Customer Loyalty Costs Less Than You Think

Loyalty clubs: perhaps no business has become as strongly associated with this marketing concept as the supermarket industry. According to the Food Market Institute, 92 percent of grocery shoppers use loyalty cards every month. With all this loyalty going on, you’d think that grocery shoppers would be as dedicated as Labrador retrievers. Not true – 73 percent of them have no loyalty to their supermarkets, even though they take advantage of “loyalty discounts.” Meanwhile, at Zappos, a billion-dollar online shoe retailer, 75 percent of sales come from repeat customers, thanks to a loyalty strategy that emphasizes special services over price breaks. This contrast provides a valuable lesson for music stores looking to build customer loyalty.

No one would seriously doubt that loyalty discounts are an effective way for any retailer to attract customers and increase traffic. Plus, given the fact that there are 1.3 billion loyalty club memberships in the U.S. (that’s about four times greater than the country’s population), the business that neglects to offer some sort of loyalty price promotion may well find itself at an immediate competitive disadvantage.

Their many marketing strengths notwithstanding, however, discount-only loyalty clubs may not be enough by themselves to build lasting customer relationships. This is very evident in the supermarket industry, where most shoppers have loyalty cards from three to four competing retailers, according to the Food Market Institute. Not only do grocery shoppers apparently divide their loyalty, they also tend not to feel a strong attachment to any particular retailer. In a 2007 study of 6,000 US consumers, only 27 percent said they would recommend their favorite supermarket to a friend.

Fostering Customer Loyalty
Winning a deeper level of commitment from customers requires a loyalty program that goes beyond supermarket-style discount cards to offer incentives that are more meaningful, personal and rewarding than the chance to save a few points on a purchase.

Writing in the Wall Street Journal, researchers Dr. Lars Meyer-Waarden and Christophe Benavent explain, “By offering different types of rewards to different groups of shoppers, companies set themselves apart and give people a reason to keep coming back. Providing access to a speedy checkout lane, for example, would be a more powerful way to win the loyalty of a person who hates grocery shopping than would a discount on a future purchase.”

Hotels and car rental companies have recognized the power of this time-saving perk, which is why they’ve made express check-in a key feature of their loyalty programs.

Targeting the specific needs of club members also makes discount offers more effective in building loyalty. Kroger, the nation’s largest supermarket chain, bucked the downward trend in its industry (sales increased 10.9 percent in the first three quarters of 2008), thanks in part to the success of a program that mails coupons to regular customers based on their previous purchases. Although average coupon redemption rates remained under 3 percent last year, Kroger’s mailings had close to a 50 percent response. Aside from being more attractive to the customer because they’re based on his or her previous purchases, these mailings make recipients feel more appreciated because they are “more personal.”

There is no one-size-fits-all reward that works to build loyalty among all customers. Although some customers place a premium on financial rewards, others are more interested in timesaving conveniences, status, or special “luxury perks” like a trip to an exotic vacation spot or free deluxe auto detailing. The Best Buy chain turned its Rewards Zone into one of the most successful loyalty programs in the retail industry by combining discounts with perks like an exclusive gaming site, free concert tickets, and special events for group members.

By going beyond monetary rewards, Best Buy makes its Rewards Zone program more personal for club members. The unique rewards also make it much more difficult for competitors to match the retailer’s loyalty offers. The loyalty that Best Buy has earned through its loyalty program has helped the company do more than hold its own during tough economic times, as sales increased four percent in December 2008, while its chief competitor, Circuit City saw same store sales drop by over 40 percent as it headed into bankruptcy.

Starwood Resorts, owner of the Sheraton and Westin brands of hotel, also went beyond discount pricing when it enhanced its loyalty club by introducing its “Moments” incentive program in 2007. Loyalty club members who sign up for this program receive special perks, such as the ability to bid on sound check sessions at concerts or Super Bowl packages. The number of club members who stay at Starwood properties 25 times a year or more has increased by 120 percent as a result of the Moments program.

Business researchers Xavier Dreze of Wharton and Joseph Nunes of the University of Southern California have demonstrated that giving customers the power to choose how they’re rewarded increases the effectiveness of loyalty programs. This makes sense, not only because rewards chosen by the customer are naturally more meaningful to the customer, but also because customers appreciate the feeling of being in control of their retail transactions, whether those transactions involve a purchase or claiming a reward.

Research by Dreze and Nunes also sheds light on the role “status rewards” play in making loyalty promotions more effective. In an article published in the Journal of Consumer Research, they described a study they conducted at an unnamed carwash, in which they gave one group of customers a “Tenth wash free” card with two of the washes needed already credited to the customer as a form of recognition. Another group of customers was given an “Eighth wash free” card, but no washes were already credited.

Each group of customers needed eight washes to earn their free trip through the tunnel. However, the first group, which was given the two washes toward the “tent free wash,” purchased the eighth washes much more quickly than customers that were given the “eighth wash free” card with no advanced credits. The reason: the recognition these customers received when they were given the two free washes created a closer emotional connection to the loyalty program, which made it more important and gratifying to them.

Service Leads to Stability
Of course, to your customers, no form of recognition is greater than personalized service. A study conducted for Goodyear Tire asked customers what type of loyalty promotion would be most likely to increase their allegiance to the company – 20 percent said one based on price reductions, while 37 percent responded “personalized service.”

On-line footwear retailer Zappos has locked in a high degree of loyalty by using a variety of service rewards to enhance the customer’s experience. Zappos builds relationships by encouraging its associates to spend extra time with customers, offering free shipping and having a 365-day return policy. As a result of this customer loyalty, Zappos enjoyed a 20 percent increase in sales in 2008, despite tough economic conditions. Approximately three out of four of its sales are made to existing customers.

As the success of these retailers illustrates, customer loyalty does not have to come from monetary incentives. Any step you take to give customers a more enriched and rewarding experience at your carwash is going to encourage them to return more often – and this loyalty is certain to make your business more likely to prosper through good times and bad.

Joe Fucini is president of Fucini Productions, a marketing and public relations agency serving clients in several industries, including MI. He can be reached at joe@fucinipro.com.