Hostage Programs or Loyalty Programs?

The most popular loyalty program among retailers today is the loyalty or affinity card. Consumers are issued a card with the promise of rebates, access to special prices, or promotional merchandise. In exchange, the customer furnishes personal information to the company and allows the monitoring of future purchases.

Since the programs have proliferated, consumers are now inundated with wallets full of plastic or cardboard affinity cards. Each time they make a purchase, they have to search for their "special" cards in order to get discounts that they were able to receive without cards before the programs were enacted.

Few companies have been able to use the data collected effectively. Hallmark has been at the forefront of the movement and is an exception. The card manufacturer created a "Gold Standard" rewards program. Purchases at Hallmark stores are credited to an account developed for each customer. At certain dollar thresholds, consumers are mailed certificates redeemable for merchandise.

Many of these programs, however, have fallen short of their objectives. It's true that companies have been able to collect consumer data. Unfortunately, by the time systems have been designed to utilize these databases, the information is usually too dated. Some firms never even get that far and wind up in a perpetual collection mode, while consumers keep digging for the cards.

In the 1950s and 60s, green and blue stamps were offered with many purchases. The stamps were redeemed for merchandise at special redemption centers. Popular with consumers, the stamps did not differentiate merchants because they were so widely distributed—even gas stations presented them with each purchase. But customers did notice when they were not available. They looked forward to pasting the small stamps into specially provided books so they could ultimately exchange them for luggage, lamps, and dishes. Consumers were disappointed when the stamps were no longer offered. Banks, gas stations, and other industries vying for the same customers supplied them with gifts and cash as substitutes.

If affinity cards disappeared tomorrow, would customers be outraged? Not likely. Some, such as frequent flyer airline programs, enjoy popularity. However, supermarket and drug store cards are often viewed more as an annoyance. The key to profitability is building long-term relationships with customers, and that requires connection and interdependence.

The true measure of loyalty as opposed to a hostage situation is if the customer would continue to purchase or use a service if there were no monetary incentive. With the lure of valuable hotel points and frequent flyer miles, how would a company know that the customer would stick by them if those programs were no longer available? Is the customer loyal to the company or loyal to the program? It could be that a customer is just waiting for something better to come along, and when it does, he will switch.

Measuring loyalty helps you track results over time. An index based on value, intent to recommend, and intent to repurchase is a good indicator of the degree of a customer's loyalty. Current loyalty program offers must be factored in, however, because programs may or may not be ongoing. Comparing the loyalty index during and after a program gives you a more precise loyalty metric.

Online Retail Trends to Watch

The future is difficult to predict. But the following trends are in progress and will continue to pick up steam as time progresses. Some, like CRM, will become a condition of doing business in the future rather than a trend.

1. One-to-One Marketing/Loyalty Programs

One-to-one marketing programs or customer-relationship management programs (CRM) are the latest trend in retailing, web-based marketing, cataloging, and manufacturer relationships. Retailers have jumped on the bandwagon, looking for new ways to create connections with individuals.

One goal of CRM programs is to provide singular insight of all customers and every interaction they have with a retailer. The main goal, however, is to act with this information in mind every time a customer visits a store or makes a transaction. That will be the major transformation in retailing in the future. Any loyalty strategy, of course, will need to employ offline and online marketing. In the future, customers most likely will refuse to provide their information to more than one agent in the same company. This will force businesses to integrate customer information.

2. Customized Programs and Services

As an adjunct to their CRM programs, retailers will be adding customized programs and services, and manufacturers will be creating customized products. As a result, retailers will have to modify their supply-chain processes to meet the demand. Logistics and warehousing will need to evolve to remain competitive.

The demand for customized products will result in shorter product lifecycles and smaller production output. Because it will require more flexibility, retailers will need to respond as well. The cycles for resetting the stores may need to move from the traditional fixed dates and seasonal planning to responsive, just-in-time planning. The store of the future will have to be very different to accommodate real-time consumer demands.

3. Aggressive Differentiation

In the past 20 years, retailers were very aggressive in expanding their chains through the building of new stores and consolidating with other companies to become larger and more powerful. In their haste to build new stores, some stores have almost become clones of one another. Warehouse-type superstores, for instance, all tend to look like one another. Other "big box" formats and club stores are hard to tell apart as well.

Now retailers realize they must close some of the stores they built so quickly and differentiate the rest of the stores in their chains. They will be adding more interactivity and special services. In order to be successful, retailers will need to help the consumer associate a unique benefit with their stores that is different from their competition.

