Rewarding loyalty

Identifying, then holding on to loyal customers is database marketing's challenge for the '90s

Back in 1981, American Airlines came up with one of the first frequency marketing programs. It was an extraordinary concept that soon had other airlines, and then hotels, jumping on the bandwagon with me-too programs that touched off a race among competitors to court and retain loyal customers.

Today, there are dozens of frequent flyer and stayer programs, as well as frequent shopper clubs for supermarket patrons, frequent caller programs for telephone users, a network for frequent pizza eaters, a program for preferred book readers, plus a whole bunch of clubs for kids who eat burgers and for folks who drink beer or patronize a shopping center or ride motorcycles.

According to Pat Alexander, a vice president of American Express Travel Related Services, her company's slogan, "Membership has its privileges," is the essence of what frequency marketing is all about. It characterizes her company's efforts to build and sustain the ongoing cardholder relationships that distinguish American Express from its army of competitors.

Like most developments in direct marketing through the years, frequency marketing is technology driven. Without computers and sophisticated software, for example, it would be all but impossible to accumulate the wealth of demographic, psychographic and transactional details that go into a typical customer database.

One of the best examples today of technology at work in frequency marketing is in supermarkets, where electronic scanners and cash registers serve as computer terminals. Supermarket frequent shopper programs identify a store's most loyal customers, track what they buy and how often, and capture any other data that will help the store market to them as individuals.

Customers who sign up are given an identification card. Most of these cards have a programmable zebra stripe barcode with demographic information that can be scanned at the checkout to identify the shopper and his or her purchases. It's a neat tradeoff--the store compiles the data it wants, the customer earns points similar to electronic green stamps, redeemable for prizes, merchandise or services.

"Computerized data gathering in supermarkets today is bigger than NASA," says Tommy Greer, president of Catalina Marketing Corp., and one of the key players in supermarket frequency programs. Its Checkout Saving System is handling about 50,000 shoppers a day in test programs on the East and West Coasts.

Advanced Promotion Technologies, jointly owned by Donnelley Marketing, Procter & Gamble and CheckRobot Inc., is another key player. APT's Vision System ID card uses a smart microchip to electronically track shopping patterns and shopper demographics. The program is being tested in a Dahl's supermarket in Iowa where 15 percent of the customers use the card frequently, accounting for about 30 percent of the store's sales. The program also has rolled out in several Big Bear stores.

Most supermarket test sites report satisfactory, if not exceptional, results with frequent shopper programs. But one would-be major player, Citicorp POS Information Services, decided to back off its Reward America frequent-shopper program last November, after sinking a reported $200 million into it. Citicorp cited a tough economic environment and the decision to focus on other emerging programs as the reason.

Despite occasional setbacks, marketers are finding real gold in frequency programs. Waldenbooks, for example, hopes to have some 4 million names in its Preferred Reader database this year. "We feel it's critically important to know who our customers are and to treat them as individuals," says Ron Jaffe, senior marketing director for the retail book chain.

The Preferred Reader Service is promoted with brochures and posters in the stores, and salespeople encourage retail customers to join. The incentives include cash discounts and a host of services, including a special monthly catalog that contains information on new books, exclusive interviews with authors and other special "insider" offers.

Frequency Marketing Inc., a Cincinnati, Ohio-based consulting firm, claims that costs should be considered on a per-customer basis. A program that tries to build relationships without any tangible rewards can be delivered for a few dollars per customer per year. But programs that give rewards and benefits and thrive on frequent communications can cost as much as $20 to $40 per customer per year.

But what many marketers struggle with is whether or not the payback on investment is worth the effort. For example, it's a tough decision for quarter-by-quarter profit-oriented packaged-goods companies, with products selling for a couple of dollars or less, to invest in building customer relationships over the long haul. However, those that have done the arithmetic on the lifetime value of a customer, and that have factored in the additional benefits from cross-selling the company's other brands, see the benefits.

Does database marketing work?

As the jet engine propelled aviation into the future, database marketing is powering direct marketing into a new age. Whether it's called micromarketing, or targeted marketing, or one-on-one marketing, the basic ingredient is a database crammed full of information about a company's customers and prospects.

But while many direct marketers are rushing to embrace database marketing for its alleged advantages--more efficiency, less waste, better response rates, customer stroking, etc.--packaged-goods marketers tend to be slightly schizophrenic.

For one thing, in a business where volume and moving the Nielsens (market share) is the name of the game, it's hard for brand managers to get excited about one-on-one relationships. They think in terms of sales dollars, not response rates. They are worried about today's profits and gaining or retaining shelf facings.

Along comes the company's direct marketing manager who preaches the value of customer relationships, who wants to segment the masses and focus on individuals, who talks about avoiding mailbox clutter rather than prime-time TV commercial rating points.

But even those packaged-goods companies unwilling to attend the funeral of mass marketing are taking a serious look at direct marketing. For some, like Kraft General Foods, the acknowledged packaged-goods database marketing pioneer, they are giant steps. For others they are baby steps in the guise of proprietary test programs.

If you ask Bob Merold of Bristol-Myers whether database marketing works, he would say, of course it does, citing two recent examples--one a new product, the other a well-established brand suffering market share losses.

When Bristol-Myers brought Nuprin to the market, the goal was to gain market share at the competition's expense. While the traditional media were used to introduce the brand, direct was also included in the mix. Tylenol users were targeted with direct response packages asking them to try Nuprin. An 800 number was used in TV commercials so viewers could respond to the challenge to try a product sample. FSIs and co-op mailings were used to support the trial building effort. According to Bristol-Myers, the results exceeded expectations.

In another recent case, Bufferin was suffering a severe headache due to dwindling market share. Direct was the analgesic of choice by targeting a specific market segment--something packaged-goods marketers concede direct does best.

Research revealed that heavy users of pain medication, most of them arthritic, account for a huge segment of the total market. Bristol-Myers' agency, Rapp Collins Marcoa, was able to rent a list of heavy users of competitive products and use it as the base for building Bufferin's own database. Several mini programs were run to test incentives, offers, copy strategies--the usual. But all versions contained a reply card that requested demographic and purchasing behavior data. The respondents, who qualified themselves, were sent $4.50 worth of cents-off coupons.

Another believer that direct works in packaged-goods marketing is John Kuendig of Kraft General Foods. Kool-Aid, a mature product, was facing sharp sales declines.

General Foods, with probably the largest consumer database of any packaged-goods marketer, was able to pull out Kool-Aid user names and add known users of other beverages and competitive powdered soft drinks. The result was a Kool-Aid database of nearly 4 million households, principally blue collar families with kids aged three to 12 years old.

Under the banner of Wacky Warehouse, the program included direct mail to kids, direct mail with a different pitch to their mothers, TV commercials promoting the Wacky Warehouse fun-and-games theme, an original comic book and magazine, and a host of premiums that could be earned by accumulating proof-of-purchase points.