transactions. Consumers view this loyalty as an inducement or a “tit for tat” relationship not dissimilar from volume discounts. The rewards here are viewed as almost meaningless. As one consumer observed:

What is the point of the loyalty club card savings when every single wine in the wine department is always on the “club card savings price,” not to mention half of the entire frozen food aisles? It becomes some stupid hassle to go through just to ensure I get the real price. Besides, whenever I forget my card the cashier just swipes hers…

This category is the least successful at driving both loyalty perceptions as well as continued patronage. Honestly, is this as good as we can do as an industry?

Examples: Grocery store loyalty cards, automatic cash back savings (i.e., Discover card’s 5 percent program), x percent savings for the use of the retailer’s credit card.

2) Incremental/Deferred:

While somewhat effective at driving continued patronage, these programs do not necessarily drive true loyalty. These programs are typically structured around the idea that repeated visits result in gradual accrual of ownership of a meaningful reward of monetary value. The term “gradual accrual of ownership” may sound awkward, but it was not that long ago that frequent flyers would be rewarded with actual tickets that could be traded in the open marketplace.

Yet while these programs might encourage continued patronage over time, they do not drive permanent patronage, as evidenced by the fact that while consumers do collect airline miles—often across a variety of airlines—the vast majority still purchase tickets based on which airline offers the best prices or the most convenient scheduling. Collecting miles is meaningful and fun, but it rarely reminds the consumer of the passion the brand maintains for its customers.

Likewise, what does it mean for consumers when nearly every single airline—as well as most credit cards—award loyalty points?

Examples: Airline miles programs, travel rewards programs, “Every X meal free” cards, etc.

3) Substantive:

Finally we arrive at the most effective loyalty strategies. These are what we term substantive loyalty programs because they drive loyalty via innovative methods of surprise and delight, as well as more general methods of making their customers lives noticeably better.

To be certain, the various airline elite status programs share elements in common with deferred loyalty programs, but here the rewards are different because they improve their customers’ quality of life on a regular basis. As opposed to airline miles, which many people collect in the same manner as the now dated S&H Greenstamps, airline status is all about quality of travel—and, by proxy, quality of life. Access to preferred security lines, free upgrades, better customer service, and access to private lounges all encourage more permanent loyalty behaviors. As most seasoned travelers come to understand, you pick one or two airlines and stick with them—even if it means that you are often forced to forego the convenience of a non-stop route.

But the best loyalty programs channel the human desire for surprise and delight with gifts of meaning and significance.

Examples: Here we find that the best-in-class examples are not really generalizable or classifiable precisely because of their unique, customized nature. Consider the following example from a consumer we recently interviewed:

Despite the fact that I love to collect my Starwood points, there are a few hotels that I always stay at even though they don’t offer reward programs.

One hotel really stands out. Upon checking in, I am often upgraded to a larger room, though to be honest that’s not such a big deal…What’s really cool is that when I get to my room there’s usually a half-bottle of champagne, a box of chocolates and a personal letter of thanks from the hotel’s manager, along with an invitation to a complimentary dinner and a couple of drink tickets. Honestly, who would prefer points to this kind of treatment?

Moving away from the travel industry, consider the following scenario: You have become acquainted with the manager of the wine department at your local grocery store. He has helped you pick out wines on numerous occasions. One day he walks up and says, “Hey I’ve got this great new wine I would love for you to try, it’s one of the best Italian wines I’ve had in ages.” While telling you this you watch as he scratches the $35.99 price tag off and replaces it with one that reads $3.99…he ends the interaction with a well-timed, “Let me know what you think.” After such a display of generosity and the closing remark all but requires one to continue the relationship.

Several best-in-class food retailers begin every month by sending all of their customers on their mailing list a coupon good for something of bona fide value for free. Past examples include lobster legs, a rib eye steak, a large bottle of Tide, and a pie. We’ll take the steak any day.

