-By Kristin V. Montalvo

As a way to say "Thank you" to customers who frequent their store on a regular basis, retailers have created loyalty programs that emphasize the cultivation of their mutual relationship. From loyalty cards to birthday programs to discounts for frequent customers, loyalty programs are a great way to build sales using your most valued -- and frequent -- customers. But it's simply not enough just to give your customer a plastic card that hangs off their key chain. Retailers need to build loyalty based on intrinsic qualities before they can expect a loyalty program to do any good.

The Loyalty Craze
Customers are spoiled -- and they have every right to be. Most of them have very little allegiance to just one store or brand, especially when prices are so comparable. As a result, companies are turning to loyalty programs to keep customers coming back. Unfortunately, those programs have become almost as ubiquitous as the stores themselves. There are frequent-buyer programs, frequent-flyer programs and frequent-dining coupons. Call it the loyalty craze.

According to Jupiter Research, more than 75 percent of consumers now have at least one loyalty card, and the number of people with two or more is estimated to be one-third of the shopping population. While loyalty cards and prizes have always been, first and foremost, an inexpensive way for businesses large and small to start tracking their customers' shopping habits, more customers than ever now consider themselves entitled to special treatment, a marketplace psychology spawned in the 1970s by the airline industry's invention of frequent-flyer miles, one of the first modern-day loyalty programs.

"Unfortunately, many people view loyalty programs as the sign of the devil nowadays," explained John Roberts, former president of the National Association for the Specialty Food Trade (NASFT) and founder of Blackpoint Management, Inc., a consulting firm to the specialty food industry. "I think, in some cases, it's a sensitivity issue to Big Brother watching and a little bit of concern at information being gathered about them -- especially the specialty food consumer."

He explained that because the specialty food consumers tend to be better educated, have more money and more worldly experiences, they in turn are more sensitive to stores monitoring them.

"Although we've come way beyond it now, you have to reflect on the fact that when loyalty cards first came out, you'd go into a supermarket and if I had just bought a bottle of Coke, the cashier would give me a coupon for Pepsi. And if I had just bought Pepsi, I'd get a coupon for coke," Roberts began. "What a loyalty card should be is a friendly face that knows your favorite wine -- it should bring the consumer and retailer closer together. If I'm shopping in a store regularly and the best thing they can do with this loyalty card is every time I buy Coke, or something I love, they give me a coupon for Pepsi, as a consumer, it's really insulting that you don't know me that well. Why don't they give me a coupon for what I like?"

Some of those early impressions of loyalty cards are still there so, according to Roberts, a specialty food retailer going into the loyalty program game needs to really get across why this program is going to benefit the consumer. "They need not assume that the consumer is just going to love this thing automatically. A specialty retailer needs to make it a prestige thing and use it to the benefit of the consumer. Where an Albertsons or a Safeway consumer doesn't seem to mind at all or they just don't participate in a loyalty program, the benefits to the specialty food consumer have to be more upfront and obvious," he stated.

Building the Program
When creating a loyalty program, Roberts said the objective should be to make your loyalty card a proud symbol of a consumer who's happy to shop in your store, rather than someone who has submitted to another method of being patrolled. To that end, he suggests retailers make sure their loyalty program card or key tag is well-designed and fits in with the store's logo.

"If the retailer is an upscale retailer, people should be proud to have it on their key chain. It should be almost a status symbol -- similar to an American Express Platinum card -- that this is a good thing to have."

Of course, it's simply not enough just to give your customer a jazzed-up plastic card that hangs off their key chain. The key to a successful loyalty program is presenting customers with useful rewards -- rewards that make your customers feel recognized and special. Many retailers create loyalty programs that offer customers discounts, but Roberts believes that this method may not be the most successful. "I don't think the main use of the loyalty card should be to get a special price. That's a good tool for the mass supermarkets, but emphasizing price in the specialty food environment isn't a good thing."

Instead, he advises that retailers use other ways to show their appreciation for their best customers, including offering cash rebates of sorts, redeemable against a future order. "You can offer prizes and discounts on product if you like, but offering them cash rebate options makes the most sense to specialty food consumers."

Look at the White Space
Another important element in building a successful loyalty program is taking the time to look for a company that supplies you with the data, which will, in turn, help serve your customer better. For example, you want to know who your most important and profitable consumers are. You want to know what the most purchased item in your store is. When the consumer comes in for that most purchased item, what else do they buy? Is it also available in supermarkets?

"In the old days, a grocer would stand in the middle of the store talking to their customers, asking them about their likes and dislikes. Now, loyalty data replaces some of that face-to-face dialogue with the consumer. And if you analyze the data correctly, you'll be able to take the initiative that might make your store better able to serve the consumer."

He also suggests that retailers shouldn't just concentrate on the positive data, but also look at the "white space," to see the things that aren't there. "It presents an interesting way of looking at your business and puts personality back in the business; it brings an art to the business that has been missing for a while."

For Roberts, it's not just simply knowing the data and sitting around number-humming all day long. "I think it's coming up with initiatives that respond to the data. Your data will show a weakness which, in turn, shows an opportunity to try something different that could, in turn, improve your business."

He continued, "Let's say you found out that 60 percent of your customers buy your rotisserie chicken, for example. You might think, 'Gee, I'd like to learn more about those customers, like what else do they buy? How important are they to my profit? Do they just come for the chicken?'"

Roberts notes that you should also be interested in the 40 percent that are not buying your rotisserie chicken. Do they not shop your Prepared Foods Department at all, or do they come to the department and buy other things, but for some reason don't buy your rotisserie chicken?

