Internet Marketing for SMEs: Loyalty marketing

Loyalty marketing is an approach to marketing, based on strategic management, in which a company focuses on growing and retaining existing customers through incentives. The discipline of customer loyalty marketing has been around for many years, but expansions from it merely being a model for conducting business to becoming a vehicle for marketing and advertising have made it omnipresent in consumer marketing organizations since the mid- to late-1990s. Some of the newer loyalty marketing industry insiders, such as Chris X. Moloney and Fred Reichheld, have claimed a strong link between customer loyalty marketing and customer referral. In recent years, a new marketing discipline called "customer advocacy marketing" has been combined with or replaced "customer loyalty marketing." To the general public, many airline miles programs, hotel frequent guest programs and credit card incentive programs are the most visible customer loyalty marketing programs.[1]

History of loyalty marketing
On May 1, 1981 American Airlines launched the first full-scale loyalty marketing program of the modern era with the AAdvantage miles program.[2] This revolutionary program was the first to reward "frequent fliers" with reward miles that could be accumulated and later redeemed for free travel. Many airlines and travel providers saw the incredible value in providing customers with an incentive to use a company exclusively and be rewarded for their loyalty. Within a few years, dozens of travel industry companies launched similar programs. The AAdvantage program now boasts over 50 million active members. [3]

American Airlines' AAdvantage program can trace some of its roots to S&H Greenstamps which were a popular retail reward coupon issued very commonly from the 1930s through the 1980s. Typically, as a consumer shopped at various grocery and dry good stores, they would receive a set number of Green Stamps that could be pasted into booklets and redeemed for prizes. [4]

Another early "loyalty marketing" program was created by baking brand Betty Crocker. In 1929, Betty Crocker issued coupons that could be used to redeem for items like free flatware. In 1937 the coupons were printed on the outside of packages, and later the Betty Crocker points program produced a popular reward catalog from which customers could pick rewards using their points. In 2006, it was announced that the Betty Crocker Catalog was going out of business and that all points needed to be redeemed by December 15, 2006. With it, one of the earliest loyalty programs ends a 77 year tradition. [5]

Loyalty marketing impact
Many loyalty programs have changed the way consumers interact with the companies from which they purchase products or services from and how much consumers spend. Many consumers in the US and Europe have become quite accustomed to the rewards and incentives they receive by being a "card carrying" member of an airline, hotel or car rental program. In addition, research from Chris X. Moloney shows that nearly 1/2 of all credit card users in the US utilize a points-based rewards program. [6]

In recent years, the competition for high income customers has led many of these loyalty marketing program providers to provide significant perks that deliver value well beyond reward points or miles. Both American's AAdvantage program and Starwood Hotels' Preferred Guest program have received industry awards, called "Freddie Awards" by Inside Flyer Magazine and its publisher Randy Petersen for providing perks that customers value highly. These perks have become as important to many travelers as their reward miles according to research.

In his book, Loyalty Rules!, Fred Reichheld details the value to customer referral on the growth and financial performance of dozens of leading US firms. Reichheld purports that the measurement of company advocates, or promoters, is the strongest single measurable correlation between customers and corporate performance. Similarly, Chris X. Moloney has presented new findings ((Loyalty World London 2006)) that showed a magnetic value to a company to promote and measure customer referrals and advocacy via research and marketing.

Loyalty marketing and the loyalty business model
The loyalty business model relies on training of employees to achieve a specific paradyme: quality of product or service leads to customer satisfaction, which leads to customer loyalty, which leads to profitability. Loyalty marketing is an extension of that effort, relying upon word-of-mouth and advertising to draw upon the positive experiences of those exposed to loyalty business model inspired ventures to attract new customers. Fred Reichheld makes the point in his books that one can leverage the "power of extension" to draw new customers.[7]

The rapid expansion of frequent-flyer programs is due to the fact that loyalty marketing relies on the earned loyalty of current customers to attract new loyalty from future customers. Incentive programs that are exclusive must strike a balance between increasing benefits for new customers over any existing loyalty plan they are currently in and keeping existing customers from moving to new plans. Hallmark did this through devising a program that directly rewarded customers not only for buying merchandise and utilizing Hallmark.com, but gaining additional benefits through referring their friends.[8]

The most recent loyalty marketing programs rely on viral marketing techniques to spread word of incentive and inducement programs through word of mouth.

References

Reichheld, F. (1996) Loyalty Rules!, Harvard Business School Press, Boston, 2001.
Philip Kotler. According to Kotler: The World's Foremost Authority on Marketing Answers Your Questions. AMACOM Div American Mgmt Assn. 2005. ISBN 0814472958
http://www.aa.com/content/AAdvantage/programDetails/main.jhtml
Dawkins, P. and Reichheld, F. (1990) "Customer retention as a competitive weapon", Directors and Boards, vol 14, no 4, 1990.
Reichheld, F. (1996) The Loyalty Effect, Harvard Business School Press, Boston, 1996.
Moloney, Chris X. (2006) "Winning Your Customer’s Loyalty: The Best Tools, Techniques and Practices" AMA Workshop Event(s). Misc. materials distributed related to event(s). San Diego, 2006.
Carrol, P. and Reichheld, F. (1992) "The fallacy of customer retention", Journal of Retail Banking, vol 13, no 4, 1992.
Scott Robinette, Vicki Lenz, Claire Brand. Emotion Marketing: The Hallmark Way of Winning Customers for Life. McGraw-Hill Professional, 2000. ISBN 0071364145

Moloney, Chris X. (2006) "Winning Your Customer’s Loyalty: The Best Tools, Techniques and Practices" AMA Workshop Event(s). Misc. materials distributed related to event(s). San Diego, 2006