Beware of creating loyalty programs and incentives that attract the wrong kind of customers.
There's a Buddhist temple in Kyoto, Japan, overlooking a small cliff. The cliff has three streams flowing into an artificial pool. Believers take water from one of the streams and pray for youth, beauty, or wisdom. They can't pray for more than one. Otherwise, the prayer won't be answered.
Marketing presents a similar dilemma. We want customers to be profitable over the long-term span of their patronage. We also want high immediate sales numbers, which influence quarterly sales numbers and most likely our bonuses.
We also want customers who won't be a resource drain, who make us spend a lot on customer service. But long-term profitability requires a series of strategies that often don't provide short-term gains. Customer handholding (like help desks and customer service centers) is expensive, even if it may eventually lead to increased loyalty.
So, if you must drink from only one fountain, which will it be: short-term profits, long-term loyalty, or high-touch (and possibly costly) customer service? You can't have them all. Each requires a vastly different strategy.
Or is there a sweet spot among these various goals?
Choosing a Stream: Pros and Cons
Most sales and marketing teams seem focused on short-term profitability. They're rewarded based on quarterly sales numbers, as are stockholders (via daily stock prices and quarterly earning reports).
Long-term customer profitability, a term thrown around in boardrooms, isn't always rewarded. Our financial infrastructure is based largely on short-, not long-, term gains. This is similar to a problem I've commented on regarding multichannel companies. When channel-oriented salespeople are rewarded based on how their channel performs (compared to other channels), a true multichannel strategy can't exist.
Many companies offer first-time incentives. Phone, cable, and other long-term utilities offer "first three months free," "free shipping for your first purchase," "get 10,000 miles for signing up," or "no sign-up costs."
After a user signs on, there aren't many incentives. In fact, loyal customers routinely become angry when promotions are offered to new customers. One company told me existing clients called to demand the free watch the company used as a giveaway for new customers.
Long-term profitability, on the other hand, often comes at the expense of short-term wins. If you don't use incentives, you'll certainly win fewer new customers. Is that always a bad thing? Depends on your business model.
It's like a sweepstakes. A sweepstakes inducing people to sign up for your offering can deliver a ton of people. But they're largely unqualified and only interested because of the sweepstakes. Who needs them? It's better to attract the smaller group actually interested in your services. They're the ones who stick with you, even when a competitor offers a larger promotion or sweepstakes.
When I switched to T-Mobile from Verizon, it was because I needed a GSM provider that would allow my phone to work globally. It didn't matter what incentives T-Mobile had (I didn't even take the free phone). No counterincentive from Verizon would have changed my mind. Verizon doesn't offer the service I need.
Coupons Lose Effectiveness
Some companies couple first-time incentives with ongoing coupons in an effort to sustain loyalty. Yes, when you give customers coupons they'll use them. Over time, you train customers to only interact with your company when they receive coupons. The result is you train them to only purchase when your margins are cut lower than normal. These aren't the customers you want to breed. Over time, they cost more money.
Constant couponing has two other results. First, coupons lose effectiveness, just as antibiotics lose effectiveness when taken too often. The body becomes accustomed, and resistant, to them. Another side effect (which almost seems to contradict the first) is coupons can become like a drug. Addicted customers become irate when you stop providing them.
New Vs. Existing Customers
Customer loyalty programs, both hard (like a points system) and soft (a wish list or other sticky feature), can be used not just for existing customers but new customers as well. If you value long-term customers over new ones, this achieves two purposes: It makes loyal customers happy and more loyal; and it shows prospects how much you value their relationship.
When correctly designed and marketed, loyalty programs make prospects salivate with the desire to become part of your "family." That's how I felt with Marriott Rewards. I couldn't wait to stay more than 75 nights so I could reach Platinum Level.
Spending Money on Customers Vs. Lowering Loyalty's Cost
The best way to increase customers' loyalty is in their time of need. Retailers tend to know this, but other industries don't. In retail, irate customers can turn into your most loyal customers if the service experience is stellar, the return process is swift, and the company admits when it makes a mistake. In customers' eyes, it becomes a "great company," overshadowing the little problem they had.
Insurance companies don't get this. I have no loyalty for insurance companies. I pay to insure my car, health, and apartment. But, after five years of my loyalty, my car insurance company dropped me because someone vandalized my car and the repairs were expensive. Health insurers drop you after extended hospital stays, home insurers drop you after burglaries. It makes you wonder why they exist in the first place.
These companies should use a "moment of need" to build loyalty. If my insurance company stood by me in my time of need, I'd be an extremely loyal customer.
Which Stream Do You Drink From?
Long-term loyalty? Short-term numbers? Expensive customer service programs? Are all these things at odds with each other?
Some are, some aren't. The programs commonly put into place for short-term number bumps can hurt long-term loyalty programs. Expensive customer service programs risk lowering short-term numbers but lead to greater customer loyalty. Long-term loyalty programs won't give the kind of quarterly highs you're used to, but they'll keep your levels consistent.
And pray for wisdom. That's what I did.
Until next time,
Jack Aaronson, CEO of The Aaronson Group and corporate lecturer, is a sought-after expert on enhanced user experiences, customer conversion, retention, and loyalty. If only a small percentage of people who arrive at your home page transact with your company (and even fewer return to transact again), Jack and his company can help. He also publishes a newsletter about multichannel marketing, personalization, user experience, and other related issues. He has keynoted most major marketing conferences around the world and regularly speaks at Shop.org and other major industry shows. You can learn more about Jack through his LinkedIn profile.
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December 2, 2015
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