With March Madness about to launch into full swing, you might be dusting off your list of favorite sports bars. In South Florida, there are a lot to choose from, but there is only one that combines good vibes, good food and a decent rewards program – Duffy’s Sport Grill. If you aren’t familiar with the area, Duffy’s is operates a 20 store chain between Melbourne and Plantation on the Southeast Florida coast.  I believe the firm to be privately held and have noticed their expansion in my area through assumption of real estate from Roadhouse Grill as that chain exited locations.

The program is simple to understand, encourages repeat visits and sports an email based communications stream that provides just enough information without being intrusive. They’ve even got a decent Twitter account which seems to be following people back (the exception for many business twits) and posts about more than just their daily special.

The Club MVP program was comfortably explained by well trained staff. Enrollment consisted of completing a simple post card size form while I waited to wrap up our tab.  Name, email address, zip code and birthday were the required data to get started.I wonder if they use the zip code to manage communications – South Florida is a tourist market and maybe they tailor offers for locals and visitors.

The program awards 1 point for every dollar spent and automatically credits $10 to the member card once accumulating 100 points. Points never expire and the 10% back is nothing to sneeze at. Members can earn double points every Tuesday and those who visit 12 times in a 12 month period receive a $25 credit on their birthday.

The communications via email over the first 30 days were on target and well paced:

• After enrolling, I received a Welcome to the Club MVP program message highlighting special offers and links to get more information
• Day 4 – I received “Ways to Save Big at Duffy’s” which informed me of mid-afternoon specials at 40% off
• Day 8 – Since we were nearing the holiday season, I received an email inviting me to ” Book your company’s holiday party and keep the MVP points yourself!”
• Day 18 – Another special was highlighted having to do with Game Day Deals (food and drink specials)
• Day 30 – More Game Day Deals were touted prior to the weekend

Following this first salvo of email, they’ve been judiciously letting me know about seasonal events, gift card specials (buy $100 gift card and earn $20 bonus)  and other special offers 2-3 x per month. I can’t say that they have offered anything of a personalized nature but since they haven’t tried a survey, that stands to reason. I also haven’t noticed any email triggered by a visit or items ordered – something to consider for the future.

One competitor on the local scene is Flanigan’s, renowned to have the best ribs in town. For years the stores in our area have been offering paper based punch cards, which in my opinion are completely worthless. There is a temporary feeling of earning something when you receive the card from the wait staff, but inevitably the card is lost along with the value.

The Flanigan’s chain has fragmented ownership and just recently I saw the group that owns the Quarterdeck (near the beach and Port Everglades) going “Duffy’s style” with a plastic card that allows value to be accumulated.  Let’s see how that one works out.

The lesson learned is simple: just like cash back can be turned from a transparent reward that offers limited leverage into something more powerful with partner offers, a few tweaks to the traditional punch card used by many small – medium businesses can be made to create a loyalty program that matters.

A small firestorm over the efficacy of Loyalty Marketing programs broke out over this past weekend thanks in large part to an article written by Joanne Kaufman for the Wall Street Journal.

Ms. Kaufman recounts a telling tale of how her own household purchase behavior adapted to take advantage of rewards programs from Duane Reade to Starbucks to the local pizzeria and shoe store, only to be thoroughly disillusioned by an in-store experience at Duane Reade.

It seems that her son was shopping at the store and had his rewards card rejected with a less than satisfactory explanation from the cashier that Duane Reade was in a “blackout” period prior to launching a new and improved customer loyalty program. According to Ms. Kaufman, worse than the blackout message was the discovery that points previously earned in Duane Reade’s Dollar Rewards™ program would not be honored in the new program.

There are several lessons to be learned here and a few questions raised as well.

First, some background: On Jan. 15, Duane Reade announced it was launching FlexRewards™, a replacement program to Dollar Rewards™, the Company’s previous customer rewards program. The new program was to be in effect on Jan. 16. On Feb. 17, Walgreens announced that it was acquiring Duane Reade, the largest drug store chain in New York City.

