Dec 20, 2009 The year was 1938 when Minnesotans were exposed to one of the earliest loyalty marketing campaigns in the form of redeemable Gold Bond Stamps, brainchild of business legend Curt Carlson.
Over the next eight decades, loyalty marketing would become a fixture in the U.S. economy, catapulted even more prominently into the public’s mind with the 1981 introduction of a concept known as frequent flier miles by American Airlines, which now is a standard perk for nearly all major airlines and some smaller ones.
Today, loyalty marketing is more than buy five sandwiches and get the sixth for free. It’s about sophisticated computers and databases that track consumer habits and spending and offer programs that get customers to spend more or use less and provide rewards for loyalty in terms of goods or services.
“For some, it’s the price of doing business,” said George John, chair of the marketing department at the University of Minnesota’s Carlson School of Management. “Do you want to change a customer’s behavior? Come up with a rewards plan.”
The concept of loyalty marketing has also spawned a loyalty marketing industry, including several firms in the Twin Cities that specialize in the genre. (One of those firms, Carlson Marketing, a direct descendant of Curt Carlson’s Gold Bond Stamps, was sold last month for $175 million to the Canadian loyalty manager Aeroplan.)
One of the fastest-growing loyalty marketing firms in the region is Denali Marketing, which was formed three years ago and has gone from a small office of a few partners to an agency with 70 employees that occupies nearly an entire floor of an office tower in downtown Minneapolis.
Its client list includes Sun Country Airlines, Toys ‘R’ Us, Best Buy and Audience Rewards, a consortium that represents the famed Broadway theater district in New York City.
“The type of work we do is very strategic,” said Denali managing partner Mark Lacek. “We need to attract and keep a customer. That’s what this business is all about.”
Another Twin Cities firm, Tecmark, has been around since 2000. Its focus is on hotels, retail stores and restaurants. Its clients include the Graves Hotel in Minneapolis, Aveda and Rainforest Cafe.
Chief Executive Brent Harms said his clients see a positive return on loyalty programs in the first year. Indeed, a New York-based convenience store chain working with Tecmark saw a 10 percent spike in gasoline purchases after it launched a rewards program recently, Harms said.
It’s not just freebies
“Once customers see the benefit, it’s easy to get them engaged,” said Harms, noting that a reward doesn’t necessarily have to be something free. “Sometimes it’s better [hotel] rooms or preferred service. Those are soft benefits.”
Lacek said loyalty programs generally generate a revenue and profitability uptick of 10 to 15 percent for a company. A firm with a mature loyalty program might see nearly half of company revenue coming from program members.
Loyalty marketing is a huge business in the United States, with more than 1.8 billion memberships in loyalty programs of one sort or another, according to the industry publication Colloquy. That’s a 24 percent increase from two years ago.
But the Colloquy survey determined that while the average membership in loyalty programs stood at 14.1 per household, participants were active in just 6.2 of them.
“Given the bursting of the consumer bubble, the recession and pressure to control program costs, loyalty marketers must turn to growing program value, not the size of their membership base,” said Rick Ferguson, Colloquy’s editorial director.
Lacek said service enhancements are particularly important in frequent flier programs, where upgrades are valued as much as rewards. “It’s about recognition and access. It’s not the miles. It’s the fact that you’re treated like a first-class customer,” he said. “Loyalty in these segments is off the charts.”
Tally knows
Denali has developed a proprietary database called Tally to track consumer purchases and behavior, and it’s developing another program to track activity on social networks. All of this information is designed to help businesses target and retain customers.
“We’ll know when they make purchases, where they make purchases, the form of payment and what they’re looking at on the Web,” said Denali President Margaret Murphy.
What, for instance, would a business learn about a consumer who frequently visited the TMZ.com website?
“They’re into entertainment, music,” said Murphy, noting businesses could tailor programs that appeal to that potential customer’s preferences.
One of Denali’s customers, Audience Rewards, has developed a membership of 500,000 in less than a year and relies on analytics to track show tastes of its Broadway clients.
“We want to find out what they like and put on more shows like that,” said Chief Executive Josh Lesnick. “Do they like premium seats? In that case we won’t push discount seats. Do they usually sit in the balcony? Can we get them to move to orchestra seats? It’s like a frequent flier program. We create a large network and provide rewards and upgrades.”
Denali also has created loyalty programs for non-retail clients, including Great River Energy and AARP, through UnitedHealth Group. For the energy cooperative, the loyalty incentive is to get utility customers to consume less electricity through a rebate program for purchase of new energy-efficient appliances.
If loyalty marketing feels as if it has some aspects of Big Brother in terms of profiling consumer habits, needs and desires, there may be some truth to the analogy.
“Airlines, for instance, know everything about us,” said John, the Carlson School professor. “They can slice and dice our behavior. Once you make a credit card charge, businesses can track you with tailored rewards. It’s almost scary.”