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One-Trick Ponies and Customer Loyalty

Learn some of the common reasons that companies fail to create customer loyalty.

About twenty years ago, Paul Simon wrote a song entitled "One-Trick Pony." The song describes a performing pony that has learned only one trick, and he succeeds or fails with the audience based on how well he executes it. As Simon conveys in the lyrics: "He's got one trick to last a lifetime. It's the principal source of his revenue."

I see this song, and its message, as a metaphor for what ails many companies endeavoring to create customer loyalty and customer loyalty programs.

A key reason companies have a difficult time achieving customer loyalty is that the fail to understand the fundamentals of value delivery. They focus on customer satisfaction, which is often too benign and passive an approach to create value. They use incentives and promotions in limited, ineffectual ways.

They use single-element or minimal element tactical approaches, such as pricing, merchandise, loyalty cards, or points-based programs without ever determining whether this is sufficient motivation for long-term purchase. Smart marketers know that, for instance, being a low-cost provider is a trap. In the United States, East Coast discount retailers like Caldor and Bradlees have filed for bankruptcy, and Jamesway, Ames, and Filene's are in trouble.

Being a low-cost provider means that brand strategies get little emphasis, and they require little investment. Let's be honest. Cutting costs does not require much imagination. In addition, it does not produce either much loyalty (customer or staff), strategic differentiation, or profitability.

In a 1980 Harvard Business Review article by William Hull (written, parenthetically, about the same time Simon wrote "One-Trick Pony"), he reported study results comparing companies that competed on differentiated customer value versus companies that competed principally on cost. On any important measure - return on equity, return on capital, and annual revenue growth - companies delivering value beat the price competitors every time.

Customers can almost always locate cheaper products or services. Ultimately, they will invest a greater share of their purchase dollars with suppliers who deliver superior value. Competing on price, or any other single dimension, may pull away customers from other suppliers in the short run, but it will be difficult to keep them for long. Price is rarely a sufficient 'barrier to exit', and is more often an invitation to churn.

The same thing often holds true for incentive programs. Many consumers participate in programs like supermarket bonus clubs and airline frequent flyer programs, but they aren't particularly effective at producing greater loyalty for any one airline or any one supermarket chain. Customers are often members of several programs, and the most active users tend to be those who would have been frequent purchasers anyway. The incentive and reward structure benefits the already loyal rather than increasing loyalty. Gift programs, travel, dining, entertainment, merchandise, and cash award programs, and other plateau and pre-selected response stimulus programs are having an increasingly difficult time breaking through the clutter to provide unique, differentiated customer value.

On the web, MyPoints, Netcentives, Cybergold, Beenz, and now S&H Green Points enable consumers to earn rewards quickly through multiple merchants. Some of these online incentive programs have positively increased transactions, mostly among younger, female, and active surfing potential buyers. Compared to traditional bricks and mortar merchants, who may spend under ten percent of revenue on marketing, online merchants spend, on average, two-thirds of their revenue on marketing. Promotions account for between 50% and 70% of the marketing budget. Still, very few of these web merchants have positive cash flow.

To keep these incentive promotions from being one-trick ponies, they must be carefully targeted to the right consumers and at the right time. These programs must have four effective elements: ability to attract prospects to the web site, and once there, to generate consideration, preference, and purchase. Getting infrequent buyers to purchase more frequently, or frequent buyers to place larger orders through the use of incentives will hinge on how well companies use their customer profiles. Even more basic, it must be well understood what customers perceive as value and what it will take to optimize their repeat purchases. The essentials for bricks and mortar product and service providers are virtually the same.

Generic, cookie-cutter and 'me-too' discounts or incentives don't do particularly well at increasing overall customer 'share of wallet', because they don't sufficiently reward the customer for their enhanced purchase activity over time. All that's really required to meet the customer halfway is infusion of some targeted, personalized elements to the incentive program to make them more attractive and beneficial.

The first step is to segment customers who should receive different incentives. This can be done through both basic and applied, or pilot, customer research. For example, for large customers who purchase infrequently, the company might have determined that, if they offer special discounts made within the near future, say 60 or 90 days, these customers would find that attractive. Customers who purchase frequently but in low volume amounts might be offered a discount on their next order, so long as it is larger than their last order. The array of potential loyalty program offerings can be customized based on identified needs.

