When you’re selling hammers, every prospect looks like a nail. You’ve heard the expression before. The loyalty version of this is that many suppliers think every solution has to be currency based because that’s what they are selling.

I can hear the groans now, but don’t worry. I’m an advocate of data-driven marketing strategies that are measurable and, whether you like points or not, having a currency as the center of your loyalty program gives you an easy way to keep score. There are lots of other benefits too, an important one being that consumers who belong to the programs tend to allow the brand a mistake or two as they have a vested interest in protecting the value of their accumulated points or miles.

That said, there are situations that not so much demand a non-points solution, but enable it to the extent that points are not in the consideration set as a solution. I’ve categorized these into three models with a few brands as examples for each one:

• Price Driven: Walmart and Costco
• Brand Personality: Apple, Red Bull, Zappos
• Social Interactive: Tasti D-Lite and Carrabbas

Zappos is the subject of the day and although I had heard all the stories of how founder Tony Hsieh personally answers tweets to help resolve customer service issues (remember the famous tale from Tara Hunt on the subject?), the Zappos story truly came alive for me when I heard Jenn Lim, the founder’s spouse, make an inspired presentation about Zappos and her new business, Delivering Happiness.

Delivering Happiness was named after the 2010 book written by Mr. Hsieh and took on a life of its own after Jenn Lim and a core group of customer fanatic “Zappites” decided they wanted to spread happiness across the nation and across corporate America.

The spring of this Happiness that seems to be a renewable resource at Zappos is their company culture. Zappos believes so much in promoting a specific culture that it takes time to solicit the opinions of its employees, partners and customers in assembling its “Culture Book”. I was able to obtain a copy (all you have to do is ask) of the 2010 Culture Book and was impressed to read the 200 plus pages of testimonies from Zappos loyalists as well as see their culture documented in living color through the pictures in the book.

The Zappos Culture is based on 10 Core Values. You can get your own copy of the book, so I’ll just share my favorites from the list of 10:

1. Deliver WOW through service
2. Be Adventurous, Creative, and Open-Minded
3. Build Open and Honest Relationships With Communications
4. Do More With Less
5. Be Humble

Creating a corporate culture is one thing, having the commitment to really live it out is quite another. Zappos has used its culture as the basis for a business that is set apart from competition and that has created customer loyalty without giving away points, miles, or other formal trappings of a loyalty program.

There’s something to be learned here, especially in the age of Social Loyalty. As another saying goes ….. if the shoe fits ……

The past few years we’ve seen somewhat of Cambrian explosion of products and services designed to help consumers burn their loyalty rewards.  Colloquy has studied the issue and found that around 1/3^rd of all earned loyalty awards go unredeemed.  Clearly there is a market for helping consumers get the most from their loyalty earnings.

Continuing our coverage of innovations in the areas of customer engagement and liability management, we interviewed Paul Hebert – Sr. VP Marketing and Skip Kitchen – Sr. VP Business Development, to learn more about LoyaltyShares LLC.

Launched in October after two years of work, the New York City based company, enables loyalty program participants to redeem their loyalty earnings for shares of stock in the sponsoring company.  If you’re a Delta frequent flyer with millions of miles – buy stock instead of stockings.  If you’re a member of AMEX rewards and just can’t stomach another trip – grab a few shares of AMEX.

Based on experience designing and operating a similar program for a regional hotel chain, LoyaltyShares LLC assembled the technical and financial resources needed to create an interface, currently called a Loyalty Equity Acquisition Program (LEAP^TM), connecting the loyalty program to a direct stock purchase plan. This allows members of the loyalty program to convert their earnings in the program – whether miles or points or whatever – into shares of company stock.  The redemption event can take place monthly and the conversion rate is set by the sponsor. Consumers pay a small annual fee with their points to have access to the LEAP^TM service and they can then execute a trade each month of the year for however many shares they wish to purchase.

What is interesting here is that not only do consumers win by getting a rather unique redemption option – the sponsor also gets a win by having what is a liability – their reserve for unredeemed points – converted into equity – stock in their company.   While any redemption would reduce the company’s liability, this option enhances its equity as well and would seem to be have a positive impact on a company balance sheet.