The Questions:

1. What influenced the timing of Duane Reade’s launch of a new program when they were (presumably) deep into the final negotiations of the sale?
2. Regardless of the answer to #1, how could someone within Duane Reade, a company recently complimented for its customer facing marketing efforts, have been lulled into allowing the “your old points don’t count” feature to come into play? Have a look at the message on the graphic here “The old card works (just not in our store). I clicked everywhere I could on the program website and could not find an explanation for this disconcerting message.
3. Could Duane Reade have found a better way to communicate the program transition to its members? Why, oh why, does business place the burden of communications on cashiers at the point of sale? It’s an unfair burden on the position with highest turnover in the store and one that does not serve the corporation well.
4. Walgreens has a lightly advertised rewards program “Walgreens Rewards“. Will they do away with this program or will they launch something that allows consumers to earn and accumulate points at any Walgreens-owned property?

Some answers are easier to guess at than others.

The announcement by Walgreens regarding Duane Reade mentioned specifically that it would allow the chain to continue to operate under its own name. That said, launching an upgraded program might have seemed business as usual to Duane Reade marketers. Needless to say, there needs to be some damage control from Duane Reade as an operational faux pas of this nature intensifies consumer ire towards consumer rewards programs.

The most interesting question to speculate about has to do with the future of the Walgreens customer strategy.

The current program “Walgreens Rewards” offers rewards on specified products purchased using a Walgreens Card®. The value proposition does not seem clear or particularly strong and there are many product restrictions which limit earning power for members. One strong program feature is the ability to pass the Walgreens Card at the point-of-sale and instantly be credited for rewards.

As far the new Duane Reade program itself, it seems that the earning power from its predecessor has been reduced. The current offer is for customers to spend $250 to receive a $5 cash back offer. This equates to a 2% earn rate, less than the 5% offered by the previous plan according to the WSJ.

FlexRewards™ offers members lower prices on many items and rewards that can be spent on the spot at point-of-sale or can be saved up for larger rewards. Clumsy paper coupons which could be easily lost by consumers have been traded in for electronic points tracking online. Points issued never expire provided a purchase is made every 26 weeks, a generous definition of an “active” customer in the pharmacy space to be sure.

According to Joe Jackman, Acting Chief Marketing Officer, Duane Reade “customers had spoken and wanted more easily attainable rewards”, adding “half of customers in our old program didn’t even redeem their reward coupons because there were too many restrictions”.

It certainly seems that the strategy cooked up by Duane Reade is headed in the right direction and had increased customer engagement as a key objective. The company even introduced a new “Super Saver” tier to reward higher spending customers at a faster pace and with more flexible rewards.

Contrast the two programs at Walgreens and Duane Reade and you should not be surprised to see either the Duane Reade program extended (in structure if not by name) to include Walgreens stores or some new program from Walgreens that would at least improve upon the current offer. The more inclusive, the better as customers will respond well to a program that allows points accumulation at both Duane Reade and Walgreens stores.

Lessons:

1. Execution nearly trumps strategy these days.  My old boss, Pat LaPointe, coined the phrase “Technology enables, but imagination wins”. Based on what clients are telling me today, I have modified the mantra this way: “Technology enables, imagination wins, but flawless execution will save your job!”.

2. Expectations for Customer Communication are higher than ever. Consumers have access to more information than ever and expect clear, transparent messaging. Anything less sets you up for what Ms. Kaufman called “Loyalty Betrayal”.

3. Staff training and incentives will trigger better program results. Turnover at the point-of-sale is difficult to control but an effort can be made to provide front line personnel with sales aids, inexpensive “take-me’s” and similar POS material to make the job easier for overburdened staff. Offering incentives for those that learn and deliver the message would help also.

Just a few months ago, on these very Loyalty Truth pages, I gave kudos to Caesars Atlantic City and its Total Rewards loyalty program.

During some trying times for the economy in general, and Atlantic City in particular, Caesars AC was making some smart moves to get its loyalty program members back to the casino.

Last week, Caesars AC got my attention again. But not in a good way. You see, they ran a rather bizarre full-page ad in the Sunday NYTimes magazine.

Let’s start with the image in the ad: a well-dressed 30-something guy has a pretty woman to his right. She has one hand on his shoulder and another wrapped tightly around his arm. It looks like they’re at a show. Okay so far, except our guy seems more interested in another woman to his left. He has his lips to her ear and her extended arm appears to be resting on his thigh.

Under the headline “The Life You Were Meant to Live“, the stilted copy reads:

Who is that in Section A, Row 1, Seat 5, having the time of your life? That’s Todd. Flanked by your fiery vixens. Paying no attention to your favorite band on stage. But give credit where it’s due. Todd is an escape artist. And when it’s time for a getaway, he get it’s right.

What!?!

