The Customer Loyalty Solution : What Works (and What Doesnt) in Customer Loyalty Programs

My wife, Helena, buys all the clothes and gifts in our family. She is a catalog freak. She recently spent $35,000 on catalog items in 1 year. She does extensive research in the catalogs to find exactly what she wants. Once she has selected the items, she usually orders by phone, but occasionally she orders over the Web. Almost every one of the catalogs has both a toll-free number and a Web site. She rarely uses the Web sites. She uses them only as an ordering device, once she has found what she wants in the catalog.

This squares with Sears Canada’s experience: 92 percent of Canadian customers buying from the Sears Canada Web site have the paper catalog in front of them. Why doesn’t Helena use the Web sites as a shopping medium?

• She enjoys reading catalogs. They are a form of relaxation, like reading a magazine. She does not find sitting at a computer relaxing.

• She cannot count on the colors on our PC being as true as the colors in the catalogs

• It takes too long to find items on a Web site. She can find a sweater or dress that she wants in a catalog in a few seconds. On the Web, waiting for page after page to download is simply a waste of her time.

• She can sit on the sofa and flip through catalogs. She can take them to the kitchen or the bathroom. You can’t do any of these things on the Web.

• Talking to an operator is much more satisfying than ordering on the Web. Helena likes talking to people. The operators seem to know when things are out of stock and can make helpful suggestions for substitutes. Most Web sites don’t tell you that the item is out of stock and very rarely make alternative suggestions

So why does she use the Web at all? Because she hates to be put on hold when she calls an operator. It is the result of desperation, not a choice.

More and more customers are placing catalog orders on the Web. Most catalogers have already put all their catalog items on their Web sites, so that customers can look at them and place orders. But the Web is not replacing the paper catalogs. In fact, it seems to be increasing them. In 1995, 13.2 billion catalogs were mailed in the United States. By 2000, despite the growth in Web catalog sites, the number of paper catalogs distributed had grown to 16 billion. By 2001, about 11 percent of catalog sales were placed through the Web.

The Web Is an Ordering Medium

The Web is an excellent ordering medium. You never get put on hold. Each year more people learn to use the Web. Some catalogers estimate that by 2005 they may have 35 percent of their orders placed through the Web.

The Web, however, does not seem to be an effective sales medium. Very few of the orders that arrive at a catalog Web site come from people who were simply browsing the Web. What brings the visitors is the arrival of the paper catalog. Once they had built their catalog Web site, many catalogers tried to use advertising, mailed promotions, and affiliate programs to bring people to the Web site to shop. However, the increase in sales seldom paid for the cost of the promotions. The catalogers discovered that the paper catalog itself is the only really effective way to drive customers to their Web sites. So since they still need the catalog, why do catalogers bother to have a Web site at all? There are many valid reasons:

• Reduced ordering costs. It costs a cataloger $4 or more to take an order over the telephone. Orders placed through the Web have a variable cost of a few pennies. Saving $4 per order can make a big difference.

• Email communications. Catalogers have found that they can improve the response to a catalog by using email to notify customers of its imminent arrival. They can also use their database of previous purchases to flag certain items for customers’ attention in an email with a click here inside it that jumps the customer to the item in the Web catalog. To use email communications, however, the cataloger must have people’s email names.

• Email name capture. All catalog Web sites insist on receiving the customer’s email name as part of the transaction. At the same time, they permit the customer to “opt out” to receiving emails concerning future product promotions. A vast majority of customers do not say “No” to this question, thereby providing permission for use of their email for commercial messages. At the same time, this permission also involves the placement of a cookie on the customer’s computer.

• Building a relationship with customers. Before the Web, catalogers could not afford to make a lot of nonproductive phone calls or send direct mail to customers. They received orders and shipped them rapidly. With the Web, this is beginning to change. When the customer places an order on the Web, he receives an immediate thank you on the screen, followed by a simultaneous email confirmation. He can use the confirmation to cancel the order with a single click. (Why would a cataloger make it so easy to cancel an order? Because 20 percent of all catalog orders are returned. Having the order canceled before it is shipped saves money.) When the order is shipped, the customer gets another email: Your order was shipped today. Finally, when the order arrives, he gets another email: Did it arrive on time? Were you happy with it? Click here to respond. This type of communication builds relationships like those enjoyed by the old corner grocers who knew their customers and talked with them frequently. This type of relationship building increases loyalty and repeat sales. It is the first time catalogers have been able to make effective use of a database.

• Creating one-click ordering. Amazon.com started it (as it did many other things on the Web). You come to the amazon.com site and find a book, video, or CD that you are interested in. You click once, and it is shipped. There’s no need for you to give your address, telephone number, credit card number, or other such information. It’s like walking out of the corner grocer’s store with a big turkey and saying, “Put it on my tab.” People love this kind of personal life simplification and will return to a site that makes it possible.

• Collecting demographic information. While they are taking orders on the Web, catalogers collect demographic information from customers. Getting customers to update their profile on the Web is easy, and much less expensive than getting the same information during a telephone order session. They can learn the customer’s age, income, family composition, preferences, and lifestyle.

• Using demographic information for personalized communications. Using this information, catalogers can send out personalized email messages. Since catalogs are always mass produced, the email becomes the only method of personalization.

• Web personalization. All good Web sites gain customers’ permission to use cookies by giving them a chance to “opt out.” More than 95 percent of customers agree to their use. By using cookies, a visitor returning to a catalog Web site sees “Welcome Back, Susan.” Susan can see items that the cataloger thinks (or she has told them) she is interested in based on her past purchases and Web activity. What catalogers tried and failed to do in catalog personalization is now economically possible using the Web.