The partners in this effort also believe – and some research does back them up on it – that customers who own stock in a company are more loyal and likely to recommend the product or service.  It does make sense that investors/owners would want their stock to increase in value and therefore would talk it up with their social networks – both virtual and real.  Points don’t grow in value if they sit in an account waiting for redemption – but stock can increase in value.

Buyer beware though – stocks can also go down in value.  When consumers redeem for stock in a company they run the risk of losing some of the value they had accumulated in points or miles. We’ll recognize that risk but also say that it’s manageable compared to allowing points to go unredeemed and “break”.

In my conversations with Paul Hebert, I learned that LoyaltyShares has a patent pending on the application and have received great feedback from their early discussions with loyalty sponsors and industry insiders.  Though most sponsors may not be able to connect its program members with shareholders, the company believes an opportunity exists to capitalize on a defined group of shareholders who are also members of their loyalty program, opening up new avenues for customer engagement.

My Take

1. With liability for unredeemed points on the increase and consumers looking under every rock for a reward option that creates excitement and value, LoyaltyShares has potential.
2. Converting points to stock invokes math similar to cash back – one of the most traditionally desired redemption options – yet this option has the potential to increase a customer’s loyalty value over time.
3. On an emotional level, I have to believe that consumers who are stockholders will be more inclined to become brand advocates in order to protect their investment.

What do you think?

1. Will offering equity in a company change the way consumers define customer loyalty?
2. Do you think consumers will take the risk of redeeming for stock?  Could people see this as a way to recap loses in 401K’s with “free money”?
3. Will Social Giving and Ownership Loyalty become two pillars of the changing loyalty landscape in 2012?

Either way – in my mind the redemption space just got a little more interesting.

At Hanifin Loyalty we like to talk about what it takes to build customer loyalty, but we also pride ourselves in being good listeners. We listen to clients and we listen to customers. Like the old saw said “God gave us one mouth and two ears for a reason”. Maybe they should be used in that proportion.

We’ve been listening to Millennials lately and we’ve shared a series of posts from our “Mystery Millennial” giving our followers insight into how Generation Y perceives the marketing efforts of big brands and local merchants.

Today’s story highlights why our Mystery Millennial loves Toys R Us.

Toy shopping with my little toddler is so much fun these days.

She sits in the cart eying the shelves with the kind of awe that such an exciting place inspires in children; innocently free from greed at her age. I love to indulge her wonder, and am amazed at what holds her attention, i.e. the cheapest trinket in the store. Much to my pleasure that’s a purchase that makes us both happy!

On a recent outing to Toys R Us I signed up for their rewards program. I had heard good things about recent updates to the program, and decided it would be beneficial to try and save some money. My experiences at the store surprised me, and the loyalty they established with me was not what I was expecting.

The main reasons I now shop at Toys R Us are less financially based and more thanks to the customer experience in-store. I have been reminded what old fashioned customer service looks like and how that often has far more weight with my purchase decision than just saving a few dollars.

The smiles, help, and conversations I have enjoyed from the employees at Toys R Us (even from the shy tech dude at the game counter) have renewed my love for shopping in-store rather than online. On one visit, I was inconvenienced when a security tag was left on a shirt by accident. It’s embarrassing when the alarms go off as you walk out the door and I appreciated the way store employees handled the situation and truly tried hard to make me a happy customer.

I will continue to shop at Toys R Us and Babies R Us. Maybe it was the money-saving rewards program which brought me into the store to begin with, but my loyalty to this store in particular was won by the sense of welcome and good cheer that I received from the people that work there.

In my opinion, a rewards program gains true loyalty when the fact that you just saved money is over-shadowed by the pleasure it was to shop!

Editor’s Note: There is wisdom to be gained by listening to our youth! Millennial marketers should lend an ear.

There has been a LinkedIn discussion ongoing for several weeks that, if you care about customer marketing, causes you to stretch your mind a bit.