What about incentives for customers who are both frequent and large volume purchasers? Well, start by saying 'thank you' to them. Few things are more appreciated than thanks, and few companies express their gratitude as much as they should. Many forget to thank their customers altogether. This is especially critical for web-based companies, where the purchase experience is frequently virtual rather than personal. Thanked customers are more likely to go out of their way to provide positive referrals and testimonials, important in the hyper-competitive web environment.

There are a couple of online companies which have recently impressed me in the way they've involved and engaged customers in the provision of strategic, multi-level value. This has included their use of customer data and purchase incentives. One is eBags, which markets luggage, backpacks, handbags, etc; and the other is SmarterKids, a marketer of learning-oriented toys, games, books, and software for children.

Unlike other sites which offer toys and related products for children, SmarterKids employs a team of teachers on their staff who evaluate each product on more than 200 attributes, including appropriateness, grade, major and minor skills required, and learning style. This gives buyers confidence. Products are rated on overall appeal (how the team of experts see it), ease of use (how much support and preparation an adult needs to provide a child so the product can be used), fun (imaginative and entertaining elements), and depth (ability to grow with the child?s abilities and interests).

One of the ways SmarterKids builds a deeper one-to-one relationship with its customers is through its referral incentive program. They ask customers to refer a prospect. For that favor, SmarterKids sends both the prospect a $10 discount coupon; and the customer also receives a $10 coupon. SmarterKids sends a personalized e-mail to the prospect, which the customer has initiated on the SmarterKids site. The e-mail contains instructions to go to a special site that gives the prospect the discount.

This particular program isn't directed at specific customer segments; however, it does illustrate how companies can set up incentive programs that are directly related to elements of customer loyalty, in this case customer referral. It's simple, but effective.

A more sophisticated use of incentives and customer data comes from eBags. Launched early in 1999, the site has 150 brands and over 4,000 products. They have had monthly sales growth of 50%. EBags has focused on creating a site that provides consumer value.

They ask consumers to return to the site 30 days after purchasing to rate the products they bought, and more than 30% do. They post all of their shoppers' opinions on price/value, appearance, durability, and overall performance, good or bad, and whether the buyers would purchase the product again. Close to one quarter of eBags' customers offer testimonials, and these are also carried on the site.

Ebags has set up alliances with travel sites Expedia and Travelocity, which provides added credibility. They have created exciting sweepstakes, such as "Million-Air", which has enabled them to build their database quickly and inexpensively and establish closer dialog with consumers. The sweepstakes also has a referral element. The sweepstakes generated over 60,000 names in 90 days, of whom 97% were new eBags members. Also, it generated 8% of eBags' sales during the period, at a cost of only $.40 per name. Less than 2% of those who entered the sweepstakes asked to unsubscribe, so eBags was able to create a very strong, interested permission-based customer and prospect list. As they say in the direct response business, this is definitely a self-liquidator.

Customers of eBags are segmented according to lifestyle ? business, sports interests, travel, children, life stage, outdoor activities, etc. - so that they can target product recommendations keyed to feedback. The "My eBags" program - opt-in monthly newsletters, special offers and promotions, monthly event reminders (special occasions and individual life events) - is built on their in-depth research and understanding of what customers value. Out of this insight have come things like giving customers a $5 birthday credit. The objectives of these programs: Making the experience valuable, attractive, relevant, and personalized.

On the business-to-business side, eBags has affiliated with "Premier Perks", a new employee benefits program administered via company intranets and liaisoned through the companies human resources groups. This program allows companies to give their employees access to special discounts from well-known Internet retailers. Ebags is one of the retailers, along with sites offering golf equipment, cooking utensils, wine, videos, flowers, and art. So far, companies like Mitsubishi, Micron, Cigna, and Ceridian have signed up for the program; and "Premier Perks" is expected to reach over 500,000 employees in the United States within the next couple of months.

EBags has also affiliated with 'community' travel sites and fundraising sites, like KickStart.com, increasing the levels of their customers' involvement beyond merely products.

The bottom line: eBags is a pony with many CRM 'tricks' to offer its customers. They have strategically differentiated themselves from other online retailers. They have built a powerful database, which they employ effectively. Customers are rewarded for interacting, and they have multiple, engaging reasons to return to the site. In their relationships with customers, eBags has optimized repeat purchase and share of wallet, creating site brand loyalty in the process. Unlike other sites, they are customer-centric, not product-centric.

Paul Simon's song lyrics conclude: "...the bag of tricks it takes to get me through my working day." Companies would be well-served to have a bag of CRM and customer loyalty tricks, using disciplined research and customer data to identify them, rather than relying on only one, to get them through.

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