State of the Industry: Thou Shalt Monetize? by Michael Hemsey

Not too long ago, I received an email from a client and longtime industry veteran, wanting to chat with me about the state of the loyalty industry. In her message, she mentioned that the vendor landscape seemed particularly crazed. Her quote was, “Many of the vendors knocking on my door seem desperate. Their frenzy has reached almost insane levels!”

While it is tempting to claim that the recession has been tough on many in our industry, the fact is that the recession, based on Economics 101, has also been just.

What do economics have to do with it? Bob Garfield, author of “The Chaos Scenario,” explains: “Twitter, Facebook and YouTube have altered human behavior on a grand scale. Two and a half years ago, Google paid $1.65 billion for YouTube. The 2008 payoff: about $90 million in ad revenue -- which might (but probably won't) cover the costs of copyright-infringement litigation and certainly won't cover bandwidth charges. Facebook, whose 2007 valuation of $15 billion has shrunk to about $3.7 billion, had 2008 revenue estimated at $300 million. And Twitter had $0.”

Thus, Garfield continues, the mantra: “We have the audience. All we need is a business model. As if adequate revenue were somehow guaranteed by physics or heavenly deity. It isn't. I've pored over Isaac Newton and the Ten Commandments. There is no ‘Thou Shalt Monetize.’”

Whether you’re a sponsor or service provider of a loyalty and rewards program, can you state that you’re program is meeting your financial projections and bottom-line ROI?

One innovative, if bucolic, example of coping with the fact that monetization and bottom line results are no longer guaranteed – through a loyalty program or otherwise – comes from a Dayton, Ohio café owner’s approach to pricing his menu: the customers simply pay what they want. When the meal is finished, customers have to look the owner of Java Street Cafe, Sam Lippert, in the eye, and say what they think their meal was worth.

Doesn’t that sound like an idyllic approach for new business proposals, contracts and RFPs?

(Are the crickets chirping?)

At a recent marketing technology conference in London, Ed Thompson, Vice President at Gartner, spoke about the shifts in the customer-relationship management space from “operational CRM to analytical and collaborative CRM strategies.” He coined the phrase “customer experience management” and identified three major challenges facing those companies attempting to address that gap in their organizations. He states:

1. Customers are becoming more powerful.
2. No one in those companies "owns" the customer.
3. On the whole, employees don't care.

Thompson reported “the challenge is to find someone who cares about customers in the company and then put the right measurement frameworks in place.”

Thompson also shared an interesting insight based on his analysis of data from the American Customer Satisfaction Index (ACSI). It turns out that the companies with the highest customer satisfaction scores are “food companies, Internet companies, and the like.” The interesting point was his view that “those with good customer satisfaction scores didn't actually deal directly with customers.”

"Humans screw up the customer experience," he said, warning, “and companies shouldn't confuse customer intimacy with good customer experience.” Isn’t it true that at a fundamental level, all companies, with or without a formal loyalty and recognition program, must focus on the customer experience?

If slogging through your day-to-day client and program issues hasn’t been enough to educate you on the state of our industry, or, if you’re embattled by unreasonable objectives or new executive mandates which are affecting your ability to succeed in your job – I highly recommend sponsorship and participation in the conference circuit. CardForum, LoyaltyExpo, CRMC – to name just a few – continue to afford the opportunity to speak, present, network, host and learn the true mindset of our industry elite. Even though the attendee mix has changed this year, certainly, the messages coming from the conferences are telling. For those of you who have participated this year, tell me: how many presentations have you sat through that spoke of growth and positive results over the past 6 to 9 months? Then think – whether you’re wearing a client or vendor hat – is your program growing and meeting your financial objectives?

(You can almost hear the crickets)

Participation (or lack thereof) in today’s stock market provides another analogy for the obvious separation between the players (either client or vendor) who are in a position to take advantage of today’s economic climate, versus those players who continue to sit on the sidelines – paralyzed by fear, change and inertia. The prices of blue chip and emerging companies hark back a generation, and yet some of us continue to ignore the fundamentals of business economics and hesitate to invest. We should be jumping in with both feet.