The question? “Can you use ONE WORD to describe the biggest challenge for Loyalty professionals?”

I read the litany of responses and found it worth documenting what keeps loyalty and database marketing professionals up at night. The answers that popped up with highest frequency fall into 2 categories and provide insight into the macro themes we are confronted with these days to build long term sustainable customer loyalty.

Core Challenges:

These one-word descriptions describe the challenges we have faced in loyalty marketing from the outset in the early 80’s. We’ve got to start with objectives to reach a good result and we are continually challenged to be financially accountable to project stakeholders.

• Accountability
• Budget
• Commitment
• Creativity
• Education
• Knowledge
• Objectives
• ROI

Loyalty Futures:

Now that we’ve mastered the art of enrollment, we are challenged to increase and maintain consumer engagement with loyalty programs. We need to do a better job using the massive stores of data we already possess as well as carefully enhancing it with more preference data to enable personalization.

We also need to move beyond traditional models and embrace ways to capture the attention of Consumer 2.0, an increasingly powerful population segment in the US and beyond. All of this needs to be accomplished in an environment of withering patience, both from corporate management and in terms of consumer attention span.

• Data
• Differentiation
• Evolution
• Engagement
• Non-conformity
• Patience
• Relevance
• Stickiness

The term most often suggested to define the biggest challenge for Loyalty Marketing professionals was Relevance, indicating a self awareness of our need to make program offers meaningful, transparent and “real”.  In turn we must communicate offers more effectively via preferred channels. It might also give a hint to the importance of including local merchants in loyalty programs to bring value to consumers on a daily basis.

Two other one-word answers to the question emphasize the changing nature of customer loyalty: Groupon and QR Codes. Translated, there are two distinct challenges to wrestle with here.

1. How to position traditional loyalty economics against the simplistic allure of deep-discounted daily offers
2. Whether and how to incorporate  social and mobile communications channels into existing programs

The (r)evolution known as Social Loyalty has begun and the new e-Book from Hanifin Loyalty of the same title will be released in January 2012. In the book, we’ll address the nature of the changes underway and shares strategies that you can use to remain relevant with Consumer 2.0 in 2012 and beyond.

Stay tuned.

In the final part of our Three Part interview series with Rob Markey, Bain & Company, we share insights from Mr. Markey on how to better execute surveys, whether to introduce incentives to improve survey responses, and get his opinions on whether NPS or other metrics will eventually influence share prices on public exchanges.

Oh yes, we’ll also get to the bottom of whether there really is “just one question” to get a grip on customer loyalty.

Many firms have response rates to surveys in the single digit range. Some respond by offering incentives to drive up response to their NPS surveys. Mr. Markey stated that “at Bain, this is evidence that you are not earning your customer’s feedback”, adding that “offering incentives is almost always a sign that a flaw exists in the customer feedback process”.

Listening to the results that do come in and making change on the front lines will earn your way to 30-40% response rates over time. Rackspace, one of the examples cited in The Ultimate Question 2.0 gets above 60% response rates to its surveys. “Here’s why” stated Markey “Rackspace earned participation in its surveys because they are meaningful to the customer”.

According to Markey, being satisfied with a 5 – 15% response rate is dangerous. Business should seek the root cause for low response rates and test surveys across groups that are weighted to promoters, passives and detractors. “Detractors are less likely to respond to a survey than prompters” said Mr. Markey, and “bias needs to be rationalized through testing”.

When I asked Mr. Markey if measures of customer value predicted by NPS or other scores would one day influence share price and market capitalization, he said that “it was already happening.” Though he cited confidentiality, Markey stated that “an average category leader in NPS scores grows at least 2X competitive growth rates”, adding that “several nationally recognized investment firms pay attention to NPS as an indicator of companies they would invest in”.

I couldn’t let my time with Rob Markey end without asking one big question: Is there just one question that companies can use to predict and / or measure customer loyalty? Markey explained that “when done on an apples-to-apples basis, NPS correlates closely with other measures such as satisfaction, but that “if the goal is to find the best statistical predictor of individual customer behaviour, most likely a multi-variable index will be superior to any single metric index”.

