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  • Defining Loyalty

    By: Karen Webster on June 18th, 2008

    Quick, someone grab a Websters.

    Because I want to talk about the crux of my current conundrum with loyalty programs (as they are now architected). What are these programs trying to achieve anyway? My economist friends say that they are all about the “lock in” – so reeling in customers with the promise that sometime in the future they will get something of value that can be had in exchange for the points that are accrued. (check out Loyalty Cards and Polymorphic Equilibria). And yes, I looked it up to be sure what it meant too.

    But for most people today, that payoff is “too little too late” – with many soured by the experience of trying to redeem air miles. But these sorts of programs are relatively easy to architect and are being positioned as “table stakes” for most retailers today. So at what point do participants start to feel like hostages instead of happily rewarded consumers?

    More difficult but more necessary – at least in my view – is creating a customer experience that people value enough to make them want to tell their friends and the kind of loyalty that will make them want to stick with that retailer for life. Wal-Mart does not have a formal loyalty program, yet the consistent experience they deliver to customers who seek EDLP keeps people coming back on a regular basis (so much so that they are and have been the world’s largest company since 2001). Apple has no formal loyalty program, but their reputation for innovative products with cool designs keeps people buying their product (including a $700 iPhone) and packing the Apple stores. Neiman Marcus (whose innovative loyalty program is really the gold standard) does not rely on it to keep customers loyal, but rather to create the feeling of being a member of a really exclusive club—a club that’s hard to get into and that once you’re in, you never want to leave.

    And, speaking of Wal-Mart, Colloquy’s recently published Retail Loyalty Index ranked Wal-Mart as the most dominant retailer for shopping frequency in all categories (including department store) but at or near the bottom when it came to customer loyalty. So, I have to say that I am admittedly a little perplexed over what is meant by “customer loyalty.” Colloquy’s report was compiled after surveying 3,000 consumers across 6 demographic segments to determine the brands to which consumers are most loyal. Results are presented in the aggregate (e.g. overall loyalty across all consumer segments) and by merchant type (e.g. personal care, department store, mass merchant, grocery).

    To quote the survey takeaway: “The survey results demonstrate that, while everyday low price tactics successfully build sales through frequency, this success comes at a cost. With the traditional marketing mix taking a back seat to a relentless focus on price, a marketing strategy focused solely on sale prices and promotions not only faces a diminishing return but can also actually breed disloyal customers. … Simply having twice the number of locations of your competition, it seems, does not guarantee loyalty.”

    This is where I get lost. People shop at Wal-Mart more often than the stores that they feel most loyal to? Sort of makes you wonder what loyalty means to those folks. The survey asked respondents to define it as a willingness to recommend a retailer to your friends. A look at Wal-Mart’s annual revenues suggests that an awful lot of those people are suggesting it to their friends. The notion that “marketing strategies based on sale prices and promotions” breed disloyal customers rings sort of hollow when (a) most loyalty programs are really price discrimination schemes anyway and (b) Wal-Mart overshadows the second largest US retailer by a factor of 4. It’s hard for me to understand what price Wal-Mart is paying as a result of having created these so-called “disloyal” customers.

    I know, I’ve talked about this before. But it’s worth the revisit: There is a loyalty frenzy going on today that has perhaps lost sight of the real reason that customer loyalty is such an important business objective. Keeping customers loyal is critical to the overall vitality and tenure of a business. Loyalty programs that simply operate as a business veneer don’t do much to further achieve those objectives.

    Just ask Wal-Mart.


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