The November 2007 article in this magazine about member loyalty programs dealt basically with the goodies to be derived from offering gifts, points and incentives, rather than with the real reasons consumers actually maintain a course of affinity with a business. I'd like to shed some light on the solid fundamentals of customer loyalty and not just the “sidebars” that the programs seem to concentrate on. Loyalty is created with customers contractually, transactionally, functionally and emotionally — sometimes in combinations of the aforementioned.
Contractual loyalty arrives out of a business agreement — in the health club industry's terms, a fixed-term membership (based on “x” number of payments). This can be very profitable, based on the net present value of the contract (number of payments over the life of the contract), but if not carried out to completion by the customer, contractual loyalty can become a liability to the business. As can be seen by the growing number of month-to-month memberships being sold each year, consumers do not want to feel trapped in a business arrangement.
Transactional loyalty is epitomized by repeat purchasing without any contractual obligation. No-contract, month-to-month memberships are examples. This is easy to stimulate with specials, promotions, discounts and, to a minor extent, rewards programs. However, price, value perception and convenience play large parts in this loyalty factor. The customer may find a better deal at any time, and, if found, some customers will switch without hesitation. The generally higher cost of customer acquisition with this method often means lesser profit to the business, unless the sales team can make up the cost factor with higher volume sales due to less consumer resistance.
Functional loyalty is based on the product's attributes and the differentiation of the offering. This includes niche clubs, fitness-only and women-only facilities. To the degree that you can offer customers something tangibly, palpably different yet relevant, you can often lock up that portion of your marketplace that prioritizes your advantaged function(s). Unfortunately, few club owners truly differentiate their facilities in practice so that customers can experience the difference. If you say that you differentiate but you don't actually do it, you are signing your business's death warrant.
Emotional loyalty is the feeling part of loyalty, in which customers develop preferences for products or services based on their appeals to individual's values, egos, sensibilities and other intangibles. This is the basis for brand identification. If you nail this, you have a different product than your competitors. However, most club operators have only scratched the surface of emotional loyalty. Surveys tell us that only 30 percent of our customers are emotionally tied to us. The rest are up for grabs.
Gifts, points and incentives are only one part of the loyalty issue. They merely support an already-established position in the marketplace, and are, at best, secondary or tertiary to inducing dedication in a customer's mind. It is the creation of the loyalty or loyalties above that make the difference.
Health club operators will have to choose what type(s) of loyalty they seek to build with consumers. Will you stick with contractual obligation in the face of continuing high attrition rates? Will you risk transactional loyalty in an attempt to induce more sales? Can you differentiate your business sufficiently to produce true functional loyalty? And will you ever get to a high level of emotional loyalty among your members?
Satisfaction alone is an insufficient condition for loyalty. As I said in my September 2007 e-newsletter, eNews, “Satisfaction is influenced by a continuing proposition of value, which we know changes with customers' usage patterns and with their experiences inside the clubs each time they use facilities.”
Although functional satisfaction is obviously desired, it doesn't automatically insure that behavioral or emotional loyalty will follow. One of the tests of emotional loyalty is its ability to withstand the pressures of economic change, price differences for the same perceived product and the lack of customer service.
Loyalty programs are great — as long as they are put together on a solid business foundation.
Michael Scott Scudder operates MeetingZone, an online-based consulting and training service. He can be contacted at 505-514-0294, on Skype at michael.scott.scudder or by email at [email protected].