For example, the investment firms cited earlier use NPS as a predictor of value, though it’s not the only metric considered. Having said that, Markey added that “in many instances, NPS will replace traditional customer satisfaction metrics, mostly for the practical superiority of the NPS system”.  “Not a single loyalty leader measured their way to success” said Markey, adding that “it’s hard to get employees fired up about some metric”.

For Markey and Reichheld, the metric is the starting point. It is the metric that provides the compass to navigate the path forward, but it is the system that is the path itself. The victory in where they have arrived with “The Ultimate Question 2.0” is that the system has been created and business now has a reliable option to predict customer loyalty and to help bring continuous improvement to the enterprise.

My interview with Rob Markey about the new book, The Ultimate Question 2.0 “How Net Promoter Companies Thrive in a Customer-Driven World”, continues today with a closer look at how the “score” has evolved into a “system”.

The book includes a number of case studies ranging from Charles Schwab to Apple Retail to The Progressive Group of Insurance Companies. One common element of execution employed by each firm was to include a short-cycle, closed-loop feedback mechanism that turns survey results into usable business intelligence that front-line managers and employees can use to better serve customers.

Mr. Markey emphasized the importance of collecting accurate NPS survey scores but also to determine the root cause of interactions that leads to people becoming “promoters” or “detractors”. Was a price too high? Could a better deal be found at a competitor or did the competitor allow more flexibilities in service agreement rules? Whatever the reason, it is essential to be able to deliver feedback from customers to the employees most directly responsible to deliver enhanced customer experience. Through the accumulated experience from working with multiple companies across varied industries, Markey and Reichheld were able to dig deeper and understand practical methods to create change.

Markey stated “Everyone in the enterprise managing a customer touch point needs to build greater understanding of where they stand with their customers, whether front-line personnel or executives… for real change to take effect, business people have to translate elements of feedback into usable and actionable items that customers can understand.”

The second critical element Markey noted was the ability to connect NPS improvements to robust economics at the enterprise level. Markey explained “managers must be able to demonstrate what it’s worth to improve NPS scores versus the competition, or the value of changing a detractor to a promoter”.  This is aspect of developing a learning environment through working with multiple enterprises that has helped to transform the score into a system.

Markey capped off this line of thinking by sharing three essential elements to successfully putting NPS to work in your business:

1. There must be a reliable way to evaluate and sort customers and employees as promoters, passives, or detractors. This evaluation must then lead to identifying customer behaviors that can be analytically tied to positive business outcomes
2. An organization must create a fast-cycle, closed-loop learning process to deliver survey as well as verbatim results to customer-serving personnel. The organization should engage in “deliberate practice” over time to demonstrate to customers that they are listening to their critiques and expression of preferences.  This could be the most distinguishing characteristic of the three elements as traditional customer satisfaction research is anonymous and misses the opportunity to establish two-way communication with customers
3. The commitment to earning the loyalty of customers must be a top priority of the organization and be supported from the top down. This commitment must be embodied in daily actions and NPS must have a high level visibility with employees. Firms putting their weight behind NPS initiatives in a sincere manner earned the best results.

When asked about finding the balance between focusing on the customer and enabling employees / associates to deliver critical feedback, Markey responded “low employee engagement is impossible to coexist with high customer NPS”. He continued “a company may create a temporary market advantage through innovation or pricing, but it is difficult to sustain high levels of scores without employee engagement”.  “It’s not just the right thing to do”, added Markey, “it’s necessary to rise above the competition”.

Interestingly, only about half of the firms encountered by Bain & Company over the past 5 years working with NPS take such a position. Reflecting on the recent economic downturn, Markey cited that “the companies which entered the global financial crisis with higher reserves of goodwill and higher NPS experienced lower dips than the general marketplace”.

In the final part of the series later this week, we’ll share some interesting tips from Markey on successful survey execution and find out if there really is “just one question” that can be used to determine customer loyalty levels within a business.

