This is not your grandfather's economy. While Grandpa was probably on a first-name basis with Stanley the bank manager and Walt the pharmacist--you deal with a series of name-tagged strangers and automated computer systems. If he had a choice, Grandpa bought from his buddies. The 21st century consumer, on the other hand, bases purchasing decisions on a complicated system of pricing, perks, points and miles. Welcome to the loyalty economy.

"We lost our focus on customers when we became huge stores and huge banks," says Chris Moloney, director of market development and strategy for Maritz Loyalty Marketing, the St. Louis-based full-service provider of loyalty marketing solutions. "There are very few places you can go where somebody knows your name. Loyalty programs are a modern way of recreating the way customers were treated years ago."

But loyalty programs are more than a throwback to yesteryear. "Loyalty programs are one of the tools that can differentiate a business in an undifferentiated market. They're what's going to make you cross the street," says Malcolm Fowler, executive vice president of product and marketing for Ernex, a Vancouver, Canada,-based loyalty solutions provider. "They move markets or they wouldn't be around. Loyalty programs create habits and change behavior."

Customers' desire to add value to their transactions has fueled explosive growth in the number of loyalty programs over the past 18 months. According to Frequency Marketing Inc., the Milford, Ohio,-based loyalty marketing firm, 55 percent of Americans have at least one loyalty card--a 20 percent increase since 2001. Among households with income exceeding $75,000, participation jumps to 71 percent. Forty-three percent of members said loyalty programs lead to more frequent purchases, and 16 percent said a loyalty program causes them to choose one store exclusively.

Those are big numbers, and they translate to big bucks: Once a customer joins a loyalty program, they tend to increase spending by an average of 27 percent.

That spike in spending is pure growth, without the cost of acquiring new customers. "It gets to the point where you can't get more new customers, but you still have to grow. You've got to get those customers you already have to buy more," says Stephen Drees, president and CEO of Quantum Loyalty Systems, an Incline Village, Nev.,-based provider of loyalty programs. "It's cheaper and easier to hold on to an existing customer than to get a new one. If you have all the sales you ever wanted and growth isn't an issue, you don't need a loyalty program. But no company has that, which is why these programs are so popular."

Airlines, banks, supermarkets, packaged goods, hotels, restaurants--nearly every industry benefits from loyalty programs. But miles, merchandise, points and perks alone will not keep your customers coming back. "The real value of a loyalty program is, when all the fundamentals are already in place, it builds goodwill and customer perceptions of value for money," says Doug Grisaffe, vice president and chief methodologist for Walker Information, a loyalty measurement firm in Indianapolis. "If the basics aren't there, you're just trapping customers." Here, according to industry experts, is what you need to know to win the hearts, minds and wallets of today's fickle consumers.



1. Brand loyalty requires a brand image.

Although it sounds like common sense, any loyalty effort should reflect the core of your business. Too many companies begin a loyalty program in hopes of differentiating themselves from the competition, only to end up with a strategy that looks like everyone else's. "Many companies end up commoditizing their program by turning to the same partners," says Patrick LaPointe, senior vice president at Frequency Marketing. "Everybody's trying to differentiate themselves by doing the same damn thing."

At Nantucket Nectars, the beverage company based in Cambridge, Mass., a new loyalty program adds value for consumers by staying close to the 12-year-old company's brand image. Loyal customers are called "juice guys," in reference to the company's founders, Tom Scott and Tom First, the men behind the "We're juice guys" slogan printed on every Nantucket Nectars bottle cap since 1995. However, it wasn't until April that Jeff Bucalo, Nantucket Nectars' director of marketing, founded the Cap Club to give his juice guys more than a nickname. "We get thousands of letters a month from customers telling us how much they love our product and that they collect the caps for the sayings on them," Bucalo says. "We wanted to reward people for their cap collections. We're saying not only do we want you to join our family, we're going to give you something in return."

The Nantucket Nectars family is young and active, an image that the Cap Club upholds. An E-mail blast encouraged "juice guys" to register online for the program and redeem their Nantucket Nectars caps for more than 100 different "Nectarized" merchandise options, including L.L. Bean gift certificates, Sony televisions and outdoor gear. Each cap equals one point, or 50 cents. Cap Club members also receive 10 points for each membership referral, for up to 50 points.

The Cap Club has been wildly successful. Originally Bucalo hoped to register 5,000 collectors in 18 months; in the first six months, the Cap Club registered more than 4,500 members. At press time, one Cap Club member had 5,550 points and 25 members had 2,000 or more points.

Bucalo says the Cap Club could be instrumental in winning new juice buyers. "A lot of people know what kind of beverage they want, but they don't know what brand they want," he says. "If people have Nectars on the brain before they make their purchase, that's huge. That's what the Cap Club is all about."

Currently, the Cap Club is scheduled to run through September 2003, but odds are it will continue long after that. "Based on what we've seen so far, I think we'd be nuts to stop it," Bucalo says.



2. The right reward mix will get results.

The Cap Club is right for Nantucket Nectars, but it wouldn't necessarily work in another industry. "The thing about loyalty programs is there's no such thing as a standard program," LaPointe says. "It's a matter of providing something of value in exchange for desired behavior."

