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Keep Your Loyal Customers
by Kim M. Bayne
e-Business Advisor magazine
September 2001

Subscribe. Unsubscribe. Subscribe Unsubscribe. So goes the opt-in patterns of online
visitors, begging the question: Can a Web site keep a customer for life? It's not
impossible, but it is challenging.

In the digital world, devoid of human touch, consumer fickleness is a problem. What was
exciting today turns boring tomorrow, making online relationships fragile. Always in
competition with "the hottest new thing," businesses with an online presence struggle to
find ways to attract and retain customers. For many e-businesses, future survival may
mean banking on existing relationships by implementing a structured customer loyalty
program.

So where does loyalty marketing fit in? Loyal customers spend two-thirds more online
within three years after first buying from a Web site, according to business consulting firm
Bain & Company. When your business is a known entity, customers develop a comfort
level and affinity for your brand. They perceive your relationship with them to be useful,
fulfilling, and/or rewarding. Loyal customers are inoculated against defection to an online
competitor. Consequently, your market share increases, giving your company a stronger
competitive footing on today's shaky economic ground.

Everybody wins

Loyalty programs provide encouragement for desired behavior such as word-of-mouth
referrals, and frequent purchases or visits.

The concept of rewarding shoppers for loyalty to boost sales and increase profits is
nothing new. In 1896, Sperry & Hutchinson introduced S&H Green Stamps to entice
shoppers. The number of paper stamps provided by a participating store was related to
the number of dollars spent by the shopper. As a result, families kept visiting the same
grocery store for years just so they could fill booklets for a coveted free gift, such as
dishes or a tape recorder. One hundred and three years later, Sperry & Hutchinson's
partners include Lands' End, Sprint, and Hertz--well-known companies interested in
rewarding customers through an online program called Greenpoints.

In the 1980s, American Airlines became the first air carrier to announce a frequent flyer
program for its best customers. In addition to encouraging travelers to choose one carrier
over another, airlines generate additional revenue by selling miles to partners for use in
their own incentive marketing programs. In 2000, United Airlines teamed with grocery
store chain Safeway Inc. to give registered shoppers 125 mileage points for every US$250
spent.

There's no doubt the Internet's biggest players have embraced the concept of loyalty
marketing, too. San Francisco-based Netcentives Inc., a provider of personalized e-mail
and rewards solutions, helps online clients leverage customer relationships through a
Web-based program called ClickRewards. Online shoppers earn ClickMiles redeemable for
gift certificates, frequent flyer miles, and brand-name merchandise.

Search portal Lycos worked with Netcentives to promote its loyalty program through
banners on LycoShop and sister sites, direct e-mail promotions, and statement tie-ins
with Lycos MasterCard, which succeeded in extending its brand throughout the Internet. In
the long run, increased user participation translates to bigger advertising revenues for
Lycos. Netcentives helped launch the American Express BlueLoot rewards program, which
succeeded in increasing customer spending.

Beyond branding benefits, cooperative marketing, and rewards activities, successful
e-loyalty programs require meaningful forethought into real e-customer needs. In her
book, Loyalty Marketing for the Internet Age, author Kathleen Sindell recommends
serving customers on several levels, simplifying online interactions, and addressing the
individual desires of your most faithful customers. She cites personalization and
customization as two focuses for dedicated loyalty marketers.

The ups and downs of e-loyalty programs

If you're planning to launch an incentive-based e-loyalty program, a turnkey solutions
provider can help. These companies serve as the liaison between the buying customer
and your business, relieving you of the need to divert resources from other marketing
activities.

Full-service providers have an established infrastructure in place, which includes
customizable tracking software and an experienced staff to handle reward fulfillment and
marketing. Online providers, who handle e-loyalty programs in varying degrees, include
Beenz, Cybergold, ipoints, MyPoints, Netcentives, S&H Greenpoints, and Yahoo! Points.

While such service providers are well versed in the ins and outs of program management,
sometimes clients can experience public relations problems when an outside firm is
involved.

For example, Dash.com terminated its services on June 22, 2001. And last spring, visitors
to online marketing and loyalty program site FreeRide.com got an unexpected home
page greeting: "FreeRide goes back to the drawing board." FreeRide executives decided
to rethink their business strategy. Like many Web-based incentive programs,
FreeRide.com encouraged visitors to click through to purchase products and services from
participating companies, thereby earning members credit toward future rewards.
Measurement firm PC Data repeatedly ranked FreeRide as one of the stickiest sites on
the Web.

So what went wrong? E-loyalty programs must be working on some level, otherwise
customers wouldn't be earning rewards. But somebody's got to pay for these programs. In
FreeRide's case, the sponsors weren't paying for services as fast as visitors were using
them. The worst part is how many loyal customers--roughly 500,000--were left out in the
cold when, without warning, the program was shut down.

At least one attempt was made to fulfill a vendor promise. FreeRide's frequently asked
questions page refers Sony gift certificate holders to a link on the Sony site for
redemption. At press time that link was inoperable, which means FreeRide holders of a
Sony reward may be out of luck for now if they didn't act fast enough.

REALITY CHECK: There are other underlying problems with how loyalty is perceived and
managed on the Web. The phrase "e-loyalty marketing" can be considered an oxymoron.
Discussions of e-loyalty often detour from what benefits the user to what benefits the
marketer. A few marketers feel e-loyalty programs merely consist of getting a customer to
the Web, signing them up, and then staying in touch to ensure future sales.