In a previous post I mentioned that I was the beneficiary of a serendipitous moment in which I was given the opportunity to interview Rob Markey, a partner in Bain & Company’s New York Office and head of the firm’s global Customer Strategy and Marketing practice.

The topic was a new book, The Ultimate Question 2.0 “How Net Promoter Companies Thrive in a Customer-Driven World”, which Markey co-authored with Fred Reichheld and published in September. The book was a revised and expanded edition of The Ultimate Question, the original book published in 2006 which introduced the world to the Net Promoter Score (NPS).

When I spoke with Mr. Markey, he was quick to shift my focus from “book review” to developing an understanding of how NPS had evolved from a scoring metric to a system which had developed through the collective experience of the thousands of companies working with NPS since 2006. With so much to talk about in a brief period of time, I have crafted a three part series of posts covering the interview, of which this is the first.

Having received a copy of Fred Reichheld’s book, The Loyalty Effect upon walking into the doors of Frequency Marketing in 1999, I was more than familiar with Reichheld’s ground breaking thought that “loyalty” had to be formed with top-down strategy that included not just customers, but also employees, shareholders, even suppliers.

This timeless path to creating sustainable competitive advantage has been followed by thought leaders in the loyalty marketing industry, though much of what we see in the market today known as loyalty or rewards programs have fallen short by focusing on customers, while giving a disappointing hand-wave to the interests of the other constituents.

There are voices in darkness supporting Mr. Reichheld’s original thesis. One industry group has emerged, the Enterprise Engagement Alliance, which is “dedicated to the concept that engagement is an enterprise-wide endeavour that begins with people and ends with profitability”. The organization’s principle mission is to support research and education to help brands “make the connection between engaging people in business and long-term financial performance”. Colloquy has a renewed focus on Enterprise Loyalty, and I have taken my stand by preferring to frame our work for clients as delivering Customer Strategy. In my opinion, every organization needs a well planned and executed Customer Strategy, while not all need a “Loyalty program”.

Markey started off by sharing that his initial interest in this topic came through reading Reichheld’s 1990 article “Zero defections: quality comes to services”. Markey’s curiosity to identify tools for making decisions on behalf of customers instead of just shareholders led him to Bain and Company and he has been working closely with Mr. Reichheld ever since.

Markey told me that this 20 year quest has led him to adopt a simplified notion of the ultimate objective – to transform the golden rule from something nice to say about customer relationship management, to something that can be implemented and drive tangible results to a business. Working with Reichheld, a system of thought was developed that, if implemented as intended, would lead to sustained market improvement and to making good decisions to earn customer loyalty.

When asked about the central point of the new book, Markey explained that the 2006 “one big question” book was meant to introduce the thesis, explain the metric construct, show how to measure, it and lay out the argument for adoption. In essence, it was a starting point.

When asked what he had learned in the years between 2006 and today, Markey pointed to the fact that Bain & Company has worked with dozens of companies around the world to implement NPS in their operations and have seen tremendous results returned, from lower churn rates, lower acquisition costs, and improved sales and profitability per customer.

In short, the “score” had become a “system” with a solid methodology to help firms guide implementation and enough market feedback to confidently predict results. Part Two of the three part series will cover how the systems works as well as share the three essential elements to successfully putting NPS to work in your business.

Editor’s Note: Frequency Marketing has since become LoyaltyOne, while The Loyalty Effect still sits on the shelf in my office, dog-eared as all good books should be.

Speak the word Loyalty and you get a range of predictable reactions. If you’re at any number of marketing conferences, the word association game leads to responses of “points”, “miles”, or “discounts”. If you mention loyalty to your friends on the golf course, the reactions range from conversation about one’s dog to “those crummy punch cards” that have been stashed away in a drawer at home.

Because the “L” word evokes such biased responses, thought leaders in our industry have worked hard to redefine the game we are playing. Formal descriptions of “data driven marketing strategy designed to change customer purchase behavior on a sustainable basis” are accurate, though not inspiring. Over the past several years, I’ve move towards Customer Strategy as a broader term that speaks to the need for any company to address the needs of its customer base in a systematic and measurable manner.