In the future, customers will want to be able to experiment in the store, enjoy face-to-face interaction with a variety of demonstrations, and participate in entertainment. Retailing will need to become more active than passive. Stores will incorporate interactive technologies and offer instant training rather than classes. Of course, retailers will have to conduct research to determine which technologies customers prefer. Some shoppers dislike using a handheld scanner that tells them which product matches their personal profile. But the same shoppers would like handheld scanners to conduct price checks, verify sizes, or place orders. Just because a tool is electronic does not guarantee its acceptance.

Increased differentiation will include these new tools and new techniques. But the main emphasis will be on building brands to gain recognition of store value and service.

4. Channel Blurring

Channels aren't as distinct as they once were. Drug stores sell milk, and grocery stores have pharmacies. More than 40,000 products are now sold in supermarkets. Consumers just want convenience and shopping speed. Retailers know that if they are able to satisfy most consumer needs in one shopping trip, there will be less need for the consumer to shop at another store. Retailers would like to capture as many of the day's shopping dollars as possible.

Watch for this channel blurring to continue. While consumers today favor European-type shopping, being able to purchase fresh foods daily or satisfy other needs without pre-planning, retailers may replicate the hypermarket concept to provide all needs under one store roof.

Customers are also moving toward using more than one channel to make their purchases. While online sales are just a fraction of traditional retail sales, the web complements all sales by providing supporting information for purchase decisions. Retailers will increasingly rely on the web to learn more about their customers and offer specialized services and promotions. It's important that the customer has a consistent experience across all of the channels.

Channel blurring has extended to the Internet as retailers have pushed customers online with web-specific promotions. Many companies still pursue web sales for the immediate cash return and low overhead dollars, rather than building the channel or contributing to a brand. The Internet customer relationship in the future will be perceived as a long-term asset, not a short- term sale.

One retailer can span channels within its own organization. Kroger owns chain drug stores, convenience stores, supermarkets, and mass merchandisers. Wal-Mart has its conventional mass stores, supercenters, Sam's clubs, and Neighborhood Store supermarkets. The future may include more blending among these.

5. Security/Trust Focus

Over the past several years, there has been an increasing issue with security and trust of both merchants and manufacturers. When appliances break before their time, when services cost more but provide less, or when fashion designers force new fads on the public without alternatives, the retailer is often the one to take the blame.

Cybercrime is also rising. An unprecedented number of websites have been infected with some type of computer virus. Other attacks have ranged from defacement of a site to disabling a site entirely. Victims include e-merchants, manufacturers, and financial institutions.

Higher costs, more self-service, and crowded checkout counters don't contribute to furthering trust. Retailers are trying to re-establish themselves as trusted advisors and service providers. Both resellers and manufacturers have dedicated resources to ensure that the products they sell and the environments in which they sell them are safe and secure. This trend will become more critical to conducting business.

6. Problem Solving Programs

Home discount centers used to be merely warehouses stocked with remodeling materials like countertops, sinks, and faucets. Now these companies provide a consultant to work with the consumer not only to select these products but also to recommend entire remodeling services. In addition to the products, home discount centers offer contracting services to install the new kitchen fixtures.

Retail solution centers will increase in virtually every store. Instead of staffing with sales associates, retailers may add category experts to their stores in major metropolitan areas. The trend will extrapolate to virtually every type of business.

7. Category Expansion

Over time, categories tend to divide as more specialized products are developed. The paper category used to consist of writing paper and typing paper. Then the advent of the computer created the need for printing paper. Now, the category has expanded to include specialty printing paper as well—glossy, resume, and brochure paper to name a few.

While companies are merging and integrating, they may mistakenly believe they have gained synergies in categories. The opposite is true. More categories are being offered in each store, and more categories are being created as they divide and multiply.

The result—for traditional as well as online stores—is the ultimate capping of product assortment. Offering too many types of products only confuses the consumer. The retailer will have to carefully prioritize even more in the future.

8. Store Expansion/Remodeling

Stores are running out of room. It is always a struggle for the retailer to determine which products go on the shelf due to space constraints. There are now more than 50 versions of Crest toothpaste, and other brands offer nearly as many. Only consumer-preferred variations will be placed on the shelf.

But store expansion is limited and not merely focused on making more space for more products. Retailers are updating their stores to create meal solution services and interactivity. Grocers feature more prepared foods and have expanded the perimeter—the most popular area of the store—to focus on high-profit, interesting products and services.