As we move closer to 2018, many retailers will try to break through the clutter and grab their portion of the more than
$1 trillion being spent by consumers this holiday season. What many of them don’t realize is that much of their success will be predicated on how they handled their relationship with customers over the previous 11 months.
What follows is a brief history of customer loyalty and some insights into how businesses have set themselves up for success during the holiday season.
When I was a five years old, the first thing I ever joined was the Frito Bandito fan club. I nagged my mom for countless bags of Fritos corn chips, then cut out the UPCs and mailed them off to the company, along with a self-addressed stamped envelope. Six weeks later, I received a certificate, along with a club badge and a sombrero eraser.
I was part of something that was bigger than myself — I saw it on television, and finally, something in the mail was for me. I remained a loyal customer for a couple more months, until the campaign was retired after complaints from the National Mexican-American Anti-Defamation Committee.
Companies differ in millions of ways, but they all have one thing in common: They need loyal customers who will return when you need them most.
To see how important loyal customers are, look at the retail chains going out of business. Shikhar Ghosh, a senior lecturer at Harvard Business School, told The Wall Street Journal that three-quarters of VC-backed tech startups go under, ultimately for the inability to interest enough paying customers to return.
Approximately 80 percent of all new businesses fail within a year, as most don’t attract enough customers. And with 30 percent of sales happening in the months of November and December, getting it right can mean success or failure for many brands.
Repeat business is critical, especially during the holiday season. When customers return, average lifetime sales increase. And since businesses don’t need to spend to replace previous business, acquisition costs drop, resulting in increased profitability.
Executives have tried many techniques to improve customer loyalty, including elaborate programs that try to reward people as a way to convince them to return again and again. The most successful approach, however, is rather simple: the membership program.
The early days of loyalty programs
Loyalty programs are said to hail back to the 18th century, when shop owners provided customers with copper tokens for application to later purchases — essentially a delayed discount program. In the 19th century, stores shifted to stamps that eventually would become third-party programs offering a variety of merchandise. Consumers ultimately paid in full and then some for the “freebies” but, given they had to buy goods anyway, it was an attempt to entice return visits and avoid customers shifting to another store.
Such stamp programs faded from the scene as loyalty strategies focused on rewarding consumers for showing up repeatedly. By the latter part of the 20th century, American Airlines helped establish such a practice with its frequent-flier program, which promised eventual free flights and better treatment while you were in transit.
The practice spread to virtually every type of business. Small coffee shops had their punch cards, and business of all kinds — pharmacies, auto repair shops, doughnut shops, hotels and more — offered plastic keychain tags that promoted their loyalty programs. Eventually, smartphone apps replaced plastic cards, but the intent behind the offering remained.
Such loyalty programs have paid off to some degree. However, they all exhibited two fundamental weaknesses. One was that constant discounting can become a way to bribe consumers, who eventually want greater savings to keep returning. The second is that all the competitors of a company had their own loyalty cards. Consumers could be “loyal” to everyone and get discounts from each rival.
Meanwhile, as loyalty programs started to crumble, a parallel development emerged to become a more solid foundation: membership programs.
Rather than a loyalty card program, which is free to enter, membership programs require consumers to pay for inclusion. Wholesale clubs like Costco, for example, only allow members to shop and receive discounts and special merchandise. Many are a bright spot in the hurting retail segment.
Museums, although not usually thought of as businesses, have successfully incorporated membership programs for decades. People pay in advance to get repeat entry, early opportunities to see major exhibitions, access to special programs and a discount at the gift shop.
My company has more than 4.5 million members who get access, rewards and deep discounts on apparel for sharing their preferences and agreeing to visit the site at least once a month when we release new collections. This strategy has gained us double-digit growth in a time when traditional retail is fairly stagnant.
The Dollar Shave Club started in 2011 with a simple idea: Members received regular shipments of the company’s branded blades. By last year, when it sold to Unilever for $1 billion, the company had captured 15 percent of unit blade shipments (with only 5 percent of the profit). In response, shaving giant Gillette recently revamped its membership program to compete.
The secret to the success of membership programs is an attractive exchange of values. Consumers get special deals beyond simple discounts, have access to goods and services otherwise unavailable, and receive an early introduction to new items. The issues associated with loyalty programs are less of a problem with membership programs: Competitors typically can’t provide the same specific benefits, and people are committed through membership fees.
Retailers, in return, get detailed knowledge of their customers, allowing for better targeting through product selection and design. They can also lower marketing costs due to acquisition savings from predictable repeat business, customer loyalty and a predictable amount of cash flow.
The base need for repeat customers this holiday season means loyalty programs will remain a staple of business. But companies that want to thrive in consumer markets should look at the effectiveness, customer satisfaction and ROI that a smart membership program can offer.
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