Several e-loyalty programs reward users with redeemable points, perhaps for simply
reading e-mail or surfing the Web. In some cases, registered users can redeem earned
points by bidding for products. Certainly, this approach decreases the drain on your
marketing budget and you don't experience as much payout as other programs, but it
could also increase customer defection. Loyal customers enrolled in bidding reward
programs may never receive your "thanks" for doing business.

BEST BET: If your company's idea of an e-loyalty program includes sending out lots of
promotional e-mail and making customers compete with each other, it's time to regroup.

Three success factors for effective loyalty programs

Trust is the operative word in building loyal customers. Loyalty programs built solely on
the marketer's needs--user registration, statistics, mailing lists, sales--miss the mark.
These approaches fail to address why customers would ever be interested in shopping on
your site.

SMART MOVE: Instead of losing money on misguided loyalty marketing efforts, start by
considering the following requirements:

1. Programs should always address this question first: Does this company care about the
customer's business? Responsive customer service, attention to detail and quality, and
fair prices are a few ways to let customers know you truly care about them. Before you
begin to focus on an e-loyalty program, you must ensure that you're already focused on
customer satisfaction. That's the key to developing an e-loyalty program that actually
succeeds in keeping customers longer. (For more information on customer loyalty, see
the article by Erin Kinikin on calculating customer lifetime value, page 32.)

2. Trust does go both ways. Online shoppers know about incentives, and not all loyalty
programs are created equally. Users looking for a freebie will simply take the money and
run. E-loyalty programs aren't about giveaways. They should always reward visitors for
ongoing behavior or risk alienating loyal customers. When reviewing others' tactics,
beware: Many dot-com businesses haven't gotten the hint yet and continue to reward only
first-time or just-browsing visitors.

3. Programs built on purchase rewards can work to everyone's advantage. For example, in
February 2001, EarthLink and S&H Greenpoints announced an incentive program that
rewards both new and existing customers. New EarthLink subscribers receive 15,000
Greenpoints over four months and 15 Greenpoints for every dollar spent thereafter.

Bill Heys, executive vice president of sales for EarthLink, views the new program as
beneficial to the company's customer retention goals because it rewards customers who
are already loyal, as evidenced by repeat purchase behavior.

EarthLink's relationship with S&H Greenpoints allows it to approach customer incentives in
two smart ways. First, it offers customers different choices with the various types of
rewards available--not everyone wants free movie passes or t-shirts. Second, it offers
several reward levels, which avoids alienating low-dollar, but still frequent, buyers.

Does this marketing strategy fit your business?

Some business types are better suited to e-loyalty initiatives than others. If you can tie
an e-loyalty program to ongoing purchase behavior, like EarthLink's monthly Internet
access fees, you're better equipped to let customers know you recognize their continued
patronage. For products, consider whether the potential exists for repeat sales (same
item), cross-selling (additional item), or up-selling (a more expensive item).

If you operated an online shoe business, for example, you would track how often certain
buyers repurchased the same shoe style as it wore out or the same brand as new styles
became available. Using this data, you could make recommendations on similar styles
through a personalized opt-in e-mail program, and then reward your e-retail shoe
customers through a redeemable points program. This two-pronged approach could keep
users from switching online shoe stores based on price alone, a common problem in the
online shoe business.

Consider the airline industry, which has proven to be a good match for online loyalty
programs. Frequent flier programs have been in place with air carriers for years, and
company executives understand how customer loyalty works to their advantage. Recently,
several airlines have extended their frequent flier programs to the Web, partnering with
reward and incentive brokers to offer more to their customers. Reward provider and direct
marketing firm Points.com recently announced its partnership with American Airlines'
20-year-old AAdvantage Travel AwardsProgram. American's 40 million members can now
visit the Web to redeem frequent flier points with other companies.

Before you revamp an existing program or create a new e-loyalty program, evaluate the
effectiveness of your current customer retention activities. For e-commerce sites, there are
three main ways to track if your e-loyalty program is working:

1. Analyze how many customers buy the same item on a repeat basis.

2. Analyze how many customers buy an additional or better item at a later date.

3. Analyze how many customers tell another user about your site.

That last item--customer referrals--tells the results tale better than any other
measurement. A reputable e-commerce site attracts buying buddies and builds its
customer base quickly. Remember to include a Web-based refer-a-friend form to invite
loyal users to inform others.

Finally, once you establish user patterns, you're ready to survey customers about their
preferences for a customer loyalty program. If you choose to work with one or more
outside service brokers to manage your e-loyalty program, investigate their business
model and funding first. You must ensure that your loyalty promises will be fulfilled.

Article COPYRIGHT 2001 Advisor Publications, Inc. and Gale Group. Reprinted with permission.

Contact
Kim M. Bayne
wolfBayne Communications
PO Box 30208
Tucson, AZ 85751-0208

Are online incentive
programs a viable option for
your marketing strategy?

Yes

E-loyalty programs can
increase sales and boost
profits

Everyone benefits when you
reward both new and repeat
customers

Incentive programs that
incorporate customer referrals
can help

But ...

Some users just take the
reward and run, never to
purchase again

Look for measurable results
to ensure the program is
working for you

Make sure your incentive
program partner is financially
solvent

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