In Sperry, Hutchinson, and the Hotel Part I and Part II we looked at the history and common pitfalls of customer loyalty programs.

So far, I’ve been less than enthusiastic. Not about the concept, you understand, but about most of the programs in use as we commonly see them implemented. There are two customer loyalty programs, however, that I believe work well.

One is transactional in nature, and one is relational. They each take a major commitment to massive amounts of work. They each must be customized for your company, and once done will never fit any other company.

As you design your loyalty program. . .

The most important metric you need to track is customer retention. How many customers are defecting? How many keep coming back?

The second most important metric is profitability. Your program should never allow unprofitable customers to become eligible for rewards.

Remember the advice of Michael Leboeuf in The Greatest Management Principle in the World: behavior that gets rewarded, gets repeated.

If you want to retain customers, let them feel rewarded for doing business with you. If you want to retain customers, don’t merely talk retention while rewarding your salespeople for “prospecting.”

The Club Card – The Transactional Solution

Points systems worked well when one company had them and the others didn’t. When everyone has them, they’re just an expensive cost of doing business. But let’s take a second look at those magnetic club cards offered by many of the nation’s grocery chains.

The club member swipes the card through the stores’ credit card reader. This simple act not only identifies the bearer of the card, but also gives the store valuable information about the member’s purchase choices.

Consider the possibilities. The MegaLoMart discovers through data mining that Chuck has no particular preferences when choosing paper towels, or charcoal briquettes, or soft drinks, but he always buys Campbell’s Cream of Chicken soup. Do you suppose that a customized offer of Campbell’s Cream of Chicken at a savings of 30 cents a can might get Chuck back into the store? If I bought six cans under this offer, the store would have given up the profit on six cans of soup in order to get me to spend another $150 on other grocery items.

Would the soup offer work for everyone? No. Only those people who were brand loyal to this specific company are likely to respond. But a well programmed computer system, looking for such predictable choices could find, and customize, different offers for each of the store’s best customers.

And since a program such as this is fully customized, no competitor could offer it – at least, not in the same way.

How much would it cost to individualize offers to your best customers? Perhaps more importantly, how much will it cost to let your competitor do this if you don’t?

The Small Business Model – the Relational Solution.

True customer loyalty is to a differentiated brand. To inspire loyalty, you must stand out from the pack.

True customer loyalty is relational in nature. As relationships grow, we’re more comfortable, and less likely to do business with strangers.

Small businesses will always have an advantage in relationship building. The natural one-on-one help that entrepreneurs automatically offer their customers is difficult for large companies to duplicate.

Relational loyalty isn’t ensured by a rewards program. What ensures relational loyalty is everyday operational excellence.

Don’t stop at learning your customers’ preferences. Learn their names. Learn their children’s names. Learn their birthdays. Learn their sizes, their color preferences, and how often they purchase.

Then, treat them like the valuable people they are. Send them birthday cards. Ask their opinions. Yes, these things cost money. What will they spend with you over the next several years? Most customers not only tend to buy more over the years, they buy more expensive products. The longer they stay with you, the more profitable they become.

As markets mature, the smartest operators will shift their focus from new customer acquisition to building relationships with the good customers whose business we’ve already earned.

And one more thought.

The simplest and most direct way to earn customer loyalty is to recruit loyal customers. If you find the right customers to begin with, your retention rate will increase without spending any more money.

Some customers prefer you to your competitors. Some customers want long term relationships. Some customers are more profitable than others. Some customers spend more and require less service.

Look for customers that have one or more of these characteristics, then earn their business with superior service.