‘Loyal customers spend more and cost less to serve’ Scullion

[This article appeared in a supplement to Strategy sponsored by Loyalty Management Group.]Customer loyalty is a powerful economic concept and one that five years ago was not greatly understood.The ability to keep and retain customers, and create loyal customers, who, in...

[This article appeared in a supplement to Strategy sponsored by Loyalty Management Group.]

Customer loyalty is a powerful economic concept and one that five years ago was not greatly understood.

The ability to keep and retain customers, and create loyal customers, who, in turn, become advocates of the business is a profitable endeavor.

Loyalty Management Group’s air miles program is all about creating loyal customers, and the belief that the goal of consumer marketing is to profitably change consumer behavior.

‘Loyal customers are significantly more profitable than infrequent or occasional shoppers,’ says John Scullion, LMG Canada chief financial officer.

‘Loyal customers spend more and cost less to serve,’ Scullion says.

‘They refer more often, and are less interested in switching for costly and dilutive price discounts and traditional promotions,’ he says.

‘The economic impact of increasing your base of loyal customers can be tremendous to your business.

‘If we analyze the full cost of customer acquisition against the marginal contribution of a single customer during their first year of patronizing our business, many of us would find we don’t even break even on that customer during the first year.’

During his research of loyalty programs while working with Bain & Co.in the u.s., LMG Canada President Craig Underwood found that standalone programs were hard to justify from an economic or strategic sense, mainly because they are costly and there’s no sustainable advantage.

‘They’re costly not only in that you have to give an award to the consumer, but there are a lot of other costs you have to cover to deliver that reward,’ Underwood says. ‘There are systems costs, mailing, marketing.

‘Secondly, it’s hard to make one profitable because very often they were not differential or sustainable.

‘American Airlines started the first frequent flyer program 12 years ago, and, within months, all its competitors copied it because there wasn’t a way to differentiate itself.

‘Existing loyalty programs also really didn’t offer a way to target non-shoppers. If you can take non-shoppers and change them into a loyal shopper, that’s the most profitable change in consumer behavior.

‘You’ve got to give the customer something they value. Something to keep them away from the competition and loyal to you.

‘That can’t just be the award. It’s got to be the service, the quality of the product you deliver, as well as a reward that says `Thanks’ to the customer and will keep them with you.

‘Obviously, that cost can’t be greater than the cost of keeping the customer.’

Underwood says often companies that try to set up their own programs end up with only a small part of the budget going to the reward, and that may not be enough to change consumer behavior.

‘I know of an example where a company is looking at spending $3.5 million to test eight of its stores in a loyalty program,’ he says.

‘The cost of starting it up, setting it up, communicating with the customer is huge.’

The air miles concept, a database marketing program, overcomes the problems, particularly the high cost of standalone loyalty programs.

Administrative and marketing costs are reduced because several companies are working together, sharing the cost of administering the program and rewarding customers.

‘You spread that cost across many companies and many years,’ Underwood says.

‘We’ve invested long-term,’ he says. ‘We’ve got 85-plus sponsors. We’ve made the investment in developing the software and developing the communications systems.

‘When we spread that cost over many years, the sponsors get the bulk of their budgets towards the award, not the administrative cost.

Underwood says there are eight basic characteristics of a successful loyalty program:

1. An aspirational award.

‘We had research done and asked people, `If you had more money, what would you spend it on?’ Underwood says. ‘Travel came out almost two-to-one over the next best thing, which was home improvement.’

2. Attainability.

‘Consumers have to be able to receive their award in a time period they consider relevant,’ Underwood says. ‘We did research, Bank of Montreal did research, and we continue to do research, and what consumers tell us is two to three years.

‘That’s what they feel is valuable to them,’ he says. ‘They’ll collect for two or three years to get a trip.

‘We have created the opportunity to get a free trip in much less time than that.

‘Some have gotten the trip in a few months, and, certainly, in a year, by using a few of our sponsors.’

3. Affordable for the company.

‘That’s where you really begin to bring in the benefits of a coalition program,’ Underwood says.

‘You can earn a free trip to New York in a year by getting a magazine subscription from Maclean Hunter, getting your car fixed at Goodyear, buying your groceries at Safeway, buying your gas at Shell, and using your MasterCard,’ he says.

‘By shopping at any one of those, individually, unless you are a very heavy spender, you wouldn’t get a free trip in just a year. With our program, air miles earned from one company are combined with others to make it attainable faster.

‘The program is low-cost for the company, but is perceived to be high-value to the consumer.

‘Pooling, or cross-category collection, creates that attainability for a low cost to our sponsors.’

4. Ease of use to consumer, and flexibility to the sponsor.

‘All the consumer has to do is show the blue card at participating retailers and it sets the process in place for air miles to be credited to their account,’ Underwood says.

‘On the sponsor side, there are several ways to use the card to record the air miles and get that information to us,’ he says. ‘All stores may not all have the same type of system – scanner or imprint. We cater to them all.’

5. Sustainable advantage.

‘In terms of being sustainable, we have an exclusive long-term contract for free air travel on the four airlines we have contracts with, and give the right to one company in every category,’ Underwood says. ‘So, their competitors can’t duplicate this type of program.

6. Results must be trackable and quantifiable.

7. Ability to identify and target segments.

8. Acquisition potential.

‘In terms of targeting non-customers, we have a database that contains people that have enrolled from different sources, different sponsors,’ Underwood says.

‘Some of those people are shoppers at some sponsors, but there are a lot of non-shoppers in there as well who want to be collectors,’ he says.

‘That gives our sponsors a base of interested non-shoppers to target.’

Underwood admits to being an evangelist for customer loyalty and results-oriented marketing.

He says the reason air miles works is because it is win-win-win.

‘In our program, it’s not like we’re one company without partners,’ Underwood says.

‘We started our company to bring together a group of visionary companies to create a loyalty program, and to share in the benefits,’ he says.

‘It works for the collector, and it works for the sponsor. If it works for the sponsor, it works for us and for our airline suppliers as well.’