Loyalty marketing goes by many names. This concept has been described as customer relationship management (CRM), retention marketing, one-to-one marketing, and many other things. Regardless of what you call it, it’s all the same. It’s a business strategy that seeks to improve retention and increase share of customer.

Let’s take a closer look at loyalty marketing, exploring precisely what it is, its benefits, economics, and some important considerations regarding how to apply loyalty marketing in your business.

Customer loyalty describes the feeling among customers toward a company or brand. It’s the feeling that compels the customer to turn left instead of right to visit your store. It’s the feeling that causes customers to think twice before accepting a competitive offer to switch to your competitor. It’s the feeling that makes customers come back time after time and to consolidate more business with you and your company. Regardless of what industry you're in, loyalty is the tiebreaker, making customers think twice about another brand. It creates a reluctance to defect among customers. Ultimately, loyalty delivers enormous economic value to your company by increasing the lifetime value of customers.

We discuss CRM and loyalty on two levels—loyalty strategy and loyalty programs. Loyalty strategy involves getting your company right for customers. It’s the equivalent of getting your house in order, and ensuring your product, its value proposition, your service, and your communication channels are conducive to developing loyalty. It also involves assessing your culture as a company to ensure it creates an appropriate platform for developing loyalty. Loyalty programs are the integrated marketing efforts that actively engage your customers in a dialogue and often deploy exclusive benefits and rewards that keep your best customer alert and attentive to your brand.

In a nutshell, loyalty strategy involves getting your company in shape to keep customers, and loyalty programs are the proactive efforts to increase customer value through relationships and special benefits. It’s important to keep the two levels of loyalty discussion clear. Loyalty strategy becomes the platform, loyalty programs become the active extension to key customers.

Loyalty programs are becoming far more pervasive today because of the dramatically reduced cost of implementation and management. The Internet has provided a new platform for very low cost communication and has allowed many companies to deploy newsletters and other forms of communication electronically and reduce or eliminate the cost of printing and postage. This reduced cost should play a major role in your economic reality check to determine whether or not you can afford to invest in customer loyalty.

The benefits of customer loyalty are all economic in the long run. Some are easier to quantify than others are, but if you take a long term, customer lifetime value approach to looking at your business, it can all be quantified.

For a simplified example, assume that Duffy’s Depot is a retail establishment. The average customer buys $1,000 in goods each year at an average gross margin of 35 percent. Furthermore, the average customer stays with Duffy’s Depot for five years.

The lifetime value calculation involves discounting each of the future profit streams to present value. It is a simple net present-value calculation that most of us have experienced at some point in our education or careers. If we use a 10 percent discount rate for the calculation, the numbers look like this:

Now, imagine you’re able to improve the retention rate and keep customers for six years, rather than just five. The lifetime value improves by adding another $197.56–-a 15 percent improvement. If you’re also able to get a greater share of the customer’s business, the lifetime value improvement is even better. Let’s assume that the average sales increase is 15 percent. The new lifetime value, considering an improvement in retention and in share of customer is as follows:

The lifetime value has been increased by another $228.65. The combined impact of both improvements is $426.21–-sa total increase of 28 percent over the original lifetime value of $1,524.34.

That covers the impact of improvements in retention and share of customer. Many people fail to look beyond that, but there are some extremely powerful benefits associated with customer loyalty that go beyond the obvious.

Customers that shop Duffy’s Depot frequently and over a period of time get to know what the company is all about and the merchandise available in the store. Very loyal customers require less help and assistance because they are so informed, and in some cases they know more about your brand than your employees. Their questions are more relevant and to the point. They come to the store with a fairly clear vision of what is available and what it takes to shop at Duffy’s Depot. As a result, these customers are more efficient in terms of the way they use the store’s resources to conduct transactions. This is an important ancillary benefit to customer loyalty that is often overlooked.

Customers that become familiar with Duffy’s Depot and its merchandise mention it to their friends and acquaintances. People like to feel smart and to have an opinion. If a customer shops Duffy’s Depot several times a year and a neighbor says, "I’m thinking about buying one of those," the loyal customer will say, "Go to Duffy’s Depot." Customers enjoy spreading the word about something they like. It helps them appear in the know about something good.

This is a subtle benefit, but it is one that we believe in from experiences with a variety of retail marketers. Customers that are loyal and that are a part of a well-executed customer loyalty program feel like they are stakeholders in the retail brand. As a result, when these customers have a bad experience they complain. They make a phone call, they ask for the manager, or they do something else to make sure their issue is addressed. Why? Because they are stakeholders. They believe in the brand. They feel that it is, in part, their brand. They want to fix it. They complain rather than quietly defect. This second chance opportunity is very important in today’s business environment in which customers are so fickle and other businesses are waiting to swoop them up.

Loyal customers are more likely to buy through alternative channels. We are talking principally about the Internet here, but in some cases it also involves other alternate channels. For instance, Godiva Chocolatier sells its premium confections in its own branded stores, as well as in many upscale department stores. Loyal customers that are familiar with your brand are much more likely to buy through other channels, increasing their total consumption and reducing your cost of doing business with them.