And how about your favorite restaurant for taking clients to dine? Why should it seem improbable that they start every meal—whether you are with clients or without—by serving you a couple of bottles of complimentary champagne?

The Upshot?

All told, the human desire to demonstrate loyalty via the ritual of continued patronage is a near universal feature of all modern economies. Your customers are begging to award you their loyalty—in part because it reduces the effort spent always having to make choices. This makes it all the more puzzling that today’s retail landscape remains littered with the dusty remnants of broken loyalty programs. Surely someone can manage to fill this void?

Dr. Paschel is the vice president of strategy and innovation for research consultancy The Hartman Group. Photo by joelogon.


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2010 NCH Coupon Facts Report Now Available

April 14, 2010 at 11:42 am (News)

As Consumer Packaged Goods (CPG) marketers in 2009 faced the pressure of maintaining sales and fending off private label competition in the midst of the worst recession since the Great Depression, they strategically increased their use of coupon promotions. As a result, CPG marketers in the U.S. distributed a record-breaking 311 billion coupons in 2009 – an 11% increase over the prior year and the largest single-year distribution quantity ever recorded.

Naturally, consumers were more actively seeking ways to save money during these difficult economic times. More than 88% of consumers reported planning their shopping lists with coupons, up ten percentage points from pre-recession levels. In addition, 58% of consumers reported that they were maintaining their level of coupon use, and 30% reported using more coupons than the prior year. Nearly one in three consumers reported being more careful to bring their coupons to the store, and six percent of consumers even reported that their economic situation had caused them to start clipping coupons, a shopping behavior that they had never done before.

Consumers’ new frugality caused them to respond positively to the greater availability of coupon offers. In 2009, consumers redeemed 23% more coupons than the prior year. This was the second-highest increase in year-over-year redemption volume ever recorded, bringing the total number of coupons redeemed to 3.2 billion. As a result, consumers saved nearly $3.5 billion with coupons, an increase of $800 million (or nearly 30%) over the prior year.

As these new behaviors become ingrained in consumers’ shopping habits, frugality will continue to be the norm. Among those consumers who reported clipping more coupons or being more careful about bringing coupons to the store, nearly three-fourths indicated that they would continue these behaviors in the future, even when their personal economic situations improve.

With consumer interest in coupons remaining extremely high and frugal shopping habits becoming permanent, both paper and digital coupons are expected to be important techniques that marketers will use to reach and motivate consumers in 2010 and beyond.


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April 8, 2010 at 1:46 pm (News)

We have just learned that COUPONEX met with a local retailer and word on the street is they have agreed to work together on the pilot.  More news will be released when it is known.

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COUPONEX Partners with EPOS

April 8, 2010 at 1:14 pm (News)

A joint venture agreement has been signed between COUPONEX and EPOS – a division of Quorion.  Details of the agreement were not disclosed however sources indicated that both COUPONEX and EPOS are looking forward to a long, prosperous working relationship for both sides.

EPOS serves convenience stores, hospitality, entertainment and fine dining industries.  In a time when dollars are tight, merchants need a way to reach the consumer in a meaningful way, and saving money is meaningful.

More information will be released when it is known.

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Paper trail – Coupon counterfeiters fake it while they make it

April 1, 2010 at 6:35 am (News)

February 2010

Coupon counterfeiters fake it while they make it, and meat brands pay the price. Here’s how processors can protect themselves.
By Kevin Knapp, contributing editor

Thanks to the latest technologies, consumers’ use of coupons is up — way up. And thanks to the latest technologies, coupon fraud is also up — way up.

Those who are considering adding couponing to the marketing mix, or those with coupon programs already underway, should be aware of new challenges that come with couponing in the Internet age. Many marketers are rapidly becoming enamored of the lower costs and new capabilities that electronically delivered coupons offer, including the ability to collect consumer data, more narrowly target offers and convince consumers to linger on their Web sites.