Putting aside the confusing use of the possessive “your”, who are the fiery vixens with Todd? Am I supposed to pretend I’m Todd…on some kind of a three-way tryst? Is this what they mean by “he gets it right?” More importantly, did Caesars’ market research show the ménage a trois market to be a growing demographic?

Personally, I can only think of one word for the ad – Stupid.

Instead of creating a scenario that the largely upscale readership of the NYTimes magazine might be able to imagine themselves in, they’ve come up with a fictional character in a contrived situation that’s a non-starter for anyone not in the “swinger” category.

It of course begs the question, what were they thinking? The only thing I can come up with is that Caesars AC is trying to out Vegas-Vegas.

Sorry Caesars, as much as I like you and your loyalty program, you’re no Vegas. And there are better ways to spend your precious marketing dollars.

Tom Rapsas is a 20 year direct and loyalty marketing veteran and heads up Creative Services at Hanifin Loyalty.  He can be reached on Twitter @tomrapsas

Atlantic City, the famed gambling Mecca about an hour down the coast from me, is on a nasty losing streak. A recent story in the NY Times quoted a top gambling executive as saying “the city is in a death spiral.” Few disagreed.

It seems that after a rough couple of years, 2009 is looking even worse. Every Atlantic City casino but one is seeing a double-digit drop in revenue. The lone exception being the glitzy, feels-like-you’re-in-Vegas Borgata, which is down about 5 percent this year.

The reasons for the decline are many: the rotten economy, competition from newly opened gambling operations in nearby states, and the fact that Atlantic City, like the dwindling number of day-tripping seniors who bus into the city each day, is feeling old and tired.

The most-talked about solution: a cash infusion of a few billion dollars to build new hotels, new attractions, new anything that can start pulling in people again. Which, with the current economic environment, is as likely as me filling a double inside straight flush at the poker table. Or not very likely.

Harrah’s Entertainment ups the ante

In years past, I’ve frequented the Borgata where I’m a member of the My Borgata Rewards program. But on my last two trips into Atlantic City, I ventured to the swanky but hip Caesars, where I joined Total Rewards–the casino loyalty program from  Harrah’s Entertainment, the company behind the Harrahs, Caesars, Bally’s and Showboat casinos.

It appears that Total Rewards has upped the ante over the My Borgata program, by rolling out the red carpet for program members. My evidence here is strictly anecdotal, but I (and a good friend) recently received a bump up not one, but two tier levels to Diamond status. I also received a pair of free weekday hotel stays. (Surprising because, trust me, a high roller I am not.)

It’s obviously a play by Harrah’s Entertainment to get past customers back to Atlantic City and it’s either a smart move or a desperate move, depending on your perspective. I say smart—because rather than gamble on an expensive, and to my thinking, ultimately wasteful mass media campaign, Harrah’s is appealing directly to its customer base for more business.

Granted, they’re digging deep into the base by giving a two-time visitor like me special favors, but my guess is they’re mining the data for a few things: the recency of my visits, my perceived spend level, and my zip code, which tells them I live nearby and should be at a certain income level.

So can Total Rewards really save Atlantic City? It’s a lot to ask of a loyalty program, but it strikes me that Harrah Entertainment is playing the hand it was dealt—and reaching out to its customer base may be its last, best hope. I, for one, hope it works. In fact, I’m about to book a free night for my wife and I right now.

Now, a few words about the Total Rewards communications

The first good thing I can say about Total Rewards is that they actually have a communications program in place. As a member of the My Borgata program, who opted in for e-mail, I cannot recall receiving the first piece of communications from them, digital or otherwise. (It’s good to be King!)

While the Total Rewards postcard and e-mail creative is perfunctory, they do some small but important things right. They recognize me by name and tier level, and occasionally by the casino I visit, Caesars. They’ve also made attempts to cross-sell me into other areas of the property, including their dining and entertainment venues.

But the Total Rewards communications could go even further. A few thoughts, for the people behind the program:

1. Pump up the engagement: I checked and Total Rewards has a presence on both Facebook and Twitter. Why not add these links to every e-mail? And while you’re at it, add an “invite a friend to join” link to each e-mail, as well.
2. Talk to my preferences: I know your part of the Harrah’s empire, but frankly I only joined the program because I like and visit Caesars. So more info on Caesars and less on Vegas and the other brands please.
3. Leverage the community: I know starting your own online community may be a hassle you don’t want to contemplate, but why not use some of the glowing testimonials found on social travel sites like Kayak and Virtual Tourist. This both encourages loyal customers to return and invites them to join the conversation.

