Sperry, Hutchinson, and the Hotel, Part I.

Are customer loyalty programs a good thing for retail? Should you have one? Do you participate in any? In part two of this article, I’ll tell you a story about a hotel's loyalty program from my own experience, and share with you both rational and emotional conclusions.

You will, of course, decide for yourself.

My story starts with a hotel in Austin, but the story of loyalty programs goes back to 1896, when Thomas Sperry and Shelly Hutchinson came up with an idea to improve retail cash flow.

Sperry and Hutchinson sold S+H Green Stamps to retailers, who gave them to customers that paid in cash instead of using store credit.


The First Loyalty Program

Customers flocked to stores that gave stamps. Filling stations, gift shops, and grocery stores gave them as bonuses with every purchase, based on the dollar amount of the purchase.

Eventually shoppers saved up books of stamps and redeemed them for gifts from the S+H Green Stamp catalog. Stamps could be redeemed for anything from furniture, to appliances, to life insurance. During the 1960s the S+H catalog was the largest publication in the US, and the company issued three times as many stamps as the US Postal Service.

S+H made money selling the stamps, and even more money because so many stamps were never redeemed. (Note to loyalty program planners: paper gets lost. Computer records don't).

During the recession of the 70’s when customers were afraid that each dollar they spent might be the last for a while, and retail sales were taking a beating, retailers cut every available cost of operation. The ongoing expense of Green Stamps became hard to justify. When the competition dropped the stamps and lowered prices by the same percentage, thrifty shoppers voted with their feet to forgo the reward and take the lower price.

By the time Sperry's and Hutchinson's heirs sold the company in 1981 only about 100 stores were still offering the stamps.


Why is Customer Loyalty Important?

Fred Reichheld, author of Loyalty Rules, says an increase of customer retention of only 5 percent can result in a 75 percent improvement in customer value.

Reichheld cites other values from customer retention including greater sales, higher profitability, better word of mouth, and the ability to identify service problems earlier.

It’s no wonder that retailers are so enamored of customer loyalty programs.


Punch Cards

The simplest loyalty program is the wallet-sized card which can be punched or stamped with each purchase. Buy eight sandwiches and the ninth is free. Stay a dozen nights in our hotel and the thirteenth is on us. Sorry… the hotel story helped to shape my view on loyalty programs, but I’m not quite ready to tell it, yet.

A variation of the punch card is the magnetic card which gets swiped in the credit card reader. It provides discounts on selected items to members of the store’s loyalty club. At least, that’s what they want you to believe. The actual purpose is to record data on your personal purchase habits, in order to tailor future offers that you’re more likely to respond to.


Improve your punch card response rate.

Professors Xavier Drèze of Wharton, and Joseph Nunes of USC’s Marshall School of Business have concluded in a paper titled The Endowed Progress Effect that people are more likely to buy eight sandwiches to get the free one if you increase the total required to ten, but give them three punches on their first purchase.

To quote the study: "By converting a task requiring eight steps into a task requiring 10 steps, but with two already complete, the task is reframed as one that has been undertaken and incomplete rather than not yet begun. This increases the likelihood of task completion and decreases completion time."


Are you rewarding the wrong customers?

Many credit card companies are now offering airline miles when you apply for, and are granted their card. It’s a variation on those first three punches on the ten punch card.

But again and again it’s been statistically shown that the least loyal customers are those who are drawn to you because of special pricing. The special pricing usually kills profitability. The last thing you should attempt is to make an unprofitable customer loyal.


Does this hotel offer airline miles?

Are you a member of any airline’s frequent flyer program? Several of them? Do you use them all? So, which of the airlines are you loyal to? Or, like most of us do you shop for best price and purchase that ticket?

When all of the competitors use the same rewards, we’re back to a level playing field. Frequent flyer miles are now part of the airlines' cost of doing business. Having one won’t increase sales, but not having one may actually decrease them.


Can you buy customer loyalty?

Or, more specifically, can you purchase customer loyalty with premiums and discounts?

This is the basic flaw in the whole concept of customer loyalty programs, and a hint of the conclusions to expect in Sperry, Hutchinson, and the Hotel, Part II.

---

Share This Article With A Friend.

Read more!

Managing the Gap, Part Deux

From my "in" box:

Chuck;

I always look forward to your articles. I don't always agree, however. And today, I'd like to argue one point with you that you mention in your Managing the Gap article.

You stated that "Without advertising, you'll be primarily conducting business with people who just happen to pass by and see your sign."

That leaves out a couple of things.

1. Sales staff. I have seen a number of businesses that do very little advertising but have an aggressive sales staff bringing in good numbers. While you may say that a sales staff is a form of advertising, I would instead say they are a form of marketing.

2. Same with a company's PR. PR is not necessarily "advertising." It is however, marketing.

3. Networking. Again, not "advertising," but a form of marketing.

Just my two cents:)

Norm Minnick
Total Marketing, Inc.
www.totalmarketinginc.biz



Hi, Norm:

I should never make statements like the one you quoted without first qualifying them. You’re absolutely right. "Without advertising, you'll be primarily conducting business with people who just happen to pass by and see your sign" is at best incomplete (if you’re feeling generous). As it stands, it’s flat out wrong.

Aggressive selling and PR are obviously factors in growing new customers. Networking is slightly different, but again, I agree. It is a form of marketing.

To be sure that we don’t have different understandings of what these terms mean. Let me share mine.

