By Channing Rollo, business intelligence manager, ClientLogic

Customer loyalty is the brass ring of business: Everyone is chasing it, yet no one seems to have quite grasped it.  The mind-boggling speed and immense selection offered through electronic commerce, coupled with reduced shopping involvement and declining brand allegiance, have made customer loyalty even more elusive. 

But customer loyalty doesn't have to be out of reach. Technology has provided merchants with new tools for fostering customer allegiance.  Unfortunately, these tools also present new challenges.

Still, the rules of customer loyalty remain simple: Customer retention begins by delighting the customer with a dynamite product or service and a positive, consistent purchasing experience.  After that, it's up to the merchant to provide continuously increasing value that will keep their customers coming back for more.

There is little business risk in investing in progressive value aimed at fostering customer retention. Loyalty has empirically demonstrated its ability to generate enormous economic returns.  Thus, a smart customer rewards initiative - if implemented in conjunction with a great product or service and stellar customer support - will give the consumer ample incentive to purchase frequently over his or her lifetime, thereby justifying the expenditure.

Where do most companies focus their attention? Profit, cash flow and customer acquisition - right? According to Frederick Reichheld, author of The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value, this concentration is exceedingly misguided. Reichheld asserts that the one business principle most likely to be ignored - customer loyalty - is the only true reflection of how much value a company is generating.

Not surprisingly, many economic experts view customer retention rate as a window to a company's future, the foremost predictor of strategic success. Why? Customers are typically the first to notice when a company's offerings decline in value or when competitors offer superior value, and they communicate this by shifting their business.

Customer loyalty, in addition to serving as a value indicator, also has a powerful effect on a business' bottom line. We all know the statistics - a five percent-increase in retention can result in a bottom-line profit increase of up to 75 percent, depending on the industry.

The dramatic economic power of customer retention is further revealed when viewing customers in terms of lifetime value (LTV). According to the book Loyalty.com, a comprehensive study of customer loyalty programs, Cadillac calculates the LTV of their loyal customers at $332,000, while Pizza Hut estimates that their life-long customers are worth more than $8,000 to the company. These figures reflect a customer's repeat purchase value, as well as some intangibles - for example, the new customer acquisition generated through positive referrals by high-LTV customers. Thus, customer retention initiatives directed at such customers guarantee significant current and future economic benefits.

The introduction of the Internet and the increasingly ubiquitous nature of information technology pose both opportunities and threats to customer loyalty. On one hand, online shopping is inherently impersonal, which minimizes the consumer's feelings of attachment and investment. The traditional marketing approach divides consumer purchasing behavior into a five-step process:

1. perception of need;
2. information search;
3. alternative evaluation (assessing value from evoked set of products or services);
4. actual purchase; and
5. post-purchase use and assessment.

While these five steps are still present in online shopping, the Internet dramatically expedites the process. In fact, on the Web, a consumer may move through all five steps in a mere five minutes. This is true even with high-involvement purchases that traditionally required extended problem solving, as demonstrated by the popularity of car shopping on the World Wide Web. With the convenience of the Internet trumping geographical barriers and facilitating widespread comparison shopping, providing a value or reward distinction becomes even more essential.

To overcome these challenges, technology also enables vendors to connect and learn about their customers like never before. Powered by solid customer relationship management (CRM) models, marketers now have ample opportunities to use personalization, customization and targeted communication to create true customer intimacy.

Customers have three currencies to "spend" in their relationships with a vendor - time, money, and data (increasingly defined as privacy). Providing superior value through a loyalty program may involve any - or all - of these.

Demonstrating ongoing value is the governing principle behind reward incentives. Such incentives - which can include private label points programs, continuity/club options and others - can be extremely effective. In fact, recent studies of American consumers reveal that at least 60 percent of individuals report that they increase their purchases from a particular vendor when offered incentives.

Regardless of program type or media, extensive evaluation and execution of online and offline loyalty initiatives reveal the following rules for developing an optimal loyalty endeavor:

1. Emphasize the relationship. Loyalty reward initiatives should not be thought of as mere marketing promotions or customer bribes. They are relationship-builders - a means by which the merchant shares value with the customer in proportion to the value the customer's loyalty creates for the merchant. It is essentially giving back a portion of the value that the customer - by acting as an ongoing source of revenue - provides the company. If the merchant builds and thinks of the program as a gimmick, so will its customers.

