Thursday, July 08, 2004

Cultural Context in Loyalty Initiatives

A two-part article describing why and how consumer companies that have emotional brand equity need to revise their loyalty initiatives, to move from transaction-based rewards and incentives to relationship-based initiatives.

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Some brands are cultural phenomenona. They serve not just as the counduit to a product or service, but fulfill a deeper, greater need that customers have, one that satisfies a more intangible yearning. In the book <a href="http://www.amazon.com/exec/obidos/tg/detail/-/1591840139">Trading Up: The New American Luxury</a>, Neil Fiske and Micheal Silverstein conducted a survey of “New Luxury” buying habits, and categorized those intagibles into: Taking Care Of Me: Goods that make them feel better about themselves immediately. Connecting: Things that make them feel more attractive, connected, and foster a sense of belonging. Questing: Experiences that make the consumer feel like they’re venturing out, and pushing personal boundaries. Individual Style: Goods and services that provide self-expression and signaling. Loyalty initiatives by companies that provide these intangibles can’t afford to follow the traditional mold of rewards, points and unrelated merchandise.  It’s vital that they focus on extending the overall brand experience into their loyalty services and benefits. I call this moving from Transactional Loyalty to Relationship-based Loyalty. Some brands are cultural phenomenona. They serve not just as the counduit to a product or service, but fulfill a deeper, greater need that customers have, one that satisfies a more intangible yearning. In the book <a href="http://www.amazon.com/exec/obidos/tg/detail/-/1591840139">Trading Up: The New American Luxury</a>, Neil Fiske and Micheal Silverstein conducted a survey of “New Luxury” buying habits, and categorized those intagibles into: Taking Care Of Me: Goods that make them feel better about themselves immediately. Connecting: Things that make them feel more attractive, connected, and foster a sense of belonging. Questing: Experiences that make the consumer feel like they’re venturing out, and pushing personal boundaries. Individual Style: Goods and services that provide self-expression and signaling. Loyalty initiatives by companies that provide these intangibles can’t afford to follow the traditional mold of rewards, points and unrelated merchandise.  It’s vital that they focus on extending the overall brand experience into their loyalty services and benefits. I call this moving from Transactional Loyalty to Relationship-based Loyalty. Why is it, do you think, that a lot of consumer companies are starting to focus on strengthening their loyalty initiatives? Don’t think its happening? Think again. Major retailers have been in the game for a while. Other have followed suit. Now, product companies with primarily third-party access to consumers are creating loyalty initiatives as well. <a href="http://www.neimanmarcus.com">Neiman Marcus’</a> Inner Circle stands as a venerable gold standard in the large retailer field. More innovative, profitable programs like <a href="http://www.chicos.com">Chicos’</a> Passport program, or <a href="http://www.spg.com">Starwood’s</a> Preferred Guest program have major usage and measurable benefits for both consumer and corporation. Paid programs like Blockbuster Rewards bring in as much as $50 million per year in incremental revenue, with plenty of “breakage.” Breakage, by the way, is a simple concept: It’s essentially free money consumers give companies. Say, for example, you have a Border’s Gift Card that’s been loaded with $50.00. Now, say you lose it. Borders will not replace the card for you, because they don’t have a way to to track the card and deactivate it. Essentially, unless the card is used, they’ve just dropped $50.00 to the bottom line.  Minus processing and acqusition fees of course, but those are sunk costs anyway. There are enough “card” programs out there to make you scream. Very few of them actually tackle the real issue around building loyalty: how to extend the experience of the brand into the context of the loyalty benefit or service. Confused? Don’t worry, so are most companies. Take a brand like <a href="http://www.potterybarn.com">Pottery Barn</a>, for instance. High profits in that business. Most of the furniture is manufactured dirt-cheap in India, and sold at high markups in well-merchandised stores. And consumers eat it up. Pottery Barn is, believe it, a true cultural phenomenon. It has become an adjective, making its way into popular conversation. “Very Pottery Barn, darling.” Now, consider the <a href="http://ww2.potterybarn.com/cs/pbccsplash.cfm">one loyalty initiative</a> that Pottery Barn runs. They offer points on their credit card. Automatically redeemed for rebate certificates. One dollar spent earns one point. $500 of spend will get you a cert for $10. Which, in case you’re running slow today, is 2%. A lot of companies do this. Banana Republic’s card does something similar. So does the <a href="http://www.firstusa.com/cgi-bin/webcgi/webserve.cgi?partner_dir_name=disney_launch_dis&page=cont&mkid=6SWJ11">Disney card</a>. So, the question is: Why would such strong brands run loyalty initiatives on such an elitist and selectively permeable platform? (It’s elitist because not everyone who spends well at their stores will want a credit card, and 50% of those who apply will get rejected—after having given the brands their personal financial information. Talk about brand dissonance!) The answer is simple: money. Private label credit card companies (<a href="http://www.geconsumerfinance.com/USandCanada/Businessfinance/PrivateLabelCards.htm">GE Finance</a> has the boatload of the market) pay retailers a flat fee per customer acquired through these programs. CFOs see green when it comes to these deals. think about it: get paid around $25 per customer that signs up, handle absolutely nothing when it comes to customer service, processing, or communication—all of it is handled in a private label fashion by the financial services partner. Most of these cards have a basic points program attached to it, and so, in the retailer’s mind, there’s really nothing to lose, and much to gain. Neiman Marcus, especially, has a nifty way of increasing their acquisition statistics. Neiman Marcus, ladies and gentlemen, does not accept Visa, Mastercard or Discover. You must have either have a Diner’s, Amex, or a Neiman card. Forget the elitist and segregational effects of the credit-card based loyalty initiative for a second. There is a greater challenge around what I call transactional loyalty. They key to loyalty—which is the driving of future purchase behavior—is to create a relationship with the consumer that extends the consumer’s unique perception of the brand’s value to him or her. For example, if your brand means “self expression” to a customer, your loyalty initiative must extend that promise—not just provide some unrelated benefit. Don’t get me wrong—your customers will grab anything you give them. It just doesn’t build loyalty. They will continually re-assess their purchase decisions in your category until your loyalty initiative provides them with the emotional context that’s necessary to build true loyalty. http://www.brutalclarity.com/index.php/24/
 

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