• Control groups. Control groups can be created in the database to test customers’ reactions to innovations in the Web site. Such groups were almost impossible to use effectively with mass mailings of catalogs.

• Online focus groups. In Chapter 6 we describe how Universal Music used online focus groups to determine customers’ reaction to the release of a new music CD. Catalogers can now use online focus groups to determine customers’ reactions to new products.

• Measuring multibuyer performance. The Web offers the opportunity to track what customers are looking at, which is not possible with a paper catalog. However, few catalogers have yet taken advantage of this feature, since it requires not just sophisticated software, but creative marketers who can look at the data and draw profitable conclusions from what they see. The scarcest commodity in all of database marketing is the creative imagination needed to drive new marketing programs. Marketers are usually awash with data that they cannot figure out how to use profitably.

How Some Catalogers Are Using the Web

Once the landsend.com Web site was constructed, the company wanted to try additional methods besides the paper catalog that would induce shoppers to come to its site and buy. It introduced several new ideas that seemed to work.

• Live customer service that allowed customers to send messages and receive replies in real time (see Figure 12-1). The customer support agents could synchronize their screens with customers’ so that they could see the same screen the customer was seeing at home. They could help shoppers with their choices and in selecting cross sales.

  Figure 12-1: Lands’ End Live. Lands’ End, Inc. Used with permission.

• A virtual model that customers could use to try on clothes (see Figure 12-2).

  Figure 12-2: My Virtual Model. Lands’ End, Inc. Used with permission.

• My Personal Shopper, who helps you the way a good clerk in a department store would (see Figure 12-3).

  12-3: My Personal Shopper. Lands’ End, Inc. Used with permission.

How well did these things work? Conversion rates among those who used the virtual model were 26 percent higher than among those who didn’t. Conversion rates among those who used the personal shopper were 80 percent higher than the average for other customers.

Other catalogers have also developed innovative methods to bring customers to their site.

• Use of affiliates. Ashford.com, a jeweler, promotes its site through 12,000 affiliates who are linked to Ashford in return for a 7 percent share of the net revenue. This program brings in 15 percent of Ashford’s sales. Ashford also uses Web advertising and Web newsletters to previous customers.

• Web newsletters from catalogers may seem like a bonanza because they are so inexpensive to send. However, they are also annoying. Forrester Research found that more than half of consumers say they receive too many commercial emails. Most long-term Net users delete all promotional emails without reading them. However, the value of a Web newsletter can be easily determined by creating a control group and determining whether the total sales, number of sales, average order size, departments shopped, and so on are greater for those getting the newsletter than they are for the control group. If there is no difference, drop the newsletter like a hot potato.

Problems for Catalogers Shifting to the Web

Many catalogers have fulfillment systems that use a legacy system that is not compatible with the modern servers that are used today for the Web and for customer service. A considerable amount of software rewriting is necessary. Only the larger catalogers can afford such an effort.

One company that succeeded in this effort was the Sharper Image (www.sharperimage.com). The company put all its customers on a single database so that it could determine their purchases through each of the three channels: retail stores (60 percent), catalog phone orders (23 percent), and Web orders (17 percent). The top customers were identified by lifetime value and recency of purchase. Gold customers got special offers, preferred mailings, and gifts during the holidays. They also got sneak-preview emails on new items.

The Sharper Image’s email list grew to over 500,000. It sent out between two and four emails per customer per month. It also sent out emails to new prospects, letting them know that a new catalog was coming out and offering a merchandise certificate. The emails did not reduce the number of paper catalogs sent out; they increased it. The number of catalogs sent out by the Sharper Image grew by 20 percent every year, with 62 million being sent out by 2000. Both catalogs and special mailers worked for this company.

The Web Creates Multibuyers

A survey by the National Retail Federation showed that catalog customers who buy on the Web buy 20 percent more than customers who respond to a catalog only by mail or phone. Web shoppers also spend 33 percent more in retail stores than retail shoppers who do not use the Web. A survey of 48,000 shoppers in all channels by Shop.org found that shoppers who bought via all three channels—retail store, catalog, and the Web—represented 34 percent of all Web shoppers. In-store shoppers who also bought from the same retailer online spent an average of $600 more per year than typical in-store shoppers.

Macys.com saw its Web site as a stand-alone store carrying items that were not available in its catalog. Customers visiting the Web site registered their age, gender, family status, and the product lines of greatest interest to them. Macy’s learned whether the customer planned to buy a home, take a vacation, have a baby, or get married anytime soon.

Macy’s click-through rates on emails featuring items on the Web site averaged 10 percent, with 2 to 3 percent of those clicking making a purchase. When customers make a purchase at the macys.com site, a pop-up window asks them to rate their Web experience. The company found that many customers left the site quickly if they did not find what they wanted in the search window. As a result, when a search failed, Macy’s visitors got a window showing the address, phone number, and directions to the nearest Macy’s store.

Office Depot introduced Web ordering for its catalog as Office Depot Online. It has been profitable since day one. The company soon discovered that catalog customers who ordered through the Web spent 33 percent more than other catalog shoppers. In 2001, Office Depot Online sales grew by 30 percent to $1.5 billion, representing 14 percent of all Office Depot sales. Office Depot, like Dell, set up Web pages for special customers such as Bank of America. By 2001, 85 percent of Bank of America’s office supplies were provided by Office Depot through the Web. These Web pages permitted Office Depot to make special volume price adjustments for large customers, which it could not easily arrange without the Web to keep track of the hundreds of thousands of individual orders.