Database: Spoils for the Loyal

If implemented effectively, loyalty-marketing programs can boost response and customer lifetime value rates.

Retailers and airlines have long recognized the lifetime value of loyalty-marketing programs, which keep their best customers faithful only unto them. So why don’t more catalogers implement such programs?

Bill Dean, president of the catalog consulting firm W.A. Dean & Associates, thinks the average cataloger feels he or she doesn’t get enough repeat purchases to support such a program, which can be expensive to start and maintain.

“Most catalogers don’t really know their mix of customers,” Dean contends, “nor do they know what percentage of their 12-month buyers have made more than three purchases. For all the talk about RFM [recency, frequency, monetary value],” Dean continues, “most catalogers don’t move past recency and frequency. They select 90-day multibuyers.”

If more catalogers did an analysis of their customer files, Dean says, they’d find that the top tier is responsible for most of their sales. “Why not run a program just for them?” asks Dean, who points to studies that show the amount of dollars spent by the average catalog shopper keeps up only with the rate of inflation and remains at 6 percent to 7 percent of retail sales.

While more catalogers certainly should explore loyalty programs, Alan Weber, CEO of DataPlus Millennium, a data-driven marketing consulting firm based in Shawnee Mission, KS, suggests these programs may benefit only specific types of catalogers. Here’s how to determine if such programs are right for your catalog company.

The Loyalty Continuum

The product you sell largely dictates your need for a loyalty-marketing program. Therefore, the more unique your products, the less your need for a loyalty program. The most successful loyalty-marketing programs are those in which the product or service is a commodity, and there’s a clear cost for customers who switch from one provider to another. The obvious example is an airline frequent-flyer program wherein a consumer forgoes travel by another carrier.

A retail example comes from Road Runner Sports, a running store, catalog and online business whose Run America Club offers members a 5-percent discount on all purchases, shipping upgrades and a 60-day guarantee—all for the price of $19.95. “Road Runner Sports sells a commodity in a highly competitive environment, which makes it worth it even if it gives up some of its margin,” says Weber.

The Value of Loyalty

A good loyalty program should increase a customer’s quantity of purchases and/or the dollar amount spent. Weber advises beginning with at least two goals in mind: to increase your customer lifetime value rates, and to boost sales and margins by pre-set amounts.

An example is Eastwood, an automobile tools and services cataloger. For an annual fee of $24.99 customers can join the Eastwood Buyer’s club, which entitles them to free shipping on every order placed via catalog or Internet, as well as purchases made at car shows and its retail store for one year. Members also get special e-mail announcements about new products and notifications about special catalog and Web promotions. The program encourages customers to buy more—and more often—because they save on shipping.

Another example is The Sharper Image Dollars program. Customers earn 5 percent back in Sharper Image dollars for purchases made at its retail stores, catalog and Web site. The cataloger sends its customers quarterly updates on the number of dollars earned, which are good for up to half the value of a future product purchase.

“Each program has to be geared to customers and what they consider to be beneficial,” advises Jack Schmid, president of J. Schmid & Associates, a catalog consulting firm. Schmid notes that you don’t necessarily have to give money away. “You can implement a reward system based on service, such as free shipping or special 800 numbers.”

For instance, Colorful Images, a personalized paper products and gift cataloger, offers its Preferred Buyer Club to customers willing to pay $9.95 for a one-year membership. In addition to a 10-percent discount on purchases, members get access to the cataloger’s Preferred Customer Club toll-free phone number, fax and customer service hotline. And both print and online orders are first in line for processing and shipping.

Exit Strategy Needed

If program benefits are offered only to existing customers, Weber suggests testing against a control group before rolling out with the program to ensure it’s giving you some lift. Remember, a loyalty program is effective only if it increases lifetime value. Test to be sure a program is giving you enough lift to more than cover its costs. “If it’s just incentive for keeping customers loyal, get out of it,” Weber advises.

Schmid agrees that an exit strategy is crucial. But he cautions: “When you cancel a program, you’ll have some unhappy customers.” And unhappy customers defeat the purpose of a loyalty program. Message: Plan carefully.