Tom Rapsas is a Creative Director/Writer/Strategist. He can be reached at tomrapsas@gmail.com and via Twitter @tomrapsas.

“While not every business needs a Loyalty Program, every business does need a well planned and executed Customer Strategy.” This is one of the loyalty mantras that I share on Hanifin Loyalty and the statement represents a guiding light on the path to innovation in the next wave of Loyalty Marketing.

For some businesses, building a brand so strong, so magnetic, so powerful is the foundation of its Customer Strategy. Achieving this summit is one of the most challenging tasks in business and, if done successfully, virtually precludes the need for a formal loyalty program, certainly one with points or other promotional currency involved.

The World Triathlon Corporation, owner and organizer of Ironman® and Ironman® 70.3 branded events, has climbed this summit, having turned a quirky and semi-dangerous undertaking in 1978 into a worldwide brand that attracts a brilliant demographic and brings tremendous economic impact to its host communities.

With the addition of the Ironman® 70.3 Series, WTC offers more than 50 events on the calendar each year and has the support of advertising partners including Ford Motor Company, PowerBar, Timex, Gatorade, Janus, and Philadephia Insurance Companies.

Ironman Lake Placid is the oldest of 7 US based events, and I was fortunate to be in town for the 10th anniversary race this past weekend. The compelling nature of the brand was on full display with over 2,500 registered athletes and their friends and families burning off nervous energy by shopping in the Ironman® store and patronizing local businesses.

Consider that the entry fee is $575 and that the average tri-bike sitting in the secured transition area is worth $4,000 (my estimate) and you can see that over $1.4 Million in entry fees alone were collected for the weekend and over $10 Million in two-wheeled treasure was waiting for a ride. Multiply these numbers by the 50+ events per year and you begin to understand the magnitude of the Ironman domain.

Ironman may still be a quirky and puzzling event for outsiders to grasp. Some of my friends have challenged the Ironman passion as nothing more than a mid-life crisis for over 40 types, suggesting that buying a new Corvette would be a heck of a lot easier. Others snipe that triathletes are narcissictic, type-A personalities preening their zero-body fat physiques in high-tech fabrics before the crowds. (OK, you’ve got the Type-A part correct).

Let me dispel some myths. As I volunteered at an aid station on the run course this weekend, I saw every size, shape, age, and ethnic origin of athlete pass me by. I would go so far as to say that, if seen in street clothes, many would never be mistaken for Ironman athletes.

I’ve also found that while some of the younger age brackets are the most competitive (30 -39 for instance), I have also noticed that as one moves up in age group, finish times don’t always increase, i.e. there is much more going on here than just signing up for the t-shirt.

Fred Reichheld, the Godfather of Loyalty Marketing, sketched out a continuum of business benefit resulting from adopting an enterprise approach to loyalty. At the end of the rainbow are price premiums. I would venture to say that Ironman, given the nature of the event and level of entry fee, is effective on all levels of lifecycle marketing, (acquisition, usage, retention, cross-sell) and delivers on price premiums across the board as U.S. based events generally sell out quickly after race day each year.

All the praise aside, there is always room for improvement. There is probably a limit on the number of events that WTC can stage each year in the U.S., and more emphasis on triathlon as a youth sport would help fill the funnel with future athletes. The fee structure could price out aspiring Iron-athletes from participating in the future, and the cost of Ironman branded merchandise is obscene at times, spawning a mild “love-hate” relationship with the brand. For instance, a fellow volunteer (himself a 9:44 IM finisher) commented as he pulled on a dollar-store poncho to thwart a rain shower that it would have been worth $70 if it had the IM logo on board.

There are other iron-distance events on the calendar, but WTC has created brand-swagger and is enjoying the price premiums created with its highly emotional participants. The fact that WTC backs up the current frenzy for its branded events with tremendous athlete experience adds glue that keeps people signing up for more. Even their finish line announcer, Mike Reilly, is part of the experience. Mr. Reilly has been the main announcer at the Ironman® World Championships in Kona since 1989, and it is his unmistakable voice that welcomes athletes to the finish line.

There may be some danger to IM that it becomes an elitist event, but then again, maybe that’s what it is all about. The Ironman® distance triathlon is still acknowledged to be the most challenging one day endurance event on the planet, and “if it was easy, everyone would do it!”

I think it’s safe to say that the same applies to WTC’s Customer Strategy.

