Recession-proof your business using Customer Loyalty Programs
Article by Esteban Kolsky, VP and practice leader eVergeance Let’s face it; the economy is not getting better tomorrow – or the day after that. In fact, it seems that we are heading towards a recession if all the experts are to be believed. This is bad news for businesses especially with the coming holiday seasons. There are few things you can do to counter that momentum, but none are more effective than customer loyalty. Creating and maintaining loyal customers is more effective at proofing your business against recessions and economic downturns than just about everything else you can do.
There are several definitions for customer loyalty. Wikipedia defines the loyalty business model as “… a business model used in strategic management in which company resources are employed so as to increase the loyalty of customers and other stakeholders in the expectation that corporate objectives will be met or surpassed”.
Webster’s defines loyalty as “faithful adherence to a sovereign, government, leader, cause, etc.” In other words, we do everything we can as a business so we have faithful followers as customers.
In my experience, it is a far simpler definition: Customer Loyalty is what happens when businesses perform with the goal of retaining their customers so they buy more from the company. Both elements must exist: customer retention and higher revenues. You can’t have one without the other for Customer Loyalty to exist. If you have retained customers that don’t spend money, you have simply satisfied customers. If you have customers that just spend money but don’t return with more, you simply have bad customers. Loyal customers create value for the organization.
How loyalty pays off
Several studies have proven that customer loyalty pays off on two fronts: keeping current customers and gaining new ones. It is a simple equation as old as business: happy customers become satisfied customers, satisfied customers become loyal customers, and loyal customers remain customers for life. Well, for life may not be true – but they do remain customers for a longer period of time. And, all in all, they tend to spend more money and bring you new business. Further, Harris Research also found that 57% will recommend your company to others when they receive outstanding experiences.
During bad economic times having loyal customers means they will favor your business over your competitors – and their priorities might even change on how they spend their money. If they believe they can get a reward or incentive for doing business with you, they will put your name ahead of others for share of the money they have to spend. In addition, Harris Research found that 58% of customers will pay more for excellence in service—even in a down economy. Alas, excellence in service is a tenet of Customer Loyalty. Finally, and you probably heard this so many times, it costs many more times to attract a new customer as it does to retain an existing one. Want to save money in a recession? Keep your current customers.
As for the issue of gaining new customers, your current loyal and satisfied customers will act as your ambassador and refer, by word-of-mouth, new business to you. As recently as last Spring, Harvard Business Review published a report by John Quelch which states “It is well documented that brands that increase (marketing) during a recession, when competitors are cutting back, can improve market share and return on investment at lower cost than during good economic times.”. As you will see, creating a brand is another integral part of a Customer Loyalty program. Increasing your expenditures or realigning them, in brand-management during a recession can not only earn you new customers during the tough times, but also improve your Customer Loyalty Program for the better years.
Please notice that I say program, not project or implementation. This is one of the few times when you have to coordinate initiatives, projects, and systems into a coordinated, strategic program. A program will take a longer, strategic view of the business of loyalty and will manage each portion of it accordingly. You have to establish a program that will have three functional areas:
1. loyalty and rewards program,
2. customer-focused view of the world, including a loyalty-focused culture, and
3. brand or identity for your customer loyalty program
There is a three-step plan to create a loyalty and rewards program if you don’t have one already.
1. Determine Benefits. Airlines use miles because they figure that someone who wants to fly with them would appreciate the ability to do so for free. Retail stores use store credit since their customers would continue to shop with them – for free. You need to figure out what your customers would like to get in exchange for their loyalty. Free product? Store Credit? Reward Cards? The only way you will know for sure is to ask.
2. Calculate Fair Value. Every company that has implemented a loyalty program has had to struggle with figuring out the value of loyalty. Should you give a 1:1 dollar-for-point ratio? A 10:1 ratio? What would work best? You need to figure out the cost and potential revenue from implementing the exchange factor according to what your customers would consider fair. If your average receipt is $100 and your conversion rate is $1,000 for one point, you won’t get many customers since they won’t see a value in buying from you.
3. Advertise, Advertise, Advertise. You’d be surprised at how many customers you can attract simply by advertising your rewards or loyalty program. Customers appreciate the fact that you are doing something for them, and they do recognize the value of your loyalty program. They will be willing to try it out, at least, and switch.
Lots has been written about becoming customer focused, including a blog entry I wrote earlier this year . The basic point of customer-focused or customer-centric organizations is that they have to change their operations and processes to revolve around the customer – not around better operations for the organization. In the process, to deploy successful customer-focused solutions, you have to make sure that both the organization and the customer benefit equally, or at the very least that they both obtain a benefit or gain.
I have witnessed many implementations that ended up in failure while trying to become customer-focused since they never figured out what the win was for the customer. It is hard to know, but it is critical for the success of the initiative.
Finally, the concept of creating a brand and an identity to ensure your Customer Loyalty program is remembered. Customer Loyalty is fleeting. If customers like your program, they will shop around for similar (how many frequent flier programs do you belong to?) You are bound to be copied or imitated in your customer loyalty program. If you get copied, the brand and identity is the key to customers remembering your program over the others. Your competitors can copy what you do, and how you do it, but they cannot copy who you are. Creating a brand is the way to ensure that even if they copy you, your customers retain your brand in mind and return to you.
The bottom line is quite simple: if you don’t have a way to retain your customers, make them, happy and offer them incentives to stay with you they will move to your competitor. While in a good economic environment that may be feasible, during an economic downturn you need to do two things: keep the customers you have and make new ones. That will decide how you perform once the problems are over.