OPINION
When It Comes to Customer Loyality, It's All About Relevance

Much analysis has gone into the debate about which type of loyalty instrument is most effective in helping businesses dynamically interact with customers in order to build and maintain more profitable relationships. The debate, focused on smart cards versus magnetic stripe cards, is irrelevant. The type of card consumers carry in their wallet will not help an organization's loyalty program succeed; the reward relevance and the program delivery method will.

Smart card adoption has been high in Europe and Asia, driven by challenging credit card verification capabilities in a telecom infrastructure that is not as robust as that of North America. The smart card, which stores data directly on the card, has helped to reduce fraud at considerable cost savings for card issuers. In North America, the robust telecom infrastructure allows real-time verification of magnetic stripe cards for banking and loyalty reward programs without the need for additional infrastructure.

Loyalty programs based on smart card technology attempt to offset higher card costs with reduced telecommunication costs by storing loyalty data on the card and enabling program rules at the point-of-sale (rather than at a centralized host). These speed and efficiency gains are offset by two factors: (a) the desire of many loyalty operators to analyze data in a central location, necessitating its periodic collection; and (b) the challenges in updating program rules at each point-of-sale when changes are required.

Loyalty Programs Popular

Most retailers in North America currently have the magnetic stripe technology and telecom infrastructure in place to cost-effectively enable host-based, real-time loyalty programs. This structure allows businesses to update program rules once, in a central location, without the extra effort of "touching" all their individual points-of-sale. Since more information can be stored in these types of real-time databases, organizations have the ability to take advantage of the added depth and richness of customer information.

The popularity of customer loyalty programs is at an all-time high. According to an analyst report by industry research firm Gartner (NYSE: IT), more than 60 million Americans belong to at least one of more than 200 US based loyalty programs, making these programs so widespread that customers have increasingly come to expect them.

For organizations that are looking to loyalty programs as a way to recognize and retain their best customers, the benefits of real-time are clear. By pushing the rewards redemption processes to the front line in real-time, an organization can reduce or eliminate resources spent on call centers and fulfillment warehouses, while customers can avoid the long delivery times often associated with reward fulfillment. Real-time loyalty makes sense, especially since instant gratification strikes at the core of making a program relevant to a consumer, not to mention successful to the bottom-line.

Who Provides the Profits?

But the benefits don't stop there. It is widely accepted that 20 percent of customers produce 80 percent of profits, and some industry analysts will even claim that more than 100 percent of profits are driven by the top customer segments. Think this isn't important to your business? Think again, as the bottom segments of a business' customers can actually contribute negatively to profits. Real-time loyalty programs can help an organization identify its best customers, reward them for their patronage and weed out the rest.

While many industry pundits closely followed the progress of retail giant Target and its foray into the smart-card loyalty market, most failed to realize that it was not the smart-card technology that failed. With a reported investment of US$50 million in infrastructure, Target was able to attract a purported 9 million customers to its loyalty-enabled card, proving that the interest and opportunity in loyalty benefits existed.

The problem was that consumers ignored the high-tech smart-card loyalty features because the perks and benefits were not delivered in a relevant manner. Target's program required consumers to go to a special kiosk in order to access the loyalty coupons for redemption at the point-of-sale.

The Irrelevant Debate

In the end, the debate that focuses on smart cards versus magnetic stripe cards is irrelevant. Magnetic stripe cards, smart cards, finger print devices or retinal scans are simply the identifier for a host-based loyalty solution. There is good reason to believe that smart-card technology may yet emerge as the technology of choice to reduce credit card fraud in North America.

However, an effective customer loyalty program is not about the type of customer interface, but rather the benefits associated with it. Businesses wanting to adopt their own rewards program should consider a solution that is real-time in nature, which allows customers to be rewarded and/or recognized right at the point-of-sale. Most importantly, businesses should specifically focus on the relevance of their rewards. Ultimately, acknowledging consumer preferences and delivering rewards in real time for their patronage is what will make your loyalty program successful, not to mention smart.