Many companies fear that channel migration represents cannibalization. But savvy marketers are learning that multi-channel buyers actually buy more than single channel buyers do. Eddie Bauer, a traditional retail and catalog apparel merchant, has found that there is a direct and positive correlation between the number of channels a consumer shops and the total amount the consumer spends with the Eddie Bauer brand. This suggests that providing many enabling mechanisms for customers to buy your products may increase customer value.

Loyalty marketing is about managing customers, not products. It’s also about making customers more important than channels. In many companies today there is an inordinate amount of time spent haggling about channel turf and product turf and inadequate time spent haggling about customers.

Loyal customers are much more likely to have your brand top of mind in your category. This manifests itself in terms of an increase in share of customer and an improvement in retention. But it also helps with referrals and it helps with bring-alongs in which loyal customers actually bring other customers—friends, relatives—to your brand. The combined impact of unaided awareness improvements shows up in many places.

Loyalty customers tend to be more aware of some of the auxiliary benefits your brand offers to customers. It has been demonstrated that greater awareness of auxiliary benefits, or hidden assets, has an impact on retention and share of customer. For instance, one retailer found that loyalty customers were more familiar with their free delivery service. The familiarity led to greater sales as a result of taking advantage of the free delivery. A telecommunications company found that loyalty customers were more aware of the services provided by their dedicated relationship managers. These customers tended to stay with the brand longer because they felt they received better value. The perception of better value was a function of understanding the services offered by the relationship managers and taking advantage of those services.

We use this to describe the subtle impact of a loyalty strategy. At times, a brand choice is made at the last minute. Do I turn left or turn right? Do I shop Lowe’s or Home Depot? Is it Barnes & Noble or Borders? Is it Amazon.com or BN.com? The subtle, psychological reluctance to defect created by a loyalty strategy often makes the difference.

As you can see, there are some tremendous benefits associated with CRM and loyalty. Many are inter-related and virtually all can be quantified and measured. But you can also see that a loyalty strategy is genuinely that—a strategy. It’s in everything you do and it can have an amazing, positive impact on your company and your brand.

Let’s assume that you’ve decided that a loyalty program is right for your business. The next thing to do is consider potential approaches.

There are quite a few approaches to structuring customer loyalty programs. Some programs become biased towards the traditional promotional currency—points, miles, free stuff—structure because it has been made so popular and obvious by travel companies, credit card issuers, and telecommunications companies. Whether a program has a promotional currency structure designed to reward customers, or a series of soft benefits designed to excite customers, there are some important decisions to be made early on in the planning process.

A publicly announced program sets a clear expectation in the minds of your customers. If it’s announced, customers believe that the program is available to everyone and will be available on an ongoing basis. It’s difficult to test anything in an announced program because any changes you decide to make after the test period may be unpopular with customers.

An announced program is also difficult to measure in a traditional direct marketing sense. Pure measurement of a traditional direct marketing program involves holding out a random control group that is consistent in composition to your test group. If you announce your program, you’ll compromise measurement and probably skew customer involvement towards those who already like your brand and are less likely to defect in the first place.

A clandestine program, on the other hand, is communicated to a group of customers privately, usually through the mail. You select the customers and you also establish the control group. In this situation, it’s best to avoid giving your program a club-like theme. Customers have been clubbed to death to a large degree and it’s possible and more desirable to create an atmosphere of exclusivity and special service without labeling your program as a club.

The successful implementation of a clandestine approach relies heavily on creative positioning and execution. You should focus on your special relationship with the customer, the extra services you can deliver, and if possible, some tangible benefits. Avoid creating the perception that you’ll continue this promotion in perpetuity. You’ll manage expectations while recognizing your customers.

If you have a mechanism in place to track the behavior of your customers, a clandestine approach also supports more thorough measurement through the establishment of a control group. Telecommunications companies, retailers with a private label credit card, and catalog companies have mechanisms in place to track customer behavior. If your business does not have a pure tracking mechanism available, you can conduct a sample tracking study using phone surveys to measure changes in customer behavior and attitude. While this is not as good as pure behavior tracking, it’s better than nothing.

In most cases, a clandestine approach is most effective during the testing and evaluation period. Some industries require making a leap of faith right into an announced program that becomes integrated in all advertising and communication. It essentially becomes an integral part of the brand. Unfortunately, once a program is announced this way, you lose the ability to effectively measure it.

This is a big fork in the road when it comes to loyalty programs. Few companies can afford to give away tangible and meaningful awards and benefits, so you should get this consideration out of the way quickly. Travel companies, telecommunication companies, and credit card issuers offer hard benefits because they can, and because it’s becoming a cost of doing business. Few other companies can afford it in the long run, although a hard benefits approach makes a good, limited time promotion.

But don’t just assume you can dream up some free soft benefits that will make a difference to your customer. Explore the possibilities early on in the planning process and make sure that you can, in fact, afford to do anything. Sometimes, simple but relevant communication several times over the course of a year can make a measurable difference.