In the beginning, there were punchcards. Since then, man has created magnetic stripe and bar code cards, smart cards, java rings, and RFID cards. Technology has evolved greatly over the past 25 years, and loyalty sponsors and providers are still seeking the silver bullet of delivery devices.

While we’re busy debating which technology will win out, I wonder if The KeyRing Thing will make a good bridge to the future?

My friend and Loyalty Truth contributing author Jim Kuschill wrote a great article for Colloquy entitled a ”World Without Cards” in which he weighed the pros and cons of whether we needed cards at all. If we’ve learned anything over the past decade or so, it is that the technology or device used as a membership card is the not the sweet-spot of the value chain.

The right strategy, targeting, and value proposition are the keys to engaging consumers in loyalty programs. Get that right, and you could get away with giving members something akin to a gas station bathroom key (the small key attached to a large wooden dowel), and they would carry it.

Admittedly an exaggeration, I hope you understand the point. Sometimes the sexiest technology, after thorough vetting, is revealed to be not much more than a ”solution looking for a problem to solve“.  Jim Kuschill and I debated the added value of smart cards to loyalty program execution for literally years and, in the end, we agreed that it wasn’t the smart card that would make the difference.

What we did learn from our debate was put to the test as we worked with card issuers in Latin America and Europe as they introduced EMV standard chip cards into their markets. The lesson: it was the synergy of technology and circumstances that made the difference.

With many Latin American banks owning a strong acquiring business, we were able to recruit merchants to support POS bonusing and point redemption at POS to pay for purchases. It was this combination of factors that helped us migrate traditional points programs from magnetic stripe to EMV cards and we allowed the smart card to grab most of the glory.

After lots of debate over technology, I appreciate a return to simplicity. That’s why I find a particular brilliance in the Key Ring Thing, highlighted by Good Morning America as part of their coverage of the “best” discount shopping cards. In the GMA piece, Shop Smart Magazine Editor Lisa Lee Freeman profiled the device as she also highlighted her favorite discount cards found on Shortcuts.com.

When I opened my morning newspaper and read another profile of this device, I had to spread the word. The Fort Lauderdale Sun Sentinel chronicled how for $3.97, you can get yourself a high quality PVC card that holds 5 or 6 barcodes of your favorite rewards program. Through the web interface, consumers can select from popular programs or load their own if it does not appear in the list.

Apps to aggregate loyalty cards don’t end there, as My CardStar allows consumers to catalogue their favorites on their iPhone, Blackberry, or Android and JustOneClubCard.com, created by Gregory Pinero, serves as a more casual hobby site for the same purpose.

I like the idea of turning my night-watchman style keychain into something more sleek courtesy of the KeyRing Thing. I like even better having a “wallet” to store all my favorites on my iPhone, though I wonder how many bar code readers are enabled to read from the iPhone screen (an acceptance issue needs to be resolved).

In the end, it just might be that the highest purpose of “high tech” will be to deliver caveman-like simplicity to consumers. For today, the KeyRing Thing delivers on that count.

For tomorrow, who knows? It might even be that the Poken Girl has the answer….

Whether you love technology or struggle to keep up with it, you have to admire how new developments push our limits. The limits I’m talking about are our imagination, our time, and our comfort zone.

Last year’s debate over the use of RFID (Radio Frequency Identification) is quickly giving way to a new battle front, “Neuromarketing“. While RFID devices were challenged by well organized consumer privacy groups such as Caspian for basic breaches of privacy, the revelations of of Neuromarketing seem capable of creating Supreme Court worthy debates.

Neuromarketing was profiled this week on CBS’s 60 Minutes and is explained as a technology that employs a specialized use of MRI scanning called “functional MRI,” fMRI for short.  In layman’s terms, its proponents are touting that we will soon be able to see what is going on inside the brain and decipher what people are thinking.

RFID has been used by Walmart, the US Military and many others to bring efficiency to the supply chain and dollars to the bottom line. Contactless cards were introduced a few years ago in the US and misunderstanding of the technology’s limits has caused some consumers to buy wallets and purses that block signal transmission and others to simply panic that we are all marching headlong into an Orwellian future. The technology does have some risk, though rarely as it is portrayed by the media and consumer protection groups.