• Marketing. – everything a company does to acquire new customers and maintain relationships with them. The goal is to match a company’s offerings of products or services to people who need, want, and can pay for them.
• Advertising – calling attention to a business, a product, or a service in some public medium in order to induce people to purchase. It’s generally accepted that advertisements are announcements paid for by the seller.
• Networking - making new contacts and spreading the word about yourself or your company. Usually this implies meeting one to one.
• Public Relations – the actions of a company to promote goodwill between itself and its buying public.

Now, lets address the points you made in your e-mail.


Point One: salespeople. I suspect you’re referring to outside sales. Sales clerks, who wait for customers to enter the business, are going to be dependent on either walk-in traffic, or on advertising, for the same reasons I put forth in Managing the Gap. There will also always be referral business, if those sales clerks provide a remarkably good customer experience.

An outside sales staff’s function is to seek out new customers. Outside salespeople will be much more important to your bottom line when your business depends on relatively few purchasers, who spend proportionally larger amounts in each transaction. Sales of services immediately come to mind. Think of a typical insurance broker’s office. The walk-in traffic will be miniscule compared to the number of sales it takes to keep that office open and thriving.

Outside sales wouldn’t work well for a grocery store, though. Businesses which rely on large numbers of customers, each of whom makes relatively small purchases, still won’t be able to trade their advertising for direct sales.

We can conclude that the value of outside sales is inversely proportional to the size of the typical purchase.


Point Two: public relations. Again, I agree. Public Relations is not advertising, but it is marketing. Public Relations is what you do with your reputation to attract new customers.

Some PR companies spend a lot of time and effort getting stories written about their clients in the major media. They justify the value of the story placement on the equivalent cost of purchasing advertising time or space. Frankly, I think stories that carry the credibility of the news medium are worth far more than their advertising equivalent.

Unfortunately, no one can predict when an editor will find such a press release useful and newsworthy. This makes Public Relations as a publicity mechanism highly limited.

A company’s ability to grow its customer base through its PR efforts faces the same limitations as a company trying to grow through outside sales – too few opportunities to convert mass impressions into multiples of new customers. If the business relies on a few customers to make large purchases, it may do quite well with Public Relations as its exclusive driving mechanism. Businesses which depend on large numbers of customers, though, will require large amounts of exposure.

Marketing professionals whom I respect disagree with me. Al and Laura Ries in The Fall of Advertising & The Rise of PR, for instance, make the bold claim that great brands are not built with advertising, but rather with PR. At a national level, they make a compelling case. I've seen very few local businesses, though, that could qualify as great brands.


Point Three: networking. By "networking," did you mean attending networking events? We both likely know people who use networking events quite effectively. Much like outside salespeople, they need to forge relationships with folks who make somewhat larger purchases, or who will make multiple purchases over a reasonable period of time.

For companies who deal with hundreds of customers in small dollar increments, networking is too inefficient to drive sales.

I truly suck at networking events. Perhaps if I were better at them, I’d be more enthusiastic. Though I don’t attend the events, I am constantly networking. Being open to people who cross my path, and staying in touch with them, has proven to be the best way to create my own luck

Norm, I appreciate you bringing up these points. Until I gave it more thought, I hadn't realized that "The value of outside sales is inversely proportional to the size of the typical purchase." I suspect I'll be quoting myself on that one.

Best regards,
Chuck

PS – we didn’t address Professional Reputation – the assessment by the community of the quality of your work, your knowledge of your trade, and your honesty and integrity. Maybe that would make a good discussion topic sometime soon.

---

Share This Article With A Friend.

Read more!

Managing the Gap

“All advertising does is try to convince people to buy things they don’t want and don’t need.”

Ever heard that? If you have, it was probably a statement made by an employee. A non-sales employee of some large company. A non-sales employee who doesn't understand commerce and has never been involved in attracting new customers to the company which employs him.

Owners of businesses (as well as their salespeople) instinctively know two things:

1. you can’t convince anyone to buy what she doesn't need (at least, not more than once), and

2. without advertising, you'll be primarily conducting business with people who just happened to pass by and see your sign.

Nobody buys anything she doesn't want or need. What? That can't be right. People don’t need tattoos. They don’t need newer cars. They don’t need the latest hot video game.

Kind of arrogant, isn’t it, to assume that just because you don’t feel the need, that no one else does, either?

The only reason a purchaser buys anything is because she feels a lack in her life. Advertising only speeds up what would have happened anyway by helping Ms. Prospective Customer to recognize her feelings of dissatisfaction, and to help her to learn about ways she could eliminate the gap between what she has, and what she wants. No gap, no reason to buy.

As marketers, our job is to manage the gap.

What makes up the gap? What’s the difference between the customer’s ideal and her reality? How can purchasing from you satisfy the need she feels? How can purchasing from your competitors satisfy her? Inside her mind, where do you and your competitors rank in your ability to eliminate that gaping lack she perceives in her life?

Those questions inevitably give rise to other questions:

• Can she articulate what it is she feels? (A problem well stated is, after all, half solved).


• Do you know her perceptions of you? Of your competitors?


• Does she understand the ideal state, that is, does she know how good it could be if she purchased from you?

The gap is always based on perceptions, and feelings. If she doesn't feel the need, she won't buy. What can you do to help her to understand what it is she's feeling, and how buying from you will satisfy the need she feels?

Could this “managing the gap” concept provide a key to creating your own powerful marketing program?

---

Share This Article With A Friend.

Read more!