New Rules of Loyalty Marketing

Targeted loyalty programs, conducted by mass-market retailers in collaboration with manufacturers, are no longer working as well as they did. Why? Let’s take a closer look.

Most experts can recite the broadly accepted 20/80 rule that is the backbone of any loyalty campaign: 20% of customers account for 80% of a brand’s sales.

But loyalty programs that have traditionally focused on “heavy” or “super heavy” users are no longer generating a positive return on investment. In this new economy, those buyers have segmented themselves into two camps: those leaving the brand and those remaining loyal.

The former group is going to leave the brand no matter what. They have made the decision, usually based on price, to downgrade. Others are saving money by cooking at home with fresh ingredients instead of buying frozen or other prepackaged foods. Others are turning to private label. Few categories have been harder hit than over-the-counter drug brands.

The second group is going to stick with the brand no matter what. And these loyalists may increase their purchase rate as they “hunker down” with brands they know and trust. Sodas and certain frozen dinner brands are good examples of increased retention rates relative to this time last year. Obviously, it is hard to make any loyalty program pay out with these two consumer groups; one will ignore the program and the other will use it to subsidize an existing purchase.

So what can be done to improve these programs?

The more successful programs are those that focus on the “light” or “medium” buyers of a particular brand—especially those new to the program. But isn’t that the exact opposite of what a loyalty program is all about? The short answer is, “No.” Remember that most heavy buyers do not begin their interaction with the brand at the heavy level. They enter as a light buyer first and become a heavy buyer second.

Brands that target lighter buyers have reaped the benefits in two ways. First, they have been able to move more mediums up to heavy status and at a quicker pace than they traditionally would have arrived there on their own. More consumers buying more products have a two-fold impact on incremental sales. In addition, by speaking with consumers before they become heavy buyers, the brand becomes part of the decision-making process to “become” that more frequent purchaser. These customers are less likely to be influenced by external factors or competitive noise that might pressure them to leave the brand. In short, a more loyal heavy buyer is created—one who is more likely to stick with the brand, “no matter what.”

The economic downturn has also been a boon for some brands. Let’s stick with the frozen meals example. That category has benefited as consumers are going out to eat less often. Sales of energy bars have increased—despite the peanut butter recall—as people looking to have a quick lunch without leaving their office. Again these consumers are not entering the brand as Heavy Buyers, but as Lights or Mediums. So, there is a greater pool of consumers for brands to influence.

Here’s the best news: This is all a targeting phenomenon, not a program or tactical one. In other words, if brands want these consumers to become Heavy Buyers, they should speak to them as if they were already Heavy Buyers. Those Mediums that are likely to convert to Heavy Buyers will respond to the message that brands have created based on their research into Heavy Buyers. This means that brands do not have to, nor should they, dismantle their Heavy Buyer programs. They need to expand them to include these lower threshold users. This will allow them to maintain their relationship with the Heavy Buyers for the time when “stick” or “cut back” are not the only attitudes held by these very important consumers. And even if budgets do not allow brands to target both Heavy and Medium Buyers, remember that – at this time – influence over the Heavies is minimal.

The Medium Buyers have proven themselves to be much more receptive to brands’ influence and messaging. It’s like the difference parents see when they talk to teenagers versus younger children. If given enough attention, these Medium Buyers will grow up right into the next wave of loyal Heavy Buyers.

Here’s the bottom line: The rules of conducting loyalty programs have changed. Targeting Light and Medium Buyers puts the brand on the road to long-term success.

Michael Schiff is managing partner at Partners In Loyalty Marketing, a Chicago-based consultancy serving manufacturers and retailers. He can be reached at [email protected].