Just as we should be jumping in with both feet in launching, revitalizing or reimagining our loyalty strategies and the customer experience with our companies.

Who is John Gault?

Indeed, at every point in the economic spectrum, the bottom line matters and dictates the direction of your company, program, widget or service. It’s time to pay the fiddler, as it were. The typical client – be they an issuer, retailer, coalition, or product manufacturer – is currently plagued with Reorganizations, RIFs, budget changes, and new directions. This, in turn, unsettles the vendor and partner landscape. Projects are delayed or put on hold. Things stall…

…but not always. There are a few, select brands who have decided not to slow down. They have decided to relish the economic climate, which, in a Darwinian fashion, has helped thin the herd, and take advantage of the market grabbing opportunities that abound. There are brands who have decided, in spite of today’s economy – to change, to innovate, to demand more of their program and vendors who supply those services and solutions.

Yes, there are many vendors and widget providers foundering to remain profitable – they may have grown too fast, or may be hemorrhaging clients because they took their eye off the client service ball and are now desperate. You see it when you stroll their booths at the conferences. And when you realize that the conferences and breakout sessions, while shouting about the next big thing, have become glorified job fairs.

Have Twitter, Facebook, MySpace, Digg and the endless parade of mobile technologies paraded before us become the next big thing? Do your clients and consumers really care that you had an egg sandwich for breakfast? Do your clients and consumers grow their affection for your brand because you’ve essentially plagiarized and “retweeted” someone else’s article? What is your differentiator?

Can anyone (preferably from the client-side) who has taken the plunge and believed in the promise of merchant-funded rewards – speak of a merchant-funded program that has delivered on its consumer promise, and subsequent revenue streams? Or, from another angle, can anyone who has implemented a “loyalty-in-a-box” solution share a success story with data demonstrating consumer incrementality?

(Did a pin drop?)

These tools and widgets and emerging applications are not a panacea for a faulty foundation in your program strategy, or your customer’s experience with your product and service. We have to let the numbers speak for themselves. If, as a partner with a widget, or a vendor with a solution, your claims haven’t been supported by the results, as magnified by the P&L, it’s time for you to pay the fiddler. Darwin works.

U-Adapt?

The most recent and relevant example of bottom-line impact and the changing landscape of monetization, and, of course, the subsequent lessons which will be learned, comes from one of the most established sponsors of loyalty in our industry: the banks and the credit card.

The Credit Card Bill of Rights was signed into law in May 2009, ending unfair and arbitrary interest rate increases; stopping excessive “Over the Limit” fees; ending unfair penalties for cardholders who pay on time; requiring fair allocation of consumer payments to balances; and protecting card holders from due date gimmicks. In addition to this Bill of Rights, there are amendments referred to as “UDAP” and “Reg Z” which are pending approval with different timelines.

And the buzz on the street? “Banks are losing 50% of their fee income! Loyalty programs are in trouble!”

Not so. Let’s take a look at how the banks and issuers can, and invariably will, respond to the legislation, starting with interest rates.

Good ol’ fashioned A.P.R. Interest Rates will increase across the board: whether they are Introductory, or based on Purchase, Delinquency, Cash Advance, Employee Promotional, or Balance Transfer – nearly ALL of the APR changes banks are putting into affect will increase their rates prior to February 2010.

What’s more, banks will have other means, besides jacking the APR, to manage the new regulations so that their credit card loyalty programs can remain untouched. Those banks that were healthier prior to the economic tsunami will not have to add or raise loyalty program fees, and they will not have to change their rewards grids. They can continue, as a predictable result, to increase acquisitions, transactions and volume.

Finally, what about all of the other ways banks monetize the income streams from credit cards?

• Grace period. Essentially, banks will have to notify their consumers when their payments are due with a 21-day grace period. Prior to the legislation, a bank could give somewhere between 17-12 days notification to pay a