Why do some loyalty programs succeed while others fail? Brian Woolf, president of the Retail Strategy Center, may provide the answer in his recently published second book, Loyalty Marketing, The Second Act. "Loyalty programs tend to do well in the first year," he explains, but like good theatre, "you have to find ways to keep filling the seats." That, says Woolf, "has less to do with the value of points or discounts to a customer, and much more to do with a company's use of data mining to improve the customer experience."

Collecting customer data is one thing, but turning actionable data into a customer-focused strategy can be a whole new ball of wax. Woolf believes it's because top management hasn't figured out what to do with all the information gleaned. "You have all this information sitting in a database somewhere, and no one taking advantage of it," he says.

So a company that offers loyalty discounts or points, but fails to properly analyze and act on that data, is forced to compete on price alone, and it has to keep offering more and more rewards in order to keep customers away from competitors with similar programs. "You need to mine the information to create not only relationships but also an optimum in-store experience." Here, says Woolf, "the best loyalty programs use the customer data to improve not only promotions, but also store layout, pricing, cleanliness, check-out speed, etc." Firms that do this, claims Woolf, are able "to double their profits." When these elements are not addressed, "all you're doing is teaching the customer to seek out the lowest price."

Points or Discounts?
So which form of currency makes for a successful loyalty program? Points can generate loyalty -- just look at UK grocery giant Tesco and its wildly successful Clubcard program that has more than 14 million members. But the points system can also be a significant cost. Woolf says Tesco chose points primarily because it's the typical m.o. for loyalty programs in the UK. But in general, discounts are a more effective means of "buying" customer information and generating loyalty. "Two tier pricing -- one price for an anonymous shopper but a lower price for the loyalty card carrier -- makes money immediately," says Woolf. "The 20% or so of sales that are not on the card go through at full margin, while the discounts on the rest of sales represent a fair tradeoff in terms of loyalty and strategic customer information." As a result, the two-tier discounting model "is almost always more profitable than a points strategy," he argues.

In addition to discounts, leading loyalty programs are learning to emphasize frequency of purchase. For example, says Woolf, "Charlotte, NC-based Harris Teeter is running a promotion where if a customer spends $35 or more in eight of 10 weeks, he receives a 10% coupon that can be used on the future purchase of his choice." Programs like this, says Woolf, "help the chain learn what it needs to improve the in-store experience, and at the same time gives the customers another reason to keep coming back."

I've known Brian Woolf personally for years, and have a high degree of respect for his work. His new book is definitely worth the read. But be careful: it's primarily a book about the mechanics, benefits, and tactics involved in grocery-based loyalty marketing programs. Not all of the principles are easily transferable to other categories.

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