My preferred tagline is to say that “everyone needs a customer strategy, but not everyone needs a loyalty program”.

That’s just me, and I have several colleagues who have chosen different paths, either sticking with Loyalty as the descriptor to keep it simple or who have taken up a seat under the big tent of CRM or Customer Management to describe our business.

Then came Twitter. My early web sherpa, The Dude Dean, taught me how to use hashtags effectively among other little pearls of wisdom to create “Google juice”. To create a conversation about our corner of the direct marketing world, it seemed common sense to use #Loyalty after each tweet. Searching on the term a few months ago, I discovered it was time for a change.

#Loyalty denoted a stream of passionate epithets that looked like a painfully assembled chat room for people looking for dating advice. I consulted with other loyalty marketers active in social media and we agreed to use #Lmktg as a way to separate business from personal “loyalty” matters. Thanks to Barry Kirk for his leadership in this effort.

Occasionally though, I check in with the old term to see if anything has changed. Today the #Loyalty Twitter stream offered these bursts of passion for our consumption:

#LOYALTY is the key to a successful friendship or any relationship

show me #Honesty …. ill show u Loyalty

#Loyalty is non existent these days

#Loyalty is so rare these days

Finally I was able to find one Tweet that hit closer to a business related take on Loyalty:

#Loyalty is not about some card an airline gives you for miles. Loyalty is wanting to do business with you, not having to

Reading the comments in the stream, I realized that what these people were talking about is indicative of why its so hard for brands to create long term value with customers. Business has to behave sincerely, as it if really wants to build a relationship, not just manipulate the customer into some form of behavior that is more beneficial to brand than human being.

There are lessons to be learned, even in the Twitter stream. All business owners and managers should revisit the purpose behind his/her marketing efforts. If it is to treat the customer as they wish to be treated, to offer tangible value for repeat purchase, to treat customer data collected like the gold that it is, and to provide customer service to match, then the foundation for success is in place.

If anything less than this, a shift in focus is heartily recommended. Why? Because as the last Tweet of note today said:

The moment you find #loyalty is the moment you’ve found everything!!!

Carrabba’s Italian Grill stands apart from many of its chain restaurant competitors. Sure, the food is freshly prepared, the wood-burning grill adds ambiance to the setting, and the service is excellent, but I was thinking about their approach to building customer loyalty.

Looking at several national competitors in quick-serve (QSR) and white-table restaurant chains, I found that Starbucks, TGI Fridays, Dunkin’ Donuts, Tasti D-Lite all had rewards programs offering points for dollars spent in the location. Crate & Barrel as well as a host of national specialty retailers are partnered with Shopkick, offering Kick Rewards for purchase transactions as well as checking-in at the store and scanning selected product bar codes.

Carrabba’s has selected a different path, one that is principally communication driven, using direct mail, SMS and location based services to deliver offers, promotions and – just this week (see graphic) – money off coupons.

The Amici Club was launched in 2010 with enrollment available both on-line and in restaurants. I encountered the program as I suspect many people did – by filling out a 3×5 card placed on the dinner table. Talk about old school, but Carrabba’s says it has enrolled over 1 Million people to date.

Since my enrollment, Carrabba’s has been a cautious new friend, treating me with respect. I’ve received mostly emails and a few direct mail pieces offering something special related to a holiday or inviting me to a cause related fund-raising dinner. I’ve been paying attention to their mailings because they are not beating me to death, assuming that just because I signed up that I’m their newest “best friend”.

The parsing of the direct and email invitations I have received is a good example of how to manage a customer communication stream. Smartly coordinated communications can move people from enrollment to purchase to survey, leading to additional visits and a willingness to recommend the restaurant to others. In sum, Carrabba’s is effectively managing the customer loyalty lifecycle.

Carrabba’s has also encouraged check-ins with Foursquare and has used both the location based marketing channel and SMS to communicate offers when customers are ready to dine. That’s a great example of social loyalty at work – creating an exchange with a customer near the point of purchase, hopefully presenting an offer that will influence subsequent purchase behavior.

