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Part Three

For the past two weeks, we’ve had the opportunity to engage in a fascinating dialogue with Rick Ferguson, the editorial director of COLLOQUY and, about the subject of loyalty marketing – where this component of the business has been, where it is going, who is doing it right, and who is doing it wrong (and why).

As we continue our discussion, we focus on examples of excellence outside the food industry, as well as some object lessons for retailers looking to get into the loyalty game, or reinvigorate loyalty programs they already have in place.

MorningNewsBeat: Outside the food business, what company is the model for loyalty marketing excellence?

Rick Ferguson: You always have to go back to the travel industry—airlines, and to a lesser extent, hotels— because they invented the concept. The principals and best practices that define loyalty marketing— a promotional currency, hard and soft benefits, tiered membership, targeted offers designed to change and influence consumer behavior— those concepts were created and refined in the travel sector. Frequent flyer programs have become so profitable and so important to the airlines that in many cases they generate as much or more revenue as their core business, which is flying the planes. Air Canada recently spun off Aeroplan into a wholly owned subsidiary in order to free it from the airline’s operating losses. Aeroplan could launch an IPO tomorrow and its market valuation would probably be close or even equal to Air Canada’s.

So, the airline programs are the model, as they always have been. For grocers, it’s difficult or nearly impossible for them to duplicate the airline programs’ success because of the reasons we’ve discussed. But it’s certainly possible to move away from discounting and towards a model that rewards profitable behavior, encourages retention, becomes a barrier to exit, provides incremental revenue and all of the other things that loyalty is supposed to do.

But the real answer for U.S. grocers is the multi-partner coalition approach to loyalty.

That’s where three or four major non-competing companies join forces to fund a loyalty program, which is administered by a separate organization from which the partners purchase the currency. The partners share the operating costs and the data, which they use for their own marketing purposes. The downside is that you have to share your marketing budget with the coalition partners, and that you are arguably creating loyalty to the coalition rather than to your own brand.

But the coalition concept instantly solves the grocer’s margin problems. A grocery partner is also essential to making a coalition run. Coalitions are launching all over the globe, but have so far failed to take root in the U.S. American companies are reluctant to get into bed with each other. But I guarantee you that the first grocer to help launch a successful national U.S. coalition will do serious damage to Wal-Mart. As a matter of fact, if I were Wal-Mart, I’d be trying to beat them to the punch.

MNB: What is the best example of loyalty marketing done badly? And why?

Rick Ferguson: We’ve already covered grocer frequent shopper cards, which mostly answers your question. But then again, as we’ve noted, those programs really aren’t loyalty programs at all. Loyalty programs in all industries come and go all the time, and the examples of bad programs are too numerous to mention.

But the failures generally share some common characteristics. Usually the failures can be traced to a lack of strategic vision. What are you really trying to accomplish with your program? What segment of your customer base are you trying to reach? What behavior do you hope to change? How will you execute? What’s your value proposition? What’s your funding rate, and will it result in positive, measurable ROI? How will you communicate with your members? You’d be surprised at how many programs launch without even these basic questions having been answered.

The worst reason to launch a program is because your competition did. Avoid knee-jerk reactions, and avoid launching copycat programs. The best programs are launched by companies with top-down management support who work hard to understand who their best customers are and what motivates them. If you couple that strategic vision with the best technology you can afford, then you’re in business.

MNB: There are movements in both the fast food business and the c-store business to develop loyalty-marketing initiatives. Do you think that they will be able to avoid the missteps that have plagued the supermarket industry, and why or why not? Who do you think is doing a good job in these industries, or at least shows potential?

Rick Ferguson: We’re excited about what’s happening in both the fast food and C-store industries because they are the last bastions of customer invisibility. Both industries are crying out for a way to identify customers and build database marketing capabilities. But thus far, the hurdles— operational costs and the high-volume, low margin business models that they share—have proven too great to overcome. But that’s changing.

Most of the national gasoline/c-store retailers have attempted to solve the customer invisibility problem by going the credit route—encouraging the use of either their private label gasoline card or co-branded credit card. The reward component is typically tied to some sort of cash rebate. There is typically no recognition element. The rebate card is a time-tested solution for gasoline retailers, but the proliferation of this solution has diminished its impact and made it the cost of doing business. And it’s really not a loyalty play— it’s a credit play. The metrics are different— rather than measuring lift or retention or share of customer, the credit manager is measuring transactions, receivables and charge volume. We have seen a couple of smaller C-store players get involved in regional coalitions. Out West, Maverick c-stores have redesigned their entire brand strategy around their loyalty program, Adventure Club. The smaller outfits have to move more quickly and be first to market with these sorts of innovative approaches in order to compete with the Shells and the ExxonMobils.