While there may not be a standard loyalty program, there is a gold standard: the American Express Membership Rewards program. At American Express, membership does indeed have its privileges for both the company and its customers. Participants in the card's loyalty program spend four times more than a customer who is not enrolled, according to Chris Lynch, vice president of Membership Rewards for the New York-based credit card company.

Membership Rewards owes its success to its willingness to broaden its offerings to meet customer demand. What began in 1991 as an airlines-only rewards program has since expanded to more than 120 partners, including hotels, merchandise, retailers, movie tickets and more. "We're driven by what is going to add the most value for the customer," Lynch says. "While travel and airline miles are still valuable from a customer perspective, there's a need for something else because many of our members are such frequent business travelers."

Expanding the reward options has also allowed American Express to deepen its relationship with cardholders beyond its traditional corporate travel uses to compete with the popularity of debit cards. "Membership Rewards has allowed us to significantly increase our share of wallet with our customers," Lynch says. "Because of the program people are putting a larger amount of their spending on their Am Ex [card]. It's allowed us to broaden our traditional T&E strengths to more regular and personal usage."

In fact, Membership Rewards has proven so successful for American Express that in September the company began waiving the annual fee for the program, making it a standard feature of its basic credit card offering. To help promote the new card, users will earn two points for every dollar they spend on everyday purchases like gas and groceries. "Consumers are looking for value with all their transactions, so it makes sense to offer rewards for all their transactions," Lynch says.



3. Beware of inertia.

In your eagerness to jump on the loyalty bandwagon, don't confuse a repeat customer with a loyal one. Inertia loyalty, which causes customers to stick around out of laziness, habit or convenience, is not the same as allegiance.

Just ask John Hayes, a Dallas-based author and speaker on marketing and customer service. He travels for business 40 weeks a year and usually flies American Airlines. Hayes loves the benefits of his frequent-flyer status: special treatment, shorter lines, free upgrades to first-class. These things appeal to his ego, but they don't differentiate American from other airlines, and they don't make him loyal. If another airline offered him the same thing, he says he'd switch in a heartbeat.

Still, Hayes says, loyalty can exist. "There is such a thing as customer loyalty. Some of our customer loyalty is begrudging, and in the long run we'll jump ship. You want to put as many barriers in the way of customers changing their buying habits as possible," he says.

Despite his tough talk, Hayes looks loyal from American's point of view. It gets his travel dollars and he gets an ego boost from the special treatment he receives. But the airline is missing out on one of the most important benefits an undifferentiated and price-sensitive business like American can hope to get from customer loyalty: referrals. "If you have a loyal customer who refers business, those new customers are costing you nothing compared to traditional advertising," he says.



With loyalty comes responsibility.

Companies in search of a loyal customer base need to look no further than the motorcycle industry, where riders frequently proclaim their devotion to a brand with a tattoo. They are typically customers for life. Sounds great, but consider the responsibility that comes with such devotion. "This is somebody's dream," says Beth Owens, vice president of marketing and sales for American IronHorse Motorcycle Co., a Fort Worth, Texas,-based maker of custom bikes. "We have to be more aggressive in our efforts because these customers are going to participate. I need to put together good programming and incentives because the quality of the bikes and the experience of the riders set the standard really high."

With an average sticker price of $29,000, an American IronHorse custom motorcycle is the top of the line, the Gucci of the industry. "Part of what we sell is ego," Owens says. "Our bikes are about horsepower and looks and expressing your personality. That makes our customers our biggest advocates." Among the five-year-old manufacturer's 2,300 riders are repeat purchasers--one fan, a Fort Worth-area homebuilder, owns five bikes.

In an effort to encourage referrals and repeat purchases, American IronHorse will launch its Riders Association in 2003. As a membership benefit the company is offering free roadside assistance on all 2003 models. "We really wanted to have a tangible benefit to our riders group, and roadside assistance was a good option," Owens says. "The 800-pound gorilla is out there, and it's called Harley-Davidson, which has an active riders group."

According to Owens, plans are also in the works to eventually open the American IronHorse Riders Association to previous owners. Another initiative aimed at current owners will offer gift certificates for American IronHorse parts or apparel as a reward for referrals.



5. Customer and employee loyalty are connected.

With all the emphasis on customer loyalty, it could be easy to forget about your employees. Don't. "There is a huge link between loyal employees and loyal customers," says Jill Griffin, author of Customer Loyalty: How to earn it, how to keep it (Jossey-Bass). "We see time and again that those who enjoy high customer loyalty also have very loyal employees."

USAA, the San Antonio, Texas,-based financial services company exclusively for active duty and retired military personnel and their families, is a case in point. Its primary cause of customer turnover is death. Customer retention is so important to USAA's top executives that they base their own bonuses on this statistic. But customers aren't the only ones who stick around: The turnover rate among the firm's call center staff is just 9 percent compared to more than 20 percent for the industry as a whole.

"Customers are buying relationships, with everyone from the person in the checkout lane to the call center representative," says Griffin, who is also the president of The Griffin Group, a loyalty consulting firm in Austin, Texas. "I tell my clients that the absolute number-one law is to first build staff loyalty."

The relationship between customer and employee loyalty is intricately intertwined. "Loyal employees will help to create loyal customers. They're the one's who embrace the management vision and go the extra mile for the customer," Grisaffe says. "Customer disloyalty can actually demotivate employees. Think of it as a circle of effects."

--Libby Estell This page is protected by Copyright laws. Do Not Copy