RAPAPORT... Loyalty programs and luxury shoppers can be a match made in retailing heaven, according to marketing mavens. The trick is to know what your customers value.
According to a recent Luxury Tracking Study by Unity Marketing, “some 77 percent of all luxury consumers are members of at least one loyalty program.” What’s even more good news for retailers, that number held true “for both the 40-and-under young affluent consumers as well as the over-40 consumers.” While the type of loyalty programs and the rewards they offer may differ, there are positive results to be reaped. As in any successful retailing endeavor, the key is to understand what your customers really want and to deliver it in a manner they will value.
WHAT IT’S ALL ABOUTOffering consumers an incentive for shopping is a tried-and-true retailing tool. And collecting names ofcustomers and their preferences is “just the absolute bare minimum of what you should be doing, and communicating with them on a regular basis is just basic marketing,” says Pam Danziger, founder of Unity Marketing, author of Shopping: Why We Love It and How Retailers Can Create the Ultimate Customer Experience. Putting these two elements together forms the bare bones of the loyalty program concept.
The idea, explains Rick Ferguson, editorial director of Colloquy, a resource devoted to the loyalty marketing industry, “is that you put some sort of additional value on the table. And that might be in the form of special offers, special pricing, special communications streams, special events, and you say to the customer, ‘If you tell me who you are and let me communicate with you, and let me have a relationship with you beyond what you just buy from my store, then I’ll give you something more personally relevant to you.’ You’re going to know when their anniversaries are coming up or some other event ahead of time and be able to proactively deliver some kind of value and get them to consolidate their spending with you. The idea is that you have some sort of relationship with them between purchase cycles.”
The end goal, says Danziger, “is to get customers to shop more frequently, to spend more money and to increase the positive feelings that they have about the store so that they might be inclined to talk about the store. It’s easier to sell more and get people to spend more money than it is to attract new people into the store.”
In the luxury category, agrees Robert Passikoff, founder and president of Brand Keys, Inc., a brand and customer loyalty research consultancy, “it’s more the rule than the exception that a loyal customer is more valuable and easier to retain, or cheaper to retain, than bringing in a new customer. The range generally we talk about is seven to ten times more expensive to bring in a new customer. “
LUXURY APPEALWhen it comes to luxury purchases, says Passikoff, “people appreciate being appreciated. They want to be rewarded. A little added value is not unexpected, especially the more you pay.” But it doesn’t necessarily have to do with discounts, clarifies Milton Pedraza, chief executive officer (CEO) of the Luxury Institute. “What wealthy consumers like more than anything else in loyalty programs is special offers just for them. Not necessarily related to price, but something customized, something special.”
And in terms of jewelry, Passikoff points out, since purchases aren’t necessarily made on a frequent basis, the idea is to “establish some aspect of your retail existence that creates an emotional bond between you and your customer that’s long term.” And to do that, he cautions, “you better exceed the expectations that [luxury customers] have for the category and constantly reinforce it.” The idea, says Pedraza, “shouldn’t be about making someone addicted to collecting points; it should be more about how unique and exclusive, how customized your offer is.” It’s a question of offering something “unexpected,” he says, “that might fulfill an unexpressed need. That’s the kind of incentive the ultrawealthy really appreciate.”
Danziger agrees that the rewards that resonate are not necessarily monetary. Affluent customers, she says, “are not foolish; they don’t throw money around. They are very value conscious.” To tailor a loyalty program, she suggests “looking at ‘special’ events like trunk shows and special-invitation open nights and invite people in to see things that other people can’t see.”
When it comes to events, says Kate Peterson, Performance Concepts, Inc., “Don’t skimp on details. Don’t over-market the same customers.” Make sure that your events are personal enough, small enough, so you can manage them. There’s nothing worse than being invited to a special event and being one of a thousand. Make sure your staff is prepared and trained well on how to simply work the crowd, how to network. The real payback on these events comes far after the event, not just during the event.”
Ferguson suggests that using the context of the loyalty program to help luxury customers save time — remind them about anniversaries and preselect options for them, for example — can be an effective strategy to build a relationship.
The “value added,” says Pedraza, “is in understanding the customer’s needs and personalizing the offer, which is what wealthy consumers really enjoy. What they expect is a great product and a great experience. And then they’ll sing your praises and come back.”