2. Deliver sustained and progressive value. One-time offers will get you one-time customers. For lifetime loyalty, the merchant must offer sustained service and rewards. While sustained rewards may be a costly investment for a merchant, the returns will be enormous - consumers will stay with a merchant whose benefits are reliable and permanent.

To that end, as a customer's purchase level, monetary level and/or frequency increases (RFM), so should the customer's incentive. Instead of throwing money away on endless customer acquisition, the vendor should direct funds and efforts into retaining its best customers via a tiered rewards system. Implementing a program that rewards every repeat buyer, with heightened rewards for increasing commercial activity, will ensure that customers stick around. It also helps prevent competitors from luring customers away. If the cost in loyalty rewards of switching vendors is significant, most consumers will concentrate their purchases with a single vendor.

3. Focus on the brand. When developing a loyalty program or initiative, merchants should be cautious not to encourage deal loyalty as opposed to brand loyalty. To bolster the brand through rewards, the brand or product itself should comprise the incentive. An example of this is the typical frequent-flyer program - the more you fly with a particular airline, the more opportunities you will receive from that airline to fly for free. Thus, the reward is more of the service itself, not a monetary incentive or some other merchant's service or product.

4. Communicate, communicate, communicate. Personalized, sincere communication is a critical element of loyalty initiatives. A good loyalty program will seek to learn more about the customer and remain in frequent contact using meaningful, individualized letters, messages and offers - not just mass-mail advertising pieces. And true communication is not one-way; sending only marketing materials is not a dialogue. For the relationship to thrive, the merchant must also solicit the customer's input and opinions. Customers typically enjoy the opportunity to "talk back" to their favorite merchants. Communication is also important when dealing with customers that leave. Should a customer defect, extra effort should be expended to connect with him or her and find out why. According to investor Warren Buffett, "There might be more to be gained by studying business failure than business successes . . . start out with failure and then engineer its removal."

5. Mix "hard" and "soft" rewards. Because thousands of companies attempt to use loyalty initiatives, consumers tend to be skeptical of program requirements and rewards. Offering only small trinkets and "soft benefits" like improved service may not be sufficiently compelling to the customer. "Hard rewards" - those the customer would have to pay for if it were not for the reward program - can demonstrate real measurable value. In the long-run, a combination of benefits is best because, while hard benefits are necessary, they are often copied. A program's soft benefits may serve to distinguish the program from others.

6. Personalize and customize incentives. To push the consumer toward his or her next purchase, rewards or incentives should be personalized. This is primarily due to the fact that loyalty programs and incentives are easily duplicated by competitors in a crowded marketplace. To ensure that the customer does not later defect to a competitor's reward program, the merchant's program should - from the outset - offer increasing levels of personalized rewards that reflect the customer's purchase history, preferences and interests.

7. Target profitable customers. Detailed customer segmentation and target audience analysis are essential to establishing a profitable loyalty initiative. Reward programs should be designed to retain the very best customers, not low-margin buyers. This may seem obvious, but many promotions end up attracting exactly the wrong type of customer. When applying the 80/20 rule of marketing, loyalty initiatives are best when created with the profitable 20 percent in mind.

8. Avoid the satisfaction trap. Countless studies have shown that customer satisfaction alone does not equal customer loyalty. When tracking repurchase loyalty, one car manufacturer was dismayed to find that although 90 percent of its auto users described themselves as "satisfied" or "very satisfied" with their vehicles, their repurchase rate hovered around 30 to 40 percent. This is due to a vast and important gap between what consumers say and what they do. Or as powerfully expressed by loyalty guru Reichheld, "Companies can avoid the satisfaction trap if they remember that what matters is not how satisfied you keep your customers, but how many satisfied and profitable customers you keep." Don't confuse the two - measure the success of your program by retention.

9. Make participation easy. Consumers do not want to jump through hoops, fill out forms, or carry innumerable special cards to be members of a loyalty program. Loyalty initiatives with optimum participation are entirely hassle-free - the customer joins by merely making a purchase and is informed immediately that he or she is a valued customer who can expect valuable returns. Following the purchase, the customer should receive clear details about how the program works and what each successive purchase will earn them.

Loyalty initiatives should be designed to be sustainable, progressive in reward-giving, and brand-centered. They must also be personal, communicative and geared toward establishing a genuine dialogue for mutual learning and sharing. They should not be merely the "icing on the cake" - they cannot fix fatal market flaws or compensate for poor services and products.

These elements, if implemented correctly, will give the consumer a strong incentive to purchase frequently over time, as each transaction is increasingly personal, rich and rewarding.

To review comparison charts of the various loyalty program options, click here.