Growth Strategy For Challenging Times:

What Price Loyalty? How To Make Sure Your Most Frequent Customers Are Also Your Most Profitable Ones

September 2009

All loyal customers aren’t created equal – neither are all loyalty programs. That’s the conclusion that can be drawn from a Wall Street Journal report on research conducted by Fordham University’s School of Business in New York and Ipsos Loyalty. Although they don’t dispute the importance of marketing to loyal customers, the Fordham-Ipsos team points out that loyalty programs have their limits.

According to these researchers, many businesses fail to realize a profit on a large share (sometimes more than half) of their loyalty customers. In most cases, this failure stems from one of two causes:

  1. The business makes its discount offer too generous in a misguided effort to win loyalty. So even though the offer attracts customers, the business loses money on them. This creates a strange situation in which the more a loyalty program succeeds, the worse it is for the business’ profit picture 
  2. The loyalty program makes customers feel good about the business, but it doesn’t change their behavior in a way that builds profits. For example, suppose most of the guests that take advantage of a hotel’s loyalty discount would have been staying there anyway without the loyalty program. The loyalty program isn’t changing the behavior of these guests, it’s simply giving them a discount on rooms they’d be booking anyway and therefore needlessly giving away profits.

SiteWatch® has a variety of tools that will help you avoid these pitfalls to create a loyalty program that not only rewards customers and makes them feel good about your carwash, but also encourages them to behave in ways that make your business more profitable. Here are some examples:

Rewards That Go Beyond Cash

Everyone likes to save money, which is why lowering prices will always draw traffic, even if it drives profits to the ground. Consider the supermarket industry, which helped pioneer the loyalty program concept over a decade ago. Americans carry an average of 3.5 supermarket loyalty cards in their wallets. (By the way, if these programs worked to build real loyalty wouldn’t it be closer to a one card per wallet average?) Anyway -- despite the presence of so many loyalty cards, only 27% of us say we are very loyal to our favorite supermarket!

Instead of being loyal to their grocer, consumers will use their cards to take advantage of one supermarket’s low prices in the meat department, then go to a competitor for dairy and a third store for produce. What these stores have done with their loyalty programs has been to encourage the kind of cherry-picking consumer behavior that erodes profits.

As a carwash operator you are not in the same unenviable position as a supermarket owner or most other retailers. The economies of scale are better in carwashing than almost any other industry. After all, the 500th can of baked beans that a supermarket sells in the evening costs pretty much the same as the first can, but washing the 500th car that goes through your tunnel on a given day costs you only a very small fraction of what the first one did. As a result, you can afford to offer deeper discounts to build volume and repeat business.

Still, you don’t want to try to “buy” loyalty by relying solely on discounts. Aside from eating into profits, excessive price cutting also detracts from the perceived value of your service and makes it more difficult for your carwash to stand out in the market. If you’re offering $1 off to club members, what can you do to counter the competitor who takes $1.50 off his wash?

A better alternative is to use SiteWatch to distinguish your loyalty program by offering special perks like these:

Although perks like these cost relatively little, they carry a high value for your best customers – the exact group of “frequent carwashers” who are most likely to join a loyalty plan.

Changing Behavior, Not Just Feelings

"The first issue here is that you do want to reward your best customers. Rewarding them by giving discounts is very expensive. The best way to reward your best customers is by making them an offer that is highly valued by them, but doesn't cost you a lot of money. For example, allocate more services to good customers. This could mean a designated line at the deli counter, or a ten items or less checkout line. You already have the buying behavior you want. So think about your costs, and make sure you aren't changing good behavior."

Rajiv Lal
Professor,
Harvard Business School

The way customers feel about your business is important, but good feelings don’t necessarily translate into bigger profits, unless they prompt a change in behavior. For example, giving a $1 discount to a customer who visits your carwash regularly is going to lower your profits, unless your loyalty promotion causes that frequent customer to visit even more often or spend more on each visit.

If your loyalty program isn’t designed to change the behavior of your best customers, it makes more sense to recognize these customers with rewards that don’t cost you a lot of money, like the VIP Express lane and other perks we covered earlier.

On the other hand, there are ways that a loyalty program can change the behavior of even those customers who are already very loyal. Consider the case of Safeway, the nation’s third largest supermarket chain. The giant grocer increased the effectiveness of its loyalty program by dividing its 1.2 million club card holders into two distinct groups so it could better influence their behavior, not just their feelings.

The first group, called “Primary Shoppers,” were frequent customers who did most of their shopping at Safeway. The second group consisted of “Secondary Shoppers,” less-frequent customers who purchased only a small share of their groceries from the chain.

Since Primary Shoppers were already regulars at Safeway, giving them club member discounts in mainstay departments like meat and produce would simply sacrifice profits without changing behavior. So Safeway stopped mailing them offers on meat and produce and instead sent them special vendor coupons (that were covered by manufacturers) and discounts for gourmet departments like the in-store bakery. The net result was that these best customers were rewarded without sacrificing profits -- and some of them also had their behavior modified by being introduced to new gourmet departments.

Meanwhile, Secondary Shoppers, who the chain identified as not meat and produce customers, were sent special offers for these departments. These special offers cost Safeway profits, but they succeeded in modifying customer behavior by convincing more Secondary Shoppers to buy meat and produce, which sent sales in these departments “through the roof” according to the chain’s marketing agency.

Translate this to your carwash, and you can see that using your loyalty club to give your most frequent customers special deals on detailing and oil changes, will reward them without making an appreciable dent in your profits. Meanwhile, if you also use SiteWatch Loyalty Promotion and Intelligent Receipt Messaging to offer infrequent customers a discount on their next visit, you can get them to modify their behavior and come to your wash more often. In this case, you’ll not only be making customers feel good about your wash, you’ll be feeling better about its profitability too.

Learn more by contacting DRB Systems.
Click here or call 1-800-336-6338.