HOW IT WORKSThe real value in loyalty programs for the retailer, says Ferguson, is in the data that is collected. But, he says, a loyalty program alone won’t necessarily create a more loyal customer. “There are essential drivers of customer loyalty and those drivers can’t be influenced by loyalty programs, and those drivers have to do with prices that you offer, the customer service that you deliver, the quality of your products. Those are the things that build loyalty. “
“What a loyalty program does,” Ferguson goes on to say, “is provide an opportunity for a deeper relationship. You learn more about the customer and you can use that knowledge to deliver offers and information they’re going to find personally relevant. And because of that, if they have the choice to respond to a competitor who might be undercutting you on price or stay with you because they feel you understand them better, then they will make the decision to stay with you.”
Setting up a loyalty program does take some time and effort. “You need to understand what the economic impact is going to be,” says Pedraza. “It’s not only in cost but in complexity. It isn’t just giving incentives…it creates costs you didn’t have previously, hiring a consultant, setting up a tracking program.”
Danziger agrees that the first thing you need to know is how much it’s going to cost you in real terms and to have some flexibility. “If you sign people into your program and you’ve promised them these things and then you do your due diligence and find out you’re losing money because of it, you need to make sure that you can make changes in what you’re offering — perhaps on a yearly basis. The number one thing I would say is do not insult the customers and make them pay for it [joining the program]. I think that’s a horrible precedent.”
It’s not just a question, says Passikoff, of setting up a program because a competitor is doing so. “You need to understand what engages your customer and what disengages your customers. It’s not just having a mailing list or emailing list and doing mail drops. You need to know where you can reasonably meet or exceed the expectations that people have.”
“The most common type of failures we see,” Ferguson says, “are programs that scrimp on the dialog. That’s really the coin of the realm for loyalty.” If customers have signed up but only hear from a retailer via statements of how much equity they’ve accrued in the program, then the retailer has commoditized the concept, Ferguson says, which makes it easier for the competition to copy it. “You need to avoid a look-alike program; you need to avoid programs that don’t offer any kind of differentiated benefit. You need to concentrate on communicating with the customer between purchases and delivering value that builds an emotional attachment to the brand. Those are the things you differentiate with.”
Moreover, Ferguson says: “You need to play on your brand’s strength. If your strength is high-quality diamonds or if it’s the customer experience inside the store or whatever brand strengths you bring to the table, you can enhance those strengths through the loyalty program and create a type of emotional attachment your competitor can’t duplicate.”
This relationship is something a brick-and-mortar retailer can use to compete with an etailer. “A computer can provide a lot of things for a customer,” says Peterson, “but the one thing it can’t provide is any kind of personal touch, any sort ofrelationship, any sort of thank you.”
Providing consumers with opportunities that remind them they’re still your customers, says Ferguson “a special event one night that may not have anything to do with actually making a purchase, such as a wine tasting at the store or a celebrity meet-and-greet or the opportunity to preview new merchandise that’s coming in — is the kind of experience that can create favorable and memorable impressions in the customer’s mind. And that helps build an emotional relationship. And that’s some-thing that a brick-and-mortar operation can do quite well, but an etailer couldn’t hope to duplicate. It’s very differentiating. And it really does create an emotional bond that takes the focus off price.”
The best time to launch a loyalty program, Ferguson advises, is during the good times, “when things are going well and margins are healthy and the business is growing and you get ahead of the competition by doing something like this and take the time to do it right. That means a combination of doing your due diligence on the design stage, making sure that you have buy-in from all the constituents of the company and the program design is sound and you’ve modeled all the results financially.
“All these things take time. And the bigger the scale of the enterprise, the longer it’s going to take. So a diamond retailer with two or three stores might be able to get up and running within two or three months; a bigger chain is going to take longer because there are more moving parts.”
By the Numbers (sidebar)Unity Marketing’s first quarter 2007 Luxury Tracking Report, which polled luxury consumers about loyalty programs, reported that:
• The striking differences in loyalty membership come with income. Superaffluents [income of $150,000 per year and up] with the highest incomes are much more likely to be members of loyalty programs than those with lower household incomes (see “Luxury Consumers’ Membership in Loyalty Programs” opposite).
•Luxury consumers who belong to a loyalty program spent more than 50 percent more in the study period buying luxuries than those who do not belong.