Also, consumers seem to like Internet coupons. According to data from coupon clearinghouse NCH Marketing Services Inc., the average redemption rate for Internet coupons was 16.6 percent in the first half of 2009, compared with a redemption rate of just 1 percent for coupons distributed through free-standing inserts (FSIs).

The downside is that Internet coupons are more susceptible to fraud than traditional printed coupons. Computer-savvy individuals can alter the graphics files of Internet coupons to change the amounts, the expiration dates or even the product for which the coupon was issued. With readily available hardware and off-the-shelf software, altered coupons can be printed and reprinted, e-mailed to others, sold on auction sites or posted to a growing number of Web sites aimed at bargain hunters. Of course, traditional printed coupons can also be copied and altered, but the speed and ease with which electronic files can be duplicated has accelerated the problem.

“This has been a record year for counterfeit coupons,” says Bud Miller, executive director of the non-profit Coupon Information Corp (CIC).

Unless marketers take some precautions, they may find themselves in a situation like the one faced recently by Ray-O-Vac, a unit of Spectrum Brands Inc. Just before the December holidays, the battery maker issued an online coupon that included few safeguards. The high value of the coupon coupled with the relatively low price of the product made it possible to get free four-packs of batteries.

Consumers soon began to spread the word about misusing the offer. One posting in an online forum read: “Print out as many coupons as you like. Apologize to the cashier for making her scan all those coupons. And enjoy free batteries!”

CIC estimates that manufacturers lose tens of millions of dollars each year to fraudulent coupons. Retailers and consumers also lose out in terms of higher prices. “Once a cashier accepts a counterfeit coupon, someone is going to have to pay for it,” Miller says.

Fortunately, there are many plenty of safeguards are available. CIC and related groups such as the Association of Coupon Professionals have developed best practices for minimizing coupon fraud.

First, coupons should never appear on the computer screen; files should be sent directly to the printer. That makes it more difficult for counterfeiters to grab the graphics files and alter them. Second, coupons should never be in a “.pdf” or “.doc” format, which can be easily e-mailed. Third, marketers should avoid high-value or “free” coupon offers. Free offers are especially appealing, as they can be easily sold and re-sold. Finally, coupons should expire within 30 days.

Even companies that follow best practices are not immune to fraud. Last Dec. 17, CIC alerted retailers to a counterfeit coupon purported to be from Tyson Foods. It offered consumers “Any Tyson Bagged Family Favorite Or Anytizers Item” for free, up to a $10.99 value. In January, it was White Castle burgers: a coupon for $3 off a six-count box of hamburgers or cheeseburgers. Neither company issued such a coupon, but they will be dealing with redemptions of the bogus offer at least until the coupons reach their phony expiration dates of Dec. 31, 2010, and Oct. 15, 2010, respectively.

How Hormel does it

Hormel Foods has emerged as an industry leader in Internet coupon usage and fraud prevention. The company works with multiple coupon-related industry groups, including the Association of Coupon Professionals (ACP), the Joint Industry Coupon Committee (JICC) and the Coupon Information Corp. (CIC), on which it holds a board seat.

“Supporting industry groups gives us the opportunity to more quickly understand issues and new opportunities and to impact best practices,” says Scott Weisenbeck, brand integrated marketing and planning manager for Hormel. “With up-to-date information, you can make the right decision for your company related to internal practices and policies.”

Weisenbeck says that by incorporating many of the suggestions made by CIC, Hormel’s Internet couponing has become an important source of customer information. “Consumers download coupons after creating an account, which provides Hormel Foods with consumer data” that ordinary coupon use would not provide, he explains.

This has led to a “significant” expansion of Hormel’s consumer database as well as increased visits to the Hormel Web site, more page views and more return visits. It has also improved Hormel’s ability to more quickly deliver timely coupons to consumers based on specific usage occasions. “For example, we can send consumers coupons for Hormel Party Trays just before the 4th of July,” Weisenbeck notes.

Hormel also adds product recipes or ideas for using the product below each coupon with the aim of cross-selling products that match the target consumer’s needs.

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