“P” as in Profitability, that is.

Part of the challenge in playing the Loyalty Marketing game is that we, as strategists and solutions providers, tend to confuse the issue for our clients through our own marketing-speak. We spend too much time battling over semantics and definitions when all our clients really care about is increasing their bottom line. An article in this week’s Wall Street Journal “Why a Loyal Customer Isn’t Always a Profitable One” is a great example of how the debate can send the wrong message.

The article is attributed to a group of four led by Tim Keiningham, Global Chief Strategy Officer at Ipsos Loyalty and author of the newly published book Why Loyalty Matters. The premise of the article is that many companies incorrectly associate so-called “loyal” customers with profitable ones. The article states that “most company surveys wrongly define what constitutes a business’s most loyal, and thus desirable, customers” and goes on to make the valid point that “when customer value is included in the measure of loyalty, the goals of improving loyalty and financial performance are synchronized”.

So far, so good, but the article centers on the phrase “loyal customer” as if there is a consistent definition of the term in Websters and Wikipedia. There is no universally accepted definition of a “loyal customer” (is loyal defined by “x” transactions per month or a Lifetime Customer Value forecast in excess of “Y”?), only agreement on how to determine success in what we commonly refer to as a loyalty program.

The business has always been about creating profitable behavior change across a designated customer group. Existing customer behavior is assessed and objectives set for the program in terms of a percentage or numerical increase in activity (increase transactions from “A” to “B” or average purchase amount by “C” percent)  over a specified period of time. Distinct goals are set by segment or subset of the overall customer base and the potential for incremental revenue by each group influences the level of investment justified by the program sponsor.

For more on the monetization of loyalty, read Michael Hemsey’s article just published at Loyalty360.org. Michael is President Kobie Marketing and knows the business very well.

In my opinion, the WSJ article painted the industry as missing the point about connecting loyalty and profitability.  Consider this quote: “Creating and nurturing real customer loyalty requires satisfying customer needs and wants at a sustainable profit. Too often, customer-loyalty experts have ignored the latter in the belief that loyalty and profitability are synonymous“.  Best Buy certainly understood the relationship between customer profitability and loyalty after learning that “as many as 100 million of its 500 million customer visits each year are undesirable”. The electronics retailer subsequently took lots of heat in the press after rolling out its new “angel-devil strategy” during 2004.

I can personally attest that most organizations have a high level of awareness that building loyalty is not about creating emotions which somehow equate to profits. On the contrary, they understand that the game is about marrying qualitative (attitudinal) data with quantitative (transactional) data to create a compelling value proposition that, when sprinkled across portions of a customer base, will return measurable ROI.  The smarter practitioners are in analyzing results and evolving promotions to maintain the attention of most valued customers, the longer we sustain the behavior change.

It is easy to point towards an assortment of companies that rely too much on customer satisfaction surveys to predict loyalty and also too many convinced that answering “one question” will reveal who the loyal customers are. My confidence level in saying that business understands the connection between profitability and marketing investment in its customers is based on having to justify the ROI of my proposed solutions to companies across industry and in different geographic markets for the past 12 years.

I only wish I could get away with justifying the proposed budget for a loyalty marketing solution with the same fuzzy metrics that are accepted when evaluating branding campaigns, general advertising, and even social media (so far). If the Ipsos article were fully on target, my job would have been a heck of lot easier over these past dozen years.

Take it a step farther and I’ll assert that while every company doesn’t need a “loyalty” program, EVERY company needs a well planned and executed Customer Strategy. Imagine if our industry ditched the “L” word and adopted a more inclusive term. The semantics debate might be de-fused and we could get down to business.

A Mosaic is defined as a decorative art involving small pieces of glass, stone, or other material. It is an art form that represents the product of human creativity and captures the eye. Mosaics date back to AD 64 when In Rome, Nero and his architects used them to cover the walls and ceilings of the Domus Aurea. The size and color of each individual tessera, or small tile of stone or glass used to make a mosaic, is determined by the artist and it is unlikely that any two mosaics are exactly the same.