•Young affluents [income of $100,000 to $149,000], age 40 and under, who belong to a loyalty program spent nearly twice as much on luxury as nonmembers. For marketers who want to target the young affluents, developing a loyalty program that fits their lifestyle could be a powerful inducement for additional spending and brand loyalty.
The Set-up (sidebar)
There are certain factors to consider when setting up
a loyalty program. Here, Rick Ferguson, editorial director of Colloquy, summarizes the key points to keep in mind.
• The important thing to understand is that there is a payback period that is required before you see a positive return. It’s about 12 to 18 months before the typical retailer will see a return on the market investment of increased purchases or increased frequency of purchase.
• It’s also important to pay attention to the retention effect. You can look at customers who no longer purchase with you and start to develop behavioral flags that will tell you that a customer is getting ready to depart and you can proactively give them an offer to retain them. And that retention effect is very important and it’s a critical part of determining what the return on investment of the program is. So you basically do some financial modeling up front.
• You’re going to need some kind of identification device, whether it’s a plastic card that they use when they make the purchase or a membership number or key fob that identifies them as a customer or a member of the program. You need the database infrastructure. For smaller retailers, you might be able to run the whole thing in Microsoft Access and keep track of who your good customers are and what purchases they’ve made. Bigger retailers with multiple chains might need some type of central database and some type of point-of-sale device that allows them to capture the transactions. • Then you have to factor in the communications costs and direct mail pieces every quarter. Or are you going to send emails, are you going to provide some value in terms of discount, points, or are you going to spend money on special events? You have to factor in all the costs up front, determine what type of return you hope to get and then just model the results from best to worst scenario.
• Make sure you are reasonably comfortable that you can see a return within a reasonable period before you launch a program. That’s key. If you go into it blindly and aren’t sure how much you’re going to spend and what you hope to get out of it, then chances are there will be some problems or design flaws that you won’t be able to see until it’s too late. But if you’ve mapped the whole thing out financially ahead of time, then you can go in with a reasonable expectation of success.
• We’re big advocates of putting together an across-the-board functional team that incorporates representatives from frontline employees, the finance department, the IT department, so everyone can put up their own red flags in the design stage. And [this way], they’re also champions of the program when it launches. At that point, you want to make sure you’ve done all the training so the frontline people know why the program is important and it should benefit them somehow to be good advocates of the program.
Retail Success Story (sidebar)Michael Pollak, chief executive officer (CEO) of Hyde Park Jewelers, Denver, Phoenix and Las Vegas, has reaped the benefits of a loyalty program he founded five years ago called Platinum Rewards. RDR recently spoke with him about how successful the experience has been.
Rapaport Diamond Report: Why did you decide to start a loyalty program?
Michael Pollak: By combining important information collected from the stores’ customers with their purchase preferences — what things they buy, what times of the year they buy them, what price range are they comfortable in, what brands they select, what gemstones are the ones they most often seek. Is it a self-purchase? Is it a gift purchase — you can have predetermined triggered events to communicate with them and make them offers to come in to the store.
We have over a thousand members in our program and from that we have a couple thousand emails and a couple thousand birthdays in the system and that’s invaluable information for a luxury retailer to have. When you sign up for the program, it’s a requirement to provide that information.
RDR: Has it paid off?
MP: I think it’s paid off in this way. What we are able to do is measure the difference between average spend, total spend, frequency of spend of a member versus a nonmember. What we know is they purchase more frequently and they spend more money. And most of your income is always going to come from existing customers.
We’re all trying to aggregate new customers and they’re important for the future, but 80 percent of most jewelers’ business will come from 20 percent of their existing customers. So the more that you can affect their behavior by giving them yet another reason to come in the store [is a positive]. You’re saying “thank you, we want to reward you for your behavior.” When they have so many choices today — choices of other jewelers and specialty stores and online partners and everybody else — it gives them one more point to affect their behavior.
RDR: Who does this appeal to — by gender, age?
MP: It attracts customers probably more in the 25 to 55 age group. It doesn’t attract many customers over 55; their online habits aren’t as developed as both the younger and the middle-aged shoppers who are using online a lot for the email part. But I would say it really goes across lots of demographics. Basically, the people who sign up for it are household income of $100,000 and higher, 25 to 55 years of age and like to
purchase jewelry.
Article from the Rapaport Magazine - October 2007. To subscribe click here.