Neuromarketing carries a higher sniff test for risk just by virtue of the way it’s advocates describe it. Neuroscientist Marcel Just painted the benefits of the technology as “thought identification” on the 60 minutes segment and one of the leading companies in the industry, Neurosense, stated it has  plenty of clients including “Unilever, Intel, McDonald’s, Proctor & Gamble, MTV or Viacom.” As there are purportedly about 92 neuromarketing agencies worldwide, it’s clear that a lot of resources are being applied to advance the cause.

Each of these technologies has application outside of consumer marketing and maybe that is just where they belong.The question in my mind is how the technology is put into practice in a sensible way that consumers will accept. I can understand that reading minds could be useful to validate live survey responses and focus group chatter. I can also see that a retailer could hone its inventory management by reading the thoughts of consumers passing by a display window with dresses in 3 colors and learning that the green model was most popular.

What I don’t envision is that consumers will accept their thoughts being translated into real-time store promotions or something similar. No matter how “relevant”, having a sales associate in the Apple store walk up and offer an unsolicited suggestion for  the best case for your new iPhone strikes me as just plain creepy.

We’ve been down this road before with chip cards and RFID enabled devices. The premise that personalized service or personal shoppers could be anonymously triggered as the RFID-enabled loyalty card of a “best” customer passed the scanner at the store entrance was not appealing to any survey or focus group respondent I have ever encountered.

The only possible scenario that I consider practical is using a mobile device to opt-in or invite current promotions to be pushed to me before I entered a particular store. Let’s say I am ready to visit Nordstrom and am sitting in the food court having some coffee. If I could open the mobile marketing application on my iPhone listing all of my loyalty program memberships, select Nordstrom and click on “today’s deals”, I would be happy to have specific offers and specials sent to my mobile phone. I could also opt-in to “personal shopper” and, if I qualified in the loyalty program, I would trigger that service upon entering the store (GPS enabled phone, right?).

The debate will rage on and next year the argument may be substantially the same with a different device or technology filling in the blank occupied last year by RFID and today by Neuromarketing. If we keep in mind that business is driven by pleasing the customer and not about advancing a particular technology, then we will have an easier time choosing the path to success.

What’s Your Plan?

Contributed by Mike Capizzi

Economic tidal waves cause disruptive things to happen along the loyalty marketing shoreline.  Whether tsunami or riptide in magnitude, the resulting on-shore event carries the potential to drown the beachcomber or create a sea-side hero.

Which will you become?

The current economic environment has many loyalty marketers scratching their sun-burned foreheads.  Large enterprises with well established loyalty marketing program strategies may not weather the tidal wave.  If their firms become subject to an inevitable round of cost cutting, dilution of the loyalty program value proposition and abandonment of best customers, then bodies will be washed ashore by the pounding surf.  Call the ambulances and the shore patrol.  Please bring a few extra body bags.

Loyalty marketing service providers who feed off of the large enterprise client will be companion victims.  How do you resuscitate the relationship and corresponding revenue potential when your client is on life support? Don’t scratch your head or reach for the sunscreen; you should be well entrenched in your “Baywatch” plan.  Otherwise you’ll fall victim to the never ending cycle of the rise and fall characterized by the coastal tides.

Simply stated, what’s your plan?

If you are on the client side, get ready for the merger and acquisition tidal wave.  You have a loyalty program, you have a team in place to manage it, you rely on your loyalty marketing service provider to deliver.  You understand best customers, you reward and recognize them appropriately, you have the metrics to prove it.  Who cares?  Here comes the judge and he ain’t pretty!  He carries an axe in one hand and a spreadsheet in the other. When you are merged, taken over, re-structured or otherwise displaced, will anybody care about your past accomplishments?

Of course they will if you have a plan.  Best customers always deliver disproportionate value to the enterprise.  Can you prove it?  Can you articulate the merits and shortfalls of your own loyalty program initiatives versus the concepts and ideas of the acquiring entity? How would the programs best be merged?  How will customers benefit?  Which segments overlap and where is the real potential for incremental revenue post merger? Which service provider or technology platform is best equipped to handle the combined loyalty program databases?  What does the transition roadmap and timeline look like? If you don’t have answers, or at least well thought out opinions, then proceed directly to the unemployment line.  Do not pass go.  Do not collect anything except severance.

If you are a service provider, the picture is even gloomier.  Who is the incumbent loyalty partner and what strengths, weaknesses, competencies, do they exhibit vis-a-vis your own organization?  What do they charge?  What is their cost per point?  How do they add value?  What can you do to position yourselves as the effective and efficient alternative to the incumbent?  If all of this is overwhelming, I understand.  If you are not ready to deal with the impending surge, or prefer to bury your head in the sand, then get ready for the unemployment line.  Bring muffins and a no-whip latte for your ex-client.  You can meet and sympathize with each other every Tuesday morning.

