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As loyalty programs become more prevalent, consumers are becoming more savvy about evaluating their benefits.

Active ImageCameron Bayley explores a range of loyalty programs for big and small business, what works, what doesn’t, and how to give customers real value without busting your bottom line.

We all know the loyalty program drill. You go to your regular cafe, buy your latte, a notch is ticked off your coffee card and so many notches later you get a freebie. While coffee cards and frequent flyer schemes are the first to come to mind when you think of loyalty programs, these days they can be found in any business from banks to wine sellers.

The reason for a loyalty program? “Keeping an existing customer is better than attracting a new one,” says Wayne Burgoyne, director of sales and marketing at Hertz, who recently launched a loyalty program for small business clients.

Loyalty programs aim to encourage clients to keep coming back and spending more, and the most common programs involve rewarding customers with free products or rebates based on cumulative spending. “Loyalty programs provide a way to reward customers for changing their behaviour and doing more business with you,” says Dicken Doe, from loyalty consulting company ICLP. He cites a new initiative from a national video store chain as a perfect example. When hiring a DVD, its customers are automatically given a voucher which either provides a special offer on their current transaction or for their next visit, thereby increasing the customer’s current spend, or ensuring they return.

Doe says loyalty programs can provide a structured marketing campaign for small businesses. “You might replace a series of discounts and other offers with a reward currency,” he explains. “So that you know exactly how much people are going to get for particular activities. You can plan a longer term strategy and several activities over time.”

Image Building

Having a loyalty program is also one way of improving your image in the public eye, according to Dr Rebekah Bennett from Queensland University of Technology who recently conducted research into loyalty programs with colleagues from Monash university. “There’s not a lot of difference in cost to a retailer whether they do a discount or a loyalty program,” Bennett explains. “But there’s a huge difference in terms of consumer perception. When you discount a product, you’re actually de-valuing it and there is also a link between price and quality in the consumer’s mind.” Most consumers, Bennett explains, would prefer that little something extra than a discount.

For the Hertz team, creating a loyalty program so businesses rather than individuals could take advantage, was an important part of designing their new program, as was knowing their market. “We think there’s a bit of ‘point’ fatigue around,” says Burgoyne. “We tried to look at this through our customers’ eyes and see what they would find valuable and of real benefit to them.”

They came up with a scheme to reward clients with one free day for every 15 days of rental. To finalise how to structure the program, Hertz conducted market intelligence, focus groups, interviews with both Hertz and non-Hertz customers, and researched up to two years of data. Two things became apparent: customers wanted something of value and a program which was easy to comprehend and use. “We wanted to make sure the prize was easily obtainable,” says Burgoyne, and it was vital customers didn’t have to modify their behaviour. “We’re giving them something in return for their loyalty, they didn’t have to do anything different, just rent with Hertz,” adds Melissa Avard, Hertz’s business centre manager.

Counting Costs

Active ImageWhile giving away a free coffee, flight or day of car rental are all wonderful ideas, the business first needs to make sure they know exactly what they’re up for. “You have to be able to demonstrate that there’s value in the program, that the business can realise it, and that it’s not just some funny numbers that marketing’s thrown up,” says Doe. “I think a lot of companies make a lot of bad assumptions about how much liability they’re going to issue, and how much are they going to see redeemed.”

Bennett agrees, “I think they underestimate the actual cost, so they come up with all these great ideas, not understanding what the true cost to the business is.” Both she and Doe advise businesses to work with someone who can analyse the finances involved and work out the bottom line cost to the business. “Then you work backwards from that to work out how much you allocate,” she says.

Just in case you get in over your head, Doe says it’s important to put a clause in the terms and conditions allowing you to withdraw the program at any point in the future. “It will probably still cost you a lot, but better to go into it well-advised and knowing what you’re doing.” He also advises putting expiry dates on programs.

And while reducing the benefits involved in the program is an option, this should be avoided as customers will have less desire to participate if the perceived value of the program decreases. “You can make it worse for yourself,” explains Bennett, citing recent frustrations with various frequent flyer programs. “You’re better off not having done it in the first place. You’ve got to view it as a long-term strategy. Maybe you’re never going to give up. If you’re not prepared for that commitment, don’t do it.”

Consumer Choice

Bennett and her colleagues’ research found some consumers prefer broad-ranging programs, such as those attached to credit cards, rather than store-specific ones. “They wanted to feel that they had the choice, so they could shop wherever they like, and wherever they shop they still got the points,” she says. “Then they felt they were in control.”

A lot of businesses wanting to provide a loyalty program could benefit from this, Bennett adds. Those who share a geographical location (shopping centre or local strip) or provide complementary services (such as tyre repairs and car washing) can link with each other to provide discounts. “That actually adds a lot more value for the customer,” she says.

Value is key, and as more and more programs appear, customers are becoming very savvy about what’s on offer. “They will actually calculate it out. It’s not an automatic response. Some people actually sit down and do spreadsheets to do the numbers,” Bennett explains.

Doe believes the approach to loyalty programs is changing as businesses start using the data highlighting customer behaviour these programs bring in. “The single biggest change in the last 10 to 15 years for loyalty programs is what people are trying to do now is collect data,” he says. “Everyone used to pay lip service to that, now people really mean it.” Companies such as banks and telecommunication companies already have customer details, while others will use bar-coded swipe member cards to keep a record.

And while the big guns have budgets to offer the big rewards to targeted customers, the humble coffee shop doesn’t need to be left behind. On top of the general coffee card, giving out vouchers recognising customer behaviour—rewarding a sweet-toothed customer with a free muffin, or giving a discount on an additional coffee—can add an extra touch. &ld
quo;The beauty of it to the small chain is, there isn’t a lot of personal contact between business and their consumers any more,” Doe explains. “So if you can use this as a vehicle to deliver that, demonstrate that, there’s another reason why people do it.”

As early response to the Hertz program already seems positive, both from customers and others in the industry, Burgoyne has brief but succinct advice for creating a loyalty program: “The simpler the better. Make sure you’ve done all the costings. Make sure the reward is actually something the customer wants.”

The final touch, Doe says, is being sure it’s not just about the bottom line. “There are a lot of businesses who think we’ll stick it in to solve a couple of customer service problems, but you won’t, that doesn’t work,” he says. “You need to actually care and want to do something for them.”