Enrollment is a key consideration for an announced program. Some marketers are tempted to take all customers and send them a welcome message and fold them all into a program right away. But many customers aren’t going to pay attention to your announcement. Experience shows that roughly two-thirds of customers that are technically enrolled in an automatic program are clueless about its existence.

Customers that must raise their hand and voluntarily enroll in a program are much more inclined to engage in the program and participate, and are therefore more likely to modify their behavior as a result.

There are various shades of gray between pure automatic enrollment and pure voluntary enrollment. It’s possible to invite customers to join through the mail and provide an easy opt-in mechanism. Another option is to announce an automatic enrollment and provide a simple opt-out mechanism.

The bottom line is that voluntary enrollment programs will grow slowly but will have members who are more involved; automatic enrollment programs will grow quickly, but will demonstrate limited member involvement.

With a minimal investment you can let customers know about your loyalty programs. You can spread the word about your loyalty rewards through in-store promotional signs and brochures, which require design, printing, merchandising, and storage cost. Other means for contact can be made through email alerts and online newsletters, which require design and maintenance costs, or with direct mail, which requires additional money for postage.

If you work with online mailings or direct mail, your company will need a tool to track customer information. Some data management solutions exist that can house customer data including contact name and address, birthday and anniversary, favorite product you sell, last purchase date, and more. Investing in a solution for your PC such as Act! 6.0, the best-selling contact management software from Best Software, can help you track and manage loyal customer and vendor information. You can then distribute loyalty program collateral with targeted client detail and minimal waste.

With the use of sophisticated data management, Sarah’s Country Candle Company can pull a report on all customers who have stated that they prefer fruit scented candles. When product sales are weak in this class, Sarah’s can issue a loyal customer coupon to these targeted customers for an invitation-only harvest fruit candle sale.

This is an important consideration for promotional currency programs. If customers have the option to voluntarily redeem their currency whenever it’s convenient, you’re less inclined to realize incremental spending at redemption time. Customers will often wait until the time is right for them, and they’ll redeem and displace what would have been a paid sale.

Automatic redemption, on the other hand, can be structured to drive incremental sales at the time of redemption. This is essentially a balance of what’s best for the customer and what’s best for the brand. It’s important to consider a balance between the two, because if you develop a program that’s great for the customer and bad for you, you’re going to regret it. If you develop a program that’s great for you but a virtual yawn for the customer, it will fail miserably.

Here’s an example of how to make automatic redemption work. Let’s say you’re a retailer with an average time between customer visits of 45 days. When a customer reaches a redemption threshold, you mail a certificate, as good as cash, for $25. To ensure that you’re encouraging incremental behavior, you should put a 30-day expiration on the certificate. On average, you’ll reduce the time period between visits and drive incremental business over the long run.

Is your house in order for loyalty? Let’s face it. All this talk of customer loyalty doesn’t mean anything if your product, price, and service aren’t up to par with your competitors. The best marketing program in the world will not overcome a fundamental deficiency in your product or service. Before you set out to build customer loyalty, do some research with your customers and your employees. Seek the answers to the following questions.

The answers to these simple questions will help provide some powerful insight. Before you set out to keep customers longer, you must understand why they come and go in the first place. Before you can set out to improve share of customer, you must understand the extent to which customers split or consolidate their business in the first place.

Is your business really at parity and will an additional tiebreaker work? Few, if any, marketing programs will overcome a fundamental price/value disadvantage. If you learn from your research that you lose significant business based on price, I suggest looking at that long and hard before developing a loyalty marketing program.

Before you can determine whether or not the economics seem to work, you must do some preliminary work on calculating customer value. Once you’ve done that you must make some assumptions about how effective you’ll be at improving retention and increasing share of customer and what impact those improvements will have on customer value. This will give you some sense of whether or not the opportunity is substantial enough to pursue. The dynamics of your individual business will determine how much a customer is worth.

The right outside perspective may be helpful in navigating through all the considerations and options set forth in this article. Be careful. There are plenty of consultants and consulting firms out there that may charge you a bundle and leave you feeling unsatisfied with the results. Be sure to work with someone fairly practical unless you have deep pockets and are in no hurry. Make sure that any work a consultant does is focused on a plan that can be acted upon.

Another alternative may be a marketing agency. Select one that has some experience in loyalty marketing. But, you must be wary here also. Some marketing agencies are not all that concerned about whether or not your house is in order for a loyalty program. They might help you develop and launch something that you’re really not ready for. It’s best to pick an agency that has some understanding of the organizational implications of loyalty marketing and not just marketing programs.

Loyalty marketing is business strategy, not just a marketing program. It is a journey, not a destination. Once you set out on a course to cultivate customer loyalty you cannot and should not stop.

Developing powerful relationships with customers can work wonders for your business. Use the tips and considerations in this article to get your company prepared and launch a well-orchestrated loyalty effort.