Establishing Fidelity in Loyalty Programs

There has been a lot of activity in the area of retail loyalty programs. But while the goals of these initiatives are simple—learn about the customer and keep him or her coming back—finding successful means of implementation has become a huge challenge.

Retailers with successful programs have learned a few tricks. They make the customer feel special, they offer a tangible incentive and they do it in a way that is too invisible to make the shopper feel like a white laboratory rat. And, they do not overtly railroad the customer into joining something. "You don't want to be irritating or alienating and you don't want it to be blatantly obvious you're studying them," notes Jeffrey Klinefelter, a senior retail analyst for U.S. Bancorp Piper Jaffray in Minneapolis.

Some clubs I've tried may have taken the wrong approach. A common practice involves stamping a card every time you spend money. I would wind up with a wallet filled with cards that I forgot to produce when I shopped a particular store. I also felt the eventual bargain was not real. At a clothing chain, for example, I was promised $10 off when I reached a certain spending level. But what about when goods went on sale? Did not everyone else get $10 off?

At CVS, I was lured by signage promising attractive pricing on paper goods (I missed some small print). At the register, I learned I'd have to join the "club." My husband grabbed the membership blank. Later, he told me he lied about my income, age, household size and everything else. I guess CVS did not learn much. As Klinefelter put it, "Having to join the club for prices can turn people off. If you're Costco and have to join just to get in the door, it can work."

It can also work if the customer feels special. Zellers' Club Z does this. Shoppers spend money, accrue points and cash them in for various products. The strategy is somewhat similar to what candy companies did when I was a kid: After you sold so many boxes, you could win a bicycle or other item.

Upscale apparel retailer and cataloger Chico's also has the right idea. After spending $500 in a year, shoppers receive 5% off everything forever. "That is one of the things that has been credited to their success," says Klinefelter. For company-owned stores during the first quarter, comp store sales increased 27.7% at Chico's, marking the 15th consecutive quarter of earnings growth in excess of 50%.

One of the newest, most sophisticated programs is coming from Target, the first major retailer to move into the smart card market. In a partnership with Visa, Target is launching a chip-embedded card that can be used in Target and other stores. The card tracks purchases and singles out customers for certain discounts. A frequent purchaser of pet food may instantaneously receive 20% off at the register. "This lets you take sales data analysis to another level," says Klinefelter. "And every time you use the card, it creates a branding impression." The chain plans to convert its portfolio of 20 million proprietary cards to a chip standard.

To date, no major U.S. merchant has invested in smart card technology. With Target taking the first step, experts predict that, in addition to benefiting Visa, a chain reaction will soon involve American Express and MasterCard as well as other retailers. Target's smart card, for example, will allow the chain to study what its customers are buying at Wal-Mart but not at Target and vice versa. In fact, there could eventually be an interesting information war among major retailers. "Wal-Mart could then track how many Target cards are used in its stores perhaps," adds Klinefelter.