My point in all of this is that you must have a concrete plan.  In writing. With supporting business case tools and logic.  Loyalty program change management is not a new thing; although the art may be lost the artists still remember.  When the tsunami strikes, you will either float to a higher ground or sink in the swell of the salt water.  Victim or hero.

What’s your plan?

Mike Capizzi is Managing Director of Marketing Strategists LLC, an independent consulting practice which focuses on best customer marketing.  Often called the “Loyalty Evangelist” by his industry peers, he has written, spoken, advised and educated on the topic of loyalty marketing programs around the world for more than a decade.

When I sat down to write about managing the financial liability generated by customer loyalty programs, I naively thought it was suitable for a post to Loyalty Truth. In terms of subject matter, it is right on target, but in terms of complexity, program liability is not something you can adequately discuss in a few hundred words.  How about if you just stay tuned for a White Paper on this subject in the very near future?

For now, let’s cover a few salient points and, in Loyalty Truth fashion, rip the cover off the soft talk that is being used to address the subject.

First and foremost, a liability can never be defined as an asset, however clever the argument. My finance professors in Charlottesville would never have let me pass if I couldn’t scribe this equation accurately: Assets = Liabilities + Owners Equity.

In financial accounting, a liability is defined as:

“an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.”

In Loyalty Marketing terms, liability represents a deferred expense and is normally satisfied by a future cash payment to a vendor for the cost of a reward redeemed by a valued program member. For loyalty program sponsors paying for points (or whatever they wish to call their promotional currency) “On Issuance”, there is a line item in the marketing budget to expense total reward cost in the current period. The flip side of the equation provides that the reward supplier (the seller of the points) holds a liability against future redemption activity. The supplier manages the point bank and accepts the associated risk, but also benefits from predictable cash flow and breakage resulting from points expired or forfeited in the future. Note: there is a potential conflict between client and supplier built-in to this business model as the breakage that creates profits for the supplier could negatively impact the client’s reward program.

For program sponsors paying for points “On Redemption”, a financial reserve is made for the value of each point issued based on a percentage rate framed by industry norms and auditor approvals.  Accounting entries are made each month for the actual cost of points redeemed in the period. The sponsor is in control of all the financial levers that dictate the financial health of the loyalty program and only parts with cash to pay supplier invoices for the actual cost of rewards redeemed on a monthly basis. The spoils of breakage belong to the sponsor.

In my experience, there are two key elements of Loyalty Program Liability that must be addressed at the Executive level of the sponsoring company:

• Setting Expectations: A fair and accurate forecast of future liability is integral to the loyalty business case. Projections should address both the magnitude and growth rate over time and be tested for sensitivity to varying levels of point cost, earn rates, and redemption levels. To understate or avoid addressing financial liability can be as damaging to the future health of a loyalty program as any other single factor while wrapping up the business case.

• Engagement Value: It is critical to establish with Executive Stakeholders that higher redemption rates correlate with higher program activity, engagement, and will lead to program ROI and corporate profitability. As an extreme example, if no one redeems, your financial staff may be chest-bumping in the short term, but working on their exit strategy within the near future. Lack of redemptions equates to customers who don’t care about your program, and are either responding to different forms of promotion or have moved on to patronize another brand.

Speaking from direct experience, I have worked with three separate banks over the past year that surprised me with one of these situations:

• An existing Loyalty program in market for several years with no reserve made to account for unredeemed points
• A mature Loyalty program with point liability being accrued based on an actuarial calculation disconnected from actual activity and redemption rates
• Newly launched program with business case in place forecasting liability and with recommended accounting entries – but no reserve being made

The root cause for each situation could be described, respectively, as lack of knowledge, inexperience with loyalty program best practices, and poor execution. In each case, it wasn’t fun being the messenger who delivered an accurate calculation of unreserved liability or pointed out that the road-map was in place but no one turned the keys in the ignition. But isn’t that what companies expect from their trusted outside advisors? The financial impact of these reserve shortcomings was more than 10X my fees charged and our recommendations spared the banks from further financial harm and management embarrassment. The message was a hard pill to swallow, but saved the patient from a potentially terminal illness!

