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loyalty programs

Shoppers Drug Mart Chief Executive Officer Jurgen Schreiber poses for a photo in the Beuty Boutique of a Shoppers Drug Mart location.Deborah Baic/The Globe and Mail

Take a peek inside the average Canadian's wallet and you'll likely see a different kind of plastic behind the Amex or Visa – an array of loyalty rewards cards.

Canadians are obsessed with loyalty and rewards programs, so much so they've become an essential part of doing business. Just how important are they to companies looking for creative ways to attract and retain customers?

A whopping 86 per cent of Canadians participate in at least one loyalty program, while the average Canadian household is active in more than nine programs, according to Cincinnati-based loyalty-marketing research firm Colloquy. Compare that to the United States, where 57 per cent of Americans carry at least one reward card and slightly more than six households participate in loyalty programs.

Add the fact that loyalty participants are 70 per cent more likely to recommend a program provider's goods or services, and it's clear why so many Canadian companies have jumped on the rewards bandwagon as they seek to shape customers' spending habits.

But owners of small- and medium-sized businesses who think loyalty programs are beyond their reach should think again.

Tim Wilson, a specialist in business-to-business loyalty with the Air Miles Reward Program, says that small and medium enterprises, or SMEs, are just as capable of organizing a loyalty plan as a larger firm, and can glean just as many benefits. By providing loyalty rewards, businesses have an opportunity to differentiate their offerings and compete outside of the price arena, he says.

How? One successful plan – Shoppers Drug Mart Corp.'s Optimum points program – can provide lessons for SMEs looking to test the waters.

"Shoppers has managed to change the retail game in that space by targeting individual consumers with offers they can't refuse," says Niraj Dawar, a marketing professor at the University of Western Ontario's Richard Ivey School of Business. "As it turns out, the cost of those points and rewards are small compared to the potential benefit of getting consumers to buy more or buy a higher-margin product."

In fact, Optimum members spend 60 per cent more than non-members, while two-thirds of Shoppers' non-prescription "front-of-store" sales are generated from cardholders.

How it works

The program's organization is simple: Shoppers offers 10 Optimum points for every dollar spent on most items in-store. After accumulating 8,000 points (equivalent to $800 in purchases), for example, customers can redeem them to save $10 on their next purchase.

Customers have their card swiped after each purchase, are provided with a running point tally on their receipts and can redeem them against their purchases at the cash register. The nationwide chain also runs regular bonus point promotions to encourage customers to spend more on different products such as a slow-selling brand of toothpaste or a higher-margin cosmetic product.

While Optimum is a standalone plan – it is operated in-house by Shoppers – others such as the popular Air Miles Reward Program are coalition plans, owned and operated by third-party firms. While coalition programs generally offer a cheaper and less time-consuming option for retailers looking to provide rewards to their customers, standalones such as Optimum offer greater control and, in many cases, analytical insight retailers can use to shape everything from store design to promotions.

For the average small or medium business, developing and managing a loyalty program as successful as Shoppers' Optimum seems like an insurmountable task.

Luckily, emulating the program's basic principles to attract and retain new customers is not.

Keep it simple, targeted

The Optimum program works because Shoppers Drug Mart listened to its customers, who said they wanted a simple program with easily redeemable points that saved them money on everyday purchases such as shampoo and toothpaste, says Rob Wilson, a professor of marketing at Ryerson University's Ted Rogers School of Management.

By expanding their product line in recent years to include food, electronics and high-end cosmetics, Shoppers has been able to grow its customer base and offer rewards on a wider range of goods.

"Before any program is put into place, you need to do a tremendous amount of analysis and thought to what you're trying to accomplish," Ryerson's Mr. Wilson explains. "You need to figure out what will make people loyal and why they'll stay loyal."

The good news for SMEs is that setting up a smaller-scale but similar system to Shoppers' isn't necessarily cost-prohibitive. "Because of technology today, it's a lot easier to implement a loyalty program than it was years ago when it was very expensive to manage them," Mr. Wilson says, adding that customer relationship-management software is a key tool in collecting and organizing that customer spending data.

So, just how many clients does a company need before setting up a loyalty program? According to Mr. Dawar, SMEs don't necessarily need massive scale to run a successful loyalty program, but they do need a significant number of customers to be able to obtain data and draw conclusions from their spending habits to build out a targeted program that offers rewards those clients might actually want.

A firm with five customers probably doesn't need a loyalty program to glean information or drive behaviour, but one with 100 or more likely could.

Reward good behaviour

There's a good reason why most coffee chains have given up their buy-nine-coffees-get-the-10th-free programs. They rewarded existing customers with discounts, but did little to encourage people to spend more or lure in new java aficionados.

"You want a program that's going to change behaviour on the margin," says Mara Lederman, assistant professor of strategic management at the University of Toronto's Rotman School of Management.

She points out that the Optimum program has successfully changed behaviour by offering an incentive for customers to buy products at Shoppers Drug Mart they would usually buy elsewhere, such as dairy products or cosmetics. And by offering bonus points on various items, the company has provided itself with an alternative means to discount and move lagging inventory out of stores, Ms. Lederman adds.

Think outside the lines

Shoppers has cleverly taken a non-linear approach to its reward structure, she says, something she thinks SMEs would be wise to replicate in their own loyalty plans.

With the Optimum program, the value of points is higher when cashed at greater amounts. This benefit encourages customers to continue shopping and saving points to maximize their eventual reward.

"That's something every firm should do, otherwise people cash out points when they earn a minimum and might start shopping with someone else," she says. "I think most consumers over-value points relative to their dollar equivalent, so you can take advantage of that … to change their behaviour."

With files from Marina Strauss

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