This aspect of singular design is shared by the proprietary planning methodology employed by Hanifin Loyalty to arrive at a Customer Loyalty Mosaic™ , a desperately needed and innovative approach to Loyalty Program design.  Any business with the will to listen to its customers and adapt its product or service offer to serve their needs is, in theory, on the road to success. To build long term brand loyalty and improve lifetime customer value however, a business must go further by matching transactional and qualitative customer data as the basis of a value proposition that is defensible and set apart from the competition.

Every business is capable of creating its own Customer Loyalty Mosaic™, the components of which range from brand message to operational efficiency, quality, and price. If you visualize the Customer Loyalty Mosaic™ (CLM) of familiar companies as a mix of shapes and colors, the idea takes shape.

Walmart’s CLM would emphasize tessera (elements) related to price and distribution, while Apple would have larger stones representing Innovation and Service. Federal Express might have larger components of Operational Efficiency and Distribution, while American Express would showcase Brand Message and Service.

In today’s difficult economy, it seems that the mosaic pieces of Service and Customer Satisfaction are increasingly in the spotlight. There is a unique challenge to consumer facing companies – do more with a diminished marketing budget and somehow meet the needs of customers who not only understand their value to the business, but carry a sense of entitlement about being recognized for their patronage. In other words, business is challenged to provide stellar service and more individual attention to customers when resources have never been more scarce, and work forces more skeptical about pitching in for the good of the enterprise.

Business Week recently chronicled this service phenomenon and noted that business resources are quietly being shifted to retain and delight more valuable (“best”) customers while deemphasizing acquisition plans. The magazine noted a renewed emphasis on segmenting customers by tiers and designing service and benefit packages customized to these tiers to improve retention. Business Week formed its own methodology to rank the top “Customer Service Champs” in 2009. Tops on the list was Amazon.com, followed by USAA, Jaguar, Lexus, and The Ritz Carlton in the top 5.

The trend towards customer retention and a more sincere approach to customer service is heartening as both are core elements of the Customer Loyalty Mosaic™. Loyalty Marketing is desperately in need of innovation. Let’s hope that the leadership exhibited by the companies on display in Business Week strike a chord for a more holistic approach towards building customer loyalty. Both consumers and business will benefit as these ideas filter throughout industry and, more importantly, have staying power as the economy improves.

How often have you seen trophies, plaques, and crystal featured in advertising as evidence that a product or service has received the “highest ranking” by the survey company? If you are channel or web surfing your haste might benefit the advertiser. Associating the award with the brand triggers a quick mental linkage between the two as you log a positive impression in your memory banks and move to the next channel.

If you pop the hood and investigate how these rankings are assembled, you’ll know why Gen Y (Millennial) consumers rely increasingly on recommendations received through social networking sites as well as word-of-mouth from friends and family.

The flaw in the system could not have been more clearly stated than in the sign next to where I was swiping my debit card to pay for car repairs at a local dealer.

“Did you know that a score of 9 or less is a failure? Please grade us “10” or tell us why you can’t.”

I paraphrased this a bit, but imagine if this customer satisfaction rating system were applied to kids in school or “us” at work. Try telling your child that anything less than an “A” is a failure and see how motivated they will be to climb that mountain. Or, imagine that the annual employee performance evaluation allowed raises only for those scoring a perfect 10 across the matrix of KPI’s (Key performance indicators) outlined by the boss.

Insisting on delivering a perfect 10 does nothing but dilute the scoring system itself. There are few customer experiences which are perfectly executed and there should be nothing wrong with being graded less than 10, especially if comments are provided to help interpret the score.

The proactive management of customer satisfaction scores continues “after the sale”. Every time I take my VW to the shop, I receive a phone call asking me to participate in a “short survey about my experience”. The first call comes within 3 days of my visit and the firm will continue to call every other day or so for up to 2 two weeks until I speak with them. Even though they tell me that participation is voluntary, it clearly is not, for they will chase me down like a hound-dog on a good scent trail.

Vladimir Putin might approve of this methodology. Consumers WILL participate in surveys and they WILL give us a rating of 10. Flip this around and imagine how the conversation goes between the sales rep from the survey company and a large auto dealer. Does the supplier go beyond assurances that they will manage the process and seek high participation levels, making promises to deliver the highest scores ever? Do they bring a catalog of award trophies to that sales meeting, encouraging the client to choose the one they will advertise before the campaign even kicks off?