Stories like these get around and there have been a few cases where issuers of promotional currency encounter financial hardship and can’t make good on their obligations. This combination of factors led one North American bank I met with to politely digest a complicated calculation of recommended reserve rate and then “over-reserve” at 90% of the funding rate to avoid even a sniff of risk associated with their program.

Loyalty Program Liability is the biggest line item in the overall budget and can’t be talked around or white-washed with business-speak. “A leopard never loses its spots” and loyalty program financial liability won’t just take care of itself.

The key to successfully managing the point-bank starts with setting expectations properly in the business case and reaching consensus with executive stakeholders that high redemption rates are a lagging economic indicator of loyalty program success. Program profitability can be further driven by aggressively managing reward cost, establishing partnerships to share cost, and remaining attentive to program rules to manage liability growth.

Editor’s Note: Jim Kuschill is a leading marketing technology advisor combining 15 years of loyalty experience with 15 years of technology experience. He consults, writes, and speaks on the implications of strategy on technology and vice-versa, with an emphasis on loyalty marketing systems.

If you need to understand why your marketing systems get in your way, to refresh your systems through build or procurement, or to understand best practices, you can contact Jim at kusch@perfectlytargeted.com. Jim is also the latest Contributing Author at Loyalty Truth and we are proud to showcase his important article on Loyalty Program measurement.

I’ve been in several senior-level meetings over the last bit where there was substantial discussion concerning the issue of Cost-per-Point (CPP).

While definitions of CPP vary, a common definition is the total financial currency cost (e.g. USD) of awards redeemed divided by the total promotional currency amount (e.g. points) used to make those redemptions over a defined time period. Note that CPP can be calculated for subsets of a membership base and for individual redemption items, both of which are valuable calculations for a Loyalty program measurement plan.

The aforementioned meetings are generally unhappy ones between programs operators and awards providers, because the CPP is rising and “something needs to be done” to bring it back down. Compromises are made, value propositions are generally diluted, and off everybody goes.

Given the magnitude of awards expense, attention to CPP makes perfect sense. The conundrum from my perspective is that CPP is often the only “cost per” metric that’s discussed. In particular, I almost never see a CPM – cost per member – metric tracked and reported against.

Historically, the largest loyalty program expense has been awards, followed by communications and operations. With the continuing emphasis on electronically delivered communications, reductions in communications frequency, and technology for self-service, it’s likely that operations costs now exceed communications costs in many programs.

Incredibly, the value of the second largest program expense, operations, is not often definitively known. Even if there is a figure provided, it’s viewed differently by siloed stakeholders and, while there may be acknowledgement, there is seldom agreement on a usable metric. As a loyalty software vendor I always thought this was a “job security” decision by program operators, as it’s tough to argue that a new solution represents a cost reduction when there’s nothing to compare against.

After looking at individual situations more closely, there are many reasons for the lack of consensus. Sometimes, the tactical overwhelms the strategic, and there’s no time to engage the debate. Sometimes, I think organizations don’t really want to know the answer because, if they did, there would be uncomfortable repercussions.  Sometimes, well, organizations are too complicated to make sense of it all, even with a concerted effort.

As loyalty marketing and loyalty marketing technology both slowly inch from art to science, I believe that measurement of the cost of delivery and the associated CPM needs to be defined and scrutinized just as closely as CPP.  The availability of this metric will help us hone the efficiency of reward delivery and to make more informed decisions for program improvement.

I would approach estimating CPM as if I were creating the expenses portion of an “income statement” for my program:

• For the numerator, I would list the cost of each major service category separately. Some programs earn revenue from partners, both internal and external, and from other sources. If this is the case for your program, I would net out the costs associated with earning this added revenue. That is, I want cost numbers that exclude “extraordinary items.” I would also exclude revenue for selling promotional currency and the cost of rewards.

• The denominator should go beyond raw member count as this overlooks the disparity in costs for servicing active versus inactive members. Ideally there are established criteria for determining whether a member is active or not. Apply this formula to create two buckets of members and weight the inactive total with an appropriate factor, for instance 20% indicating that 5 inactive members use the resources of 1 active member.

The process doesn’t sound overly complex, but in practice it can be. Nevertheless, tremendous value results from the discipline of measurement which yields the true cost breakdown for servicing a member and illustrates whether the cost of each service category is trending up or down.

This knowledge allows executives to weigh investment strategies, evaluate alternatives, and make better cost projections. And of course, knowledge is power whether negotiating with my service organizations or with an internal team.