"You think your rotisserie chicken is great and you get a ton of compliments on it, but maybe they don't like the idea of taking the chicken home and cutting it up. Maybe they prefer to have chicken breasts only and not the whole chicken. Maybe that consumer has a different need -- they still want fully prepared chicken, but they want it even more prepared."

And since you already know their names, Roberts suggests that maybe you offer a coupon for a free rotisserie chicken or buy-one-get-one-free, and see if you convert them. If you can't convert them, he suggests conducting a brief customer phone survey to find out their likes and dislikes.

"You can work into the conversation the rotisserie chicken and ask them if they buy this item elsewhere or how they like to buy it. If you use this as a way of getting closer to your customers, knowing them better and servicing them better, then I think people are going to appreciate this, and you're going to improve your business. The value of a loyalty program, if used correctly, is that you know your consumer better by their actions and you ultimately serve them better.

Relationships Count
Unlike supermarkets and other mass markets, specialty food retailers have a special relationship with their customers (or at least they should). At the heart of a specialty retailer's relationship with their customers is providing great customer service. This can come in the form of little inexpensive details, such as a penny jar at the register, products to sample or more informative details about a product. Superior customer service gives that competitive advantage for specialty stores and is critical to forging more sincere relationships with customers. When creating a loyalty program, think about how you would like to be treated. Do you enjoy a store where the sales associates greet you by name, or suggest products based upon your past buying patterns?

A variety of different loyalty programs can be implemented; they can range from data-based programs that track frequent customers and send e-mails or printed direct mailings that give customers advance notice about upcoming special sales or new products and events coming to the store, to something that doesn't use technology to track loyal customers, but instead focuses intensely on that relationship.

Zingerman's "Frequent Foodies"
When specialty food retailer Zingerman's first began their loyalty program back in the mid-'90s, it basically started as a way to thank their top customers who shopped Zingerman's Mail Order. "We saw that a few people were buying a lot and we wanted to acknowledge that and do something nice for them. Not too lofty a goal. We sent them gifts, unannounced. They loved it and, no surprise, ordered more from us," began Mo Frechette, managing partner of Zingerman's Mail Order, part of the highly successful Ann Arbor, Mich.-based Zingerman's Community of Businesses.

A few years later, Zingerman's Mail Order formalized the program. They created different tiers of prizes, coined the name "Frequent Foodies" and printed it in their mail order catalog. Fast forward almost 10 years and that same program is pretty much still in place today.

"The 'rules,' to the extent there are any, have stayed the same. To win a prize, you don't have to do anything. Just buy food. You don't need to sign up. You don't need a special code. You don't have to memorize any rules. You don't even have to remember that we have a rewards program. We'll tell you when you've won," explained Frechette. "Halfway through the year, I write a letter that says thanks, tells them where they're at prize-wise, and gives them a discount for shopping. Closer to the end of the year, I contact them again and let them know how their prize is shaping up -- again, in a letter. When the year is over, I write a postcard that says what they won and please give us a ring or e-mail to redeem it. That e-mail or phone call redemption is the only 'work' they need to do to win their prize."

It's this simplicity, Frechette believes, that has contributed to the success of the Frequent Foodies program. "When you think of other, complicated programs like frequent-flyer rewards -- the big promises and the frustration people have when they try to obtain them -- they often create as much ill feeling as goodwill. In effect, when you make the rewards hard to get, you're punishing your best customers -- the exact opposite of what you were intending! I've never gotten too far from the principle that rewards are a thank-you. They aren't a strategy to hook people onto us and make it hard for them to leave. They're a way to thank people who keep shopping with us because they think we're worth it."

And how does Zingerman's Mail Order reward their Frequent Foodies? "Prizes" have ranged from loaves of bread to bottles of olive oil and vinegar to free flights and trips to Zingerman's. But for the past few years, they've stuck to gift cards.

"They're easier for us to mail. And when we tried them the first time, folks just loved them. It makes sense. These are our top customers. They love shopping with us. They're really excited to have some 'free money' they can use to shop for something they might not have wanted before. Almost invariably, people get the gift card, turn around and shop with us right away -- spending more than the value of the gift card."

Sickles' "Good Stuff Club"
Little Silver, N.J.-based Sickles Market just started their loyalty program last March, but it has already garnered a loyal following with over 10,000 participating members.

Called the "Good Stuff Club," customers are given a card and key chain card to be scanned by the POS system when they check out. Providing more convenience, if a customer forgets their card, they simply tell the cashier their phone number. Their sales are then recorded and when they hit $500.00 in sales, they get an immediate $10.00 reward at the register, which they can use or save, amounting to a 2 percent discount on everyday shopping.

"For the holiday period and due to current economic conditions, we doubled the reward amount for the same $500.00," said owner Bob Sickles. "There are other specials and deals available to them along the way. The benefit to us is increased foot traffic, per capita sale and customer retention. The benefit that they get right at the register is very positive."

Because the program is still in its infancy, Sickles said future incentive ideas include rewarding purchasers of large amounts of a particular product with that product; determining which customers do not purchase a particular product and offering them a significant promotion to try it; and cross-marketing compatible products to customers that purchase those products, like offering specialty cheese accompaniments to those that purchase a lot of artisanal cheese, or barbecue accessories to those that purchase barbecue sauces.

"There are millions of opportunities," Sickles said. "You just need the data to determine who to send what offer to, then send an e-mail. Do your homework, know your objectives, be patient, but do not get bored. The key to success is in using the information you collect from your customers' purchase history to better their experience in your store and thus better your profits."