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A Thing

What Every ISO Should Know about Loyalty
By Warren Zunino and David Randolph

There is an often told story of a man who was fixing a flat tire at dusk near the edge of a notorious asylum. In his rush to get away from the place before dark, he inadvertently stepped on the hubcap where he had placed the wheel's lug nuts, catapulting them into a stand of high grass. As he searched for them he was startled to see two possessed eyes watching from the other side of the chain-link fence. The man frantically combed through the grass but in the end found only one of the lug nuts. Just as he was about to give up and begin the long walk into town, the inmate spoke up.

"Hey, Mister! Why don't you just take one lug nut off each of the other wheels and put them on your spare? With the one you found, it will hold well enough to get you into town."

The man smiled at this astonishing advice. "Why, that's good thinking! You shouldn't be in an asylum at all."

The inmate smiled back. "I'm in here because I'm crazy, Mister - not stupid."

Loyalty programs are only slightly less misunderstood. They suffer from image problems inherited from decades past. Remember when the fledgling frequency industry had little more to offer than trading stamps? It's not that the sticky little things were not popular. They were popular. For years many American homes were marginally furnished by these green or blue stickers, and the currency of the day was often expressed in "books" ("This guitar was eight books!").

Today, many Merchant Level Salespeople are scrambling for an added-value item they can put on their menus for retailers, and loyalty is a good and logical choice. The problem is that few sales reps know what they are getting into. Many believe that those 30-mil cards and keychain tiles with the barcode are just the modern equivalent to the old sticky trading stamps. That line of thinking will lead to disaster.

Your company may already have a loyalty system that isn't exactly flying off the shelves. If you can't understand why it's not selling, it could be that your people don't understand what they're selling. Offering a loyalty product is a different mindset than selling equipment leases and transaction agreements. It is selling a service, not transactions.

Don't use a wrench to drive a nail

First, a chasm of differences separates trading stamps from a loyalty program. Presenting retailers with an electronic trading stamp program is the wrong approach. A truly effective loyalty program provides a real "lock" on the merchant, while the electronic trading stamp program is only a "me-too" solution. A loyalty program can and should do a good deal more for the retailer. If you don't know what the tools are and which to apply to the situation, you are not creating that "lock" with your client.

If your goal is to increase the number of transactions run through your system, then offering an electronic trading stamp program may do the job. Just be aware that such programs do nothing to bond you with the merchant. Our experience is that the merchants drop the programs almost as fast as they sign up.

Their customers react even faster. One survey of retail customers found that up to 80% of customers at a casual-wear retailer would spend less at a store that put in such a program. When a majority of merchants in an area have similar offerings, then the programs do not help at all. Trading stamps failed for the same reason: Once everyone had them, it didn't make any difference to the customer where he or she shopped.

An effective loyalty program warms a retailer's heart. It doesn't just identify the most loyal customers or reward them for their loyalty. It educates the retailer about what made these customers the best and offers suggestions about how to convert more of them.

An effective loyalty program also encourages the merchant to do a better job of offering what customers want. It tells the merchant when customers don't like a change in products or policies. It tells the merchant if a significant percentage of customers come from a different ZIP code, which could point to a promising location for a new store. It tells the merchant if senior customers would prefer their own seating area in the restaurant or if new parents would like to have their favorite products grouped together in the store. The sticky point is that one size does not fit all.

Each retailer, attraction operator or restaurateur needs unique information about the business and its customers. How can the merchant fill the slow times, move off-season items and know if the latest promotion idea is going to work without investing in it first? The loyalty program should provide the needed information, and a good program will do a lot of the work for the merchant.

What tools to use?

Knowing how to craft such a program for your client means spending more time with him or her. It means getting to know the customers better than the merchant does and educating the merchant on how to serve them better. It means knowing what can be done, what tools are available and which to use.

In planning a loyalty program, it is important to recognize that customers who spend a lot are not always the best customers. There are customers who spend a lot of money but only purchase items on sale or the "loss leader" items. Rewarding these customers is only giving more money away. The goal is to identify the customers who are the most profitable.

What are the tools that make for an effective loyalty program? At the high end, an effective loyalty program identifies both the customers and the items purchased. That requires SKU capture. Most Merchant Level Salespeople would do better to look at the middle ground where just the customers are identified and the amount of purchase is captured. This information must be augmented by periodic SKU review and customer surveys. Instead of looking at all transactions, the program can be used to identify which receipts to look at.

The most valuable tools in electronic loyalty are the reports. Once data has been captured, the merchant can use the reports to identify the who, what, when and where of the most profitable transactions. However, many merchants do not know how to read and translate these reports. It is the job of the loyalty provider to teach the merchant and, at the same time, identify what changes to those reports should be made to better service the merchant.

In the same way that retailers may lack the resources to craft a successful loyalty program, sales reps might not have these skills inside the company or time to acquire them. In this case, partnering with a company that specializes in loyalty might be a better option. However, it's still best to pay close attention in selecting that partner.

Asking retailers to offer sticky stamps for their customers to paste into a pulp book is a bit stupid - but trying to sell them a loyalty program that does the same thing is just plain crazy.

Warren Zunino has been working in the electronic loyalty business for 15 years and implemented the programs for many national chains.

David Randolph founded Prairie Trail Software in 1991 after spending many years in POS software. He is recognized as a pioneer in the field, having created many of the tools and procedures now commonly used in the POS industry.

Prairie Trail Software, Inc. is the premier provider of custom POS terminal software. Its clients range from some of the largest ISOs and networks down to some of the smallest. It strives to provide all clients with high quality software and offer extensive experience in the business. Contact Prairie Trail Software at 800-618-4199 or 888-300-4645.

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