As for fast food, that business is in a lot of trouble. The recent bad news about McDonald’s is the tip of the iceberg. They’ve been caught in this price-promotional marketing model for decades now, and they’re starting to slide into that familiar margin death-spiral that you see when businesses compete solely on price and promotion. They spend untold millions of dollars on mass-market advertising, and they’re seeing diminishing returns. And let’s not even mention all the bad press they’ve gotten recently about how bad their food is for you.

So, database marketing will become a necessity for them. The problem is that they just can’t afford the investment in technology. They work on the franchise model, which makes any sort of top-down corporate initiative problematic. Any loyalty solution, like a mag-stripe card reader or a stored-value “Starbucks Card” style program, is going to slow down transaction time and thus reduce their sales volume, which they simply can’t afford. So what do they do? Burger King deserves props for their BK Reward program, where you plugged in codes from your French fry boxes into a Web site in order to earn auction points. But as clever as that program was, I’m not sure that it accomplished any of loyalty marketing’s three big objectives, which are identifying, maintaining and increasing the yield from best customers. Give them kudos for trying, though.

What will solve the problem for fast food is the introduction of new payment and identification technologies— contactless payment systems, biometric solutions. McDonald’s has experimented with a SpeedPass-style payment system in Chicago, and with biometrics out west. You’re starting to see drive-through windows accept debit cards, and you’ll see more of that as interchange fees go down. Once you have these sorts of solutions in place, they’ll be able to start capturing transactions and bonusing profitable behavior. We’re a few years off from this technology really having an impact—but it’s coming.

Finally, it’s also a no-brainer for a fast-food company to join a national coalition. A loyalty coalition solves their problems the same way it solves the grocer’s problems. McDonald’s is already a player in UPromise, as are several grocers. Whether UPromise offers a sustainable value proposition remains to be seen, but it’s clear that the multi-partner loyalty model holds appeal.

MNB: Finally, do you think that the golden days of loyalty marketing are ahead of us, or behind us? And what can we expect for the future?

Rick Ferguson: Everything is cyclical, you know. We saw the first golden age of loyalty happen in the 1980s and 1990s, when it transformed the travel and leisure industries. But as the concept spread into retail, and then onto the Web, and as it evolved into the concept of CRM, the vision and strategic brilliance of those early program designs took a back seat to the technology hype. Suddenly CRM was no longer about understanding your customer—it was about installing the latest sales force automation or supply-chain software. It was about back-end processes. Frankly, a lot of CIOs and CFOs were sold a lot of snake oil. The result was a lot of poorly-designed programs with no enterprise-wide support and a lot of expensive technology that did absolutely nothing to change consumer behavior.

When the promised ROI never materialized, the naysayers wagged their fingers and said, “See, loyalty marketing doesn’t work. CRM was just a fad.” But they’re wrong— the concept isn’t flawed, but the execution was. Marketers are realizing that database marketing that doesn’t motivate consumers and reward profitable behavior is time and money wasted. It’s analogous to the Internet bubble— million of dollars were wasted on Internet IPOs founded on fundamentally flawed business models, and everybody was shocked and alarmed when the bubble burst. But the next decade will see an Internet renaissance, as sound business models prosper. Everyone is a little older and a little wiser.

The same thing happened to loyalty marketing. So, we like to promote a sort of utopian vision of loyalty and CRM in the 21st Century. Out of the core concept of loyalty marketing has grown the concept of Customer Relationship Management, which embodies all data from all customer touch points, as well as all of your operational data, all tied together and moving seamlessly through an enterprise that is organized around customer segments rather than products or sales channels. That machine needs customer data as fuel, and no mechanism is better equipped to deliver that fuel than a well-designed recognition and reward strategy that encourages consumers to raise their hands and engages them in mutually profitable relationships. Loyalty is the engine that drives CRM.

That’s the grand vision. We’ll see if we’re right.
KC's View:
We believe that despite the bad reputation that loyalty marketing seems to have gotten in the past few years, we’re going to see it popping up in more and more places, utilized by a wide variety of retailing venues.

For example, just yesterday it was reported that Starbucks is experimenting with adding a loyalty program to the stored-value card that has proven so successful since its inception in November 2001. If it works, it would be a powerful marketing engine.

The best is yet to come.

To read the previous two parts of this e-interview, you can go to the following two pages in the MNB archives.

Part One:

Part Two: