Cornering the Market on Loyalty

Most marketers believe they have a pretty good understanding of the value of loyalty systems, but through some informal surveying we’ve found they often focus on less important aspects. Certainly a loyalty system is important for optimizing the value of your customers, but there is real potential that your loyalty approach might apply a discount to your product for actions your customers would have undertaken anyway. We believe the greatest value of a loyalty system is in acquiring new customers, because it can eliminate barriers to purchase. Please indulge us through these two short scenarios—we promise you’ll see loyalty in a new light.

Imagine that one day you receive two direct mail pieces. One includes some useful coupons for a local video rental company that you’ve never used. You commonly use NetFlix—but when you forget to send back the DVD’s in time for the weekend or a sudden urge for a trashy action movie strikes, you usually rent from a different video store or you buy a couple DVD’s at Walmart.

The second piece is an intriguing brochure that invites you to come to the online reward center for yet another video rental company. It doesn’t tell you much—there’s a card with your personal URL: www.vidrent.com/sam.jones and there’s a PIN number. The envelope containing the card states, “Come to your personal site and login with your PIN. Your personal reward center will give you VIP treatment at all our stores, let you reserve new releases of videos and games, accumulate points with every purchase that you can use for any rental or purchase, and will connect you directly to our website and the world’s hottest game designers, with special sneak previews of the movies you like and pre-release delivery of the newest games.” It’s all free—and all you have to do is go online.

Contrast the effort and the value proposition of these two pieces. In one case, you need to remember to take these coupons with you when you go to a store you don’t usually visit. You know it will take you time and be frustrating to register and become a customer. They might not even have anything you want. And the coupons will only be useful if you spend some money. There’s some value and some people will respond, but there are a lot of barriers to response. The company will have to send a lot of these coupons in order to see the needle move at all. And the program remains stuck at acquisition—the most expensive part of any marketing campaign.

In the second case, you don’t need to go anywhere or spend any money. There’s no hassle at all—you type a URL, enter a PIN and presto—you’re a member. Response rate will be many times higher than the coupon redemption rate. Once you’re there, a simple interactive dialogue—no more challenging than chatting at a party—helps you configure the system so it adapts to your interests and desires. It immediately tells you that there’s a movie being released on Thursday—one you’d love to have for the weekend. The five hundred bonus points you received for signing up are just enough to let you reserve the movie for pick up on Friday night. You won’t have to pay a thing. But if you don’t pick up the movie, you lose your points. You reserve it.

You also see that there is a hot new game available for your Nintendo Gamecube. Nintendo has a special offer on the site to let you join their section of the reward center. You can sign up with a single click and get an additional five hundred bonus points. That’s not enough to buy the game, but it’s enough to reserve and rent it for the weekend at Vidrent—so you do.

Now you have two strong reasons to become a member of Vidrent. The third reason comes by email on Friday. It’s a reminder that you have reserved items on hold and contains a link that lets you go back to the site and print your completed registration form—including your confirmed reservation for that new movie and the hot video game. Of course, the email is a reminder that you want to stop at the store and the paper form folded in your pocket is a powerful secondary reminder. When you arrive at the store, just as the form says, you drop it off with the cashier and go browse. When you’re done picking out a couple more movies and another game you’ve wanted to try, you go back to the cashier—bypassing the line because of your VIP status—hand him your credit card and the transaction is completed in moments. You’ve now got your free video rental and game, and your other rentals and purchases.

On Saturday, you get another email—a friendly reminder that you need to come back to the site and update your personal record to get credit for the movies and game you rented. A single click brings you into the site and brings up the rewards form. You find your sales slip, enter the transaction code printed on it, and then record the videos and games you rented—your reserved ones are already listed—you simply check the boxes to confirm that you picked them up. Reward points for your additional purchases are then added to your account.

The system also tells you that when you return your videos on Sunday you can rent any videos on the suggested list for a week. The list is built from the preferences you stated and the kind of videos and games you rented. It includes some old movies you loved and want to see again and some newer ones that you missed. You reserve several. Now when you return your rentals, you can pick up others that will be waiting for you. It’s the best of both worlds—the ease of NetFlix with the convenience and browsing aspect of a local store.

What we’ve just described is a relatively simple loyalty system that can be applied to almost any product. It doesn’t require connection to legacy databases, accounting systems or transaction processing systems—it operates independently. All that is required is that the reported transactions eventually be checked against the actual transactions for that customer. A simple integration issue to solve—in cases where the volume is small it can even be done manually.

While this system is relatively simple, its impact can be enormous. It’s easy to add partners and programs because the entire system is Web and XML-based. There are deep affiliate opportunities. It scales from small business to Fortune 500 without effort. And, it solves a host of new customer acquisition challenges.