Now, Carrabba’s has taken the Amici Club a step further, sending a direct mail offer for $10 off specific appetizers or a complementary appetizer or dessert with purchase of an entrée.

Carrabba’s has been building its relationship with customers through the Amici Club thoughtfully and gradually, and is presenting a good example of how to engage with Consumer 2.0 using Social Loyalty tactics.

I’m going to continue to pay attention to Amici Club. Let me know what you think.

What do Citi, Sony, Michael’s, Epsilon, and 4 leading Australian banks have in common?

The answer is globalization – of consumer data intrusion – that is.

Most everyone is aware of the steady stream of data breaches perpetrated this year against high profile brands, and some sources have counted over 150 major breaches in the U.S. alone. The two highest-profile might be the intrusion and alleged theft of customer data from numerous Epsilon clients and Sony Playstation users, but the Citi incident was significant as well.

I’ve maintained a theory that data security will be the next differentiating field of play, not just for Loyalty Marketing, but for the broader database marketing industry. The frequency of announcements that we’ve seen during 2011 validates the growing problem.

Although data security has been a concern for over a decade, a move to adopt industry standards began in the 2005 time frame. The top tier of suppliers invested in obtaining PCI Compliance and SAS Type I and II certificates, and for a brief period the industry developed into a “have and have not” landscape. Smaller suppliers could not afford the six-figure investment needed to obtain the certifications, and were forced to make a business decision regarding the impact on their customer base by not having it.

The need for data security certification became overwhelming soon thereafter, and today I would say that PCI compliance is a “must have” in order to compete for business from top brands in North America. Now, the bar must be raised.

I read this statement in an article this week on Supermarket News discussing lessons learned from a 2007 intrusion at Hannaford Bros.: “Compliance with the five-year-old Payment Card Industry (PCI) Data Security Standard – Hannaford was PCI-compliant – proved not a sufficient defense against malware that could pilfer moving card data.”

If PCI isn’t enough, what is? To get the answers, I sought out the opinions of a seasoned practitioner fighting cyber crime and had an interview with Alan Heyman, Managing Director of Cyber Security Auditors & Administrators LLC.

Alan exploded one myth that I had believed about data breaches – that hackers might one day sweep money on large scale from a portfolio of checking or savings accounts at a bank. “It won’t happen that way”, he shared, “the hackers prefer to creep in and instigate small charges that can be perpetuated for a sustainable time without sounding the alarms of the corporate watchdogs.” Apparently an innocent “service charge” appears and the game for the hackers is based on volume and time.

While such direct fraud damage may be significant enough, a host of indirect costs can further devastate a breached firm. Alan reminded me that the attack on TJMaxx a few years back ultimately cost the firm over $300 Million, and Sony’s disclosed cost to date is in excess of $171 Million. Alan told me that “the costs are an aggregate of IT hardware remediation and repair, legal fees and customer notification, and do not include fines and longer term remediation.” In other words, the cumulative cost to business can be enormous.

Like other types of fraud, managers need to look internally to ensure that associates are not part of the problem. There is strong suspicion that the intrusion at Michael’s retail stores was an inside job. The hackers don’t want to be found out and hedge their risk by claiming a few pennies here and there, not unlike the scheme illustrated in the movie “Office Space”.

The risk to brands is hard to quantify. How do you put a price on loss of customer loyalty, goodwill, and trust? The cost of class action suits, fines from state authorities, and customer notification is more easily projected, but think about large scale loss of customers who say “I’m not going to shop “there” anymore or “I’m not going to use my debit card anymore” and the threat comes into full perspective.

Alan validated the Supermarket News statement in my interview, saying that “organizations must work ahead of the game to establish a defensible security position” and that “PCI is not enough anymore, firms must create and maintain a Written Information Security Plan (WISP) to place themselves in an accountable and defensible position, should a breach occur”.

The game has changed again, and all marketers who collect, manage, and maintain consumer data should be re-orienting their view towards security “standards”. I just scratched the surface in my conversation with Alan and we all need to go deeper.

Your brand affinity and customer trust may just depend on it.