Much has been written about how we have raised an entire generation of young people on participation trophies and certificates in fear of hurting someone’s feelings. We can argue that elsewhere, but I do not believe this approach helps consumers make better decisions about spending their hard earned money.

The appeal of recommendations made in social networking sites is the focus on content and not integers. I may not know the difference between a 9 and 10, but I can learn a bunch from reading a description of a post-sale service experience from another VW owner.

Marketers would be better served to change the game before their customers stop reading their survey results. Making the process more transparent will encourage more subjective input from customers. Don’t be afraid to learn what your customers really think about you. If you can’t stand this idea and stick with the old system, dissatisfied customers will leave anyway. I think anything less a 10 has the sound of a slamming door as they go across the street! …………. Bill Hanifin

That’s the cry heard from an increasing number of frequent flyers today. When primary research is commissioned to help diagnose the complaint, it may be surprising to learn that the same program features are often reported as both a Key Complaint and Delight.

Three examples:

Program Feature	Delight or Complaint
Options to earn miles	Lots or not enough
Ability to redeem miles for desired travel	Satisfactory or Impossible
Value of miles beyond air travel	Wonderful or Nil

These consumer opinions form a classic two edged blade that slices for or against depending on your point of view. To a great extent, the airlines and issuers of cobranded airline cards could do more to relieve frequent flyer angst.

Let’s take the issues sequentially:

In defense of the airlines and their card issuing partners, options to earn miles have grown to the point of near saturation. Miles can be earned on activities as diverse as sending flowers or obtaining a mortgage. It is well publicized that many airline cobrand cardholders earn the majority of their miles without stepping on an airplane. As a consumer, the complaint that not enough options exist falls on deaf ears. By making this statement, you serve witness that either you are not paying attention to program communications, or that you are not the best candidate to benefit from a frequent flyer program. In this case, your failure to redeem can’t be blamed on the Loyalty Asterisk™.

Consider the options to redeem mileage beyond air travel and hotel stays. After nearly wearing out my calculator, I can’t make the math work in favor of swapping miles for merchandise and magazines. In fact, the only time I have gone the magazine route is when I was striving to beat an expiration date on mileage earned with an airline I no longer frequent. In that case, I was willing to ignore the value exchange and was satisfied to get something for what otherwise would have turned to dust.

The complaint that “I can’t use my miles when I want” is the most delicate to correct. The early premise of frequent flyer programs was “travel now and take your family to Hawaii next Christmas” (fill in your own dream destination). And over the years, the sense of entitlement created by loyalty program sponsors has created a difficult fan base to satisfy. Let’s face it, the air travel experience has changed and consumer expectations for using miles should change as well.

The perceived value of air travel rewards has always been measured in emotional terms. Redeeming to attend a family reunion or take a vacation increases value, while redeeming to attend yet another business meeting is evaluated through careful fare comparisons.

I have not experienced difficulty redeeming miles for my desired travel destinations. It’s not because I am lucky, just that I try to match the destination with the season and am flexible on dates. Applying common sense to the process would help consumers tremendously and reduce frustration, but the airlines can play a big role in the process.

The challenge for the airlines is to tone down the aspirational messaging that has driven demand for frequent flyer programs since their beginning, and subtly reposition with a more practical approach to mileage redemption. Flying the family to Cleveland to visit friends may not play well in full page advertisements, but in today’s economy it represents a valuable savings to a family of four.

I humbly suggest that the airlines limit their promotion of exotic destinations where obtaining a seat with miles carries the same odds as hitting the lottery. Traveler preferences can be refined through use of the massive data the airlines possess and would allow the suggestion of secondary destinations to meet the needs of frequent flyers, reduce frustration, and increase the perception of value across the flying base.

The change is subtle and not easy to execute, but will pay off through higher customer satisfaction over time. The airlines have contributed to the present frustration with their yield management systems and can just as directly relieve the pressure by changing the focus on what constitutes a worthwhile reward.

Bill Hanifin