CUSTOMER LOYALTY PROGRAMS THAT WORK

№ 8

Harvard Business chool Journal, July 2011

by Maggie Starvish

The customer rewards cards that clutter wallets and clog key chains of many a shopper may soon be no more, as retailers move from physical to digital forms of loyalty program member identification. It's a smart decision. Unfortunately, it's one of the only smart decisions retailers are making when it comes to customer loyalty schemes.

"Most retailers are at a very basic level in how they use loyalty programs, and many customers see loyalty programs as punitive," says Harvard Business School senior lecturer José Alvarez. "Loyalty schemes are not being used to their best advantage." Fortunately, there's hope. Retailers that do rewards programs right can see "incredible loyalty," says Alvarez.

Self-service retail, which started with customers selecting their own merchandise in the 1930s and evolved to modern conveniences including self-checkout lanes, has saved businesses labor costs and customers time. But Alvarez thinks the loss of face-to-face interactions between merchant and shopper has left a lot of customers wandering the desert. Well-run loyalty schemes are a way to bring them back into the fold.

Such programs can also help remedy the commoditization that has occurred in the retail sector on many levels. Both the Internet and what the researchers call a "massive availability of real estate" have made location differentiation a moot point. Retailers looking to differentiate on selection have fared no better, considering that the latest Coach bag can be found at Macy's, Nordstrom, TJ Maxx, the Coach outlet store, and, most importantly, on a panoply of Internet sites. It's just as hard to differentiate on price, for similar reasons: any consumer with an Internet connection can quickly determine if that flat-screen TV that Walmart claims is at a blowout price actually is. Loyalty schemes offer retailers a way to stand out from an ever-growing crowd.

Technology is also a helpful factor in rewards programs, representing a vast improvement over an old, markedly creepier, and now mostly illegal strategy: dispatching an employee to the parking lot to write down license plate numbers, which then could be cross-referenced with addresses at motor vehicles registries. In the digital era, retailers have myriad ways to collect, store, and slice-and-dice customer data. "The more information you can get and the better you can deal with it, the better you can become at providing services for the customer," says Alvarez.

But the most important component by far is customer engagement. "Retailers should ask themselves, 'how do I create a partnership with the consumer?' says Alvarez. Successful retailers connect with customers via loyalty programs at three levels. The first is an introduction of sorts: the customer receives a generic reward for enrolling in the program. At the second level, the retailer contacts the customer directly, often via e-mail, to offer a reward more tailored to the customer's wants and needs. Two-way communication occurs at the third level with customer- or retailer-initiated feedback loops.

Loyalty program data can be enormously advantageous in other ways, such as helping a retailer perform market research, set pricing strategies, and decide whether and where to open new stores. "Retailers can get a better understanding about what brands matter to consumers," says Alvarez.

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