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Treat each customer the same, or reward the best?

To get the most bang for your rewards buck, customers need to know the value of a reward beforehand, experts say.

If you visit your favourite hair salon and see a sign advertising half-price cuts for new clients, what pops into your head?

Warm and fuzzy thoughts about telling your friends? Or are you more inclined to think: "I drop $70 here every six weeks, so where is my discount?"

The above scenario shows that when it comes to rewards, many companies often get it wrong.

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"A mistake I often see is when companies mix rewards and incentives, specifically when incentives to gain new customers are more aggressive than "rewards" to current customers," says Bruce Chin, a chartered accountant and senior manager for private companies at the Toronto office of Deloitte, a professional services firm.

"Talk about a fast track to eroding brand loyalty."

Whether it's bonus minutes for switching mobile providers, special rates for credit card balance transfers or free gifts for new client sign-ups, a business risks alienating prize customers if they are left out of the best deals. Sure, regulars can ask for the same perk, but then it becomes a negotiation, usually involving long waits on hold, not to mention voice- recognition rage.

David Crisp, a leadership consultant for Crisp Strategies in Toronto, is one customer who resents this.

"The best negotiators get the best price," says Mr. Crisp, who ran the HBC Rewards program from 1997 to 1999. "It's confusing, takes my time and I'm not very good at it. I figure that everybody else is getting a better deal."

So is the answer to treat everyone the same? Probably not. People like to be recognized as special. Rewards need to offer differentiated products and services to customers based on their purchasing power to be effective, according to marketing research by Xavier Drèze, associate professor at UCLA's Anderson School of Management and Joseph Nunes, associate professor at the University of Southern California's Marshall School of Business.

Rewarding your best customers in a way that recognizes their valued status is a key strategy that can keep people coming back to your business again and again, the research concludes.

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Bluecap Financial, a new Toronto financial services firm catering to small-and medium-sized businesses, hopes to do exactly that with its rewards program. The company works with many customers whom the banks don't want due to poor credit ratings, or because of the particular industry they're in, says Scott Wilson, Bluecap president.

Bluecap operates gives money up front to merchants in exchange for a fixed percentage of that company's future credit card and debit sales until their contract is fulfilled. Mr. Wilson believes in rewarding loyalty after he has an understanding of how the person works.

"Typically, I'll price people based on their credit, but once I have a relationship with them, I'll lower their rate over time." says Mr. Wilson, who previously worked in lending and credit cards for Capital One. "If they've done a good job, I'm going to throw out what the world thinks of that business and look at them based on what I think of them as a customer."

Mr. Wilson believes his approach is innovative within the financial lending industry.

"If they pay back their loans earlier than expected, we have FlexRewards," Mr. Wilson says. "That might be a cash rebate of $500, for example. But if they want to take out another loan, I'll up their rebate by 20 per cent to $600, and apply it to their next loan instead."

Since everyone's circumstances are different, decisions about discounted rates and FlexRewards are made on an individual basis. Bluecap, which launched this spring, doesn't have a set program yet.

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However, that can be a problem when customers don't have a clear idea what the rewards being offered are or what the competitive advantage is, Mr. Crisp says. Customers need to see detailed information about the reward so they can decide whether it's valuable and so they can compare it with other offers.

"If you're offering one hundredth of a percentage point off as a reward, why would I bother?" Mr. Crisp asks. "But if it's 10 per cent of your interest back, that starts to sound like a lot of money, and may be way better than what the guys down the street are offering."

Mr. Wilson acknowledges that there's always a trade-off between having a cookie-cutter approach that's simple for customers and one that weighs the individual case. Right now, he has time to analyze and customize individual rewards, but even if his business increases substantially, he wants to make it feel like something special. With technology, he thinks that's possible.

Not spelling out the terms of their loans or FlexRewards has advantages for Bluecap, Mr. Crisp says. With fluctuating interest rates and razor-thin margins in Bluecap's type of business, and a single operator making the decisions about the rewards, some flexibility may be necessary. But the lack of transparency bothers him. "Not everyone would feel confident with that," he says.

Mr. Wilson, however, is optimistic that his FlexRewards will pay off with long-term retention of the right customers.

"The people who pay me back faster are probably better risk customers," Mr. Wilson says. "I'm rewarding the behaviour that's going to be important to my business in the long run. So I'm not only rewarding them for coming back. I'm rewarding the right customers for coming back."

What's your objective?

"Think carefully about what customer behaviour you want to motivate," says Bluecap's Mr. Wilson. Target rewards to achieve a specific change in how people deal with your company.

Are your rewards what people want?

People love to get something for free, but there's an absolute hierarchy, says Mr. Crisp of Crisp Strategies. The best reward is cash. Second best is something flexible, such as points or travel points that you can use any time.

Do customers understand what you're offering?

To get the most bang for your rewards buck, Mr. Crisp says, customers need to know the value of a reward beforehand.

Customer profiling

Know who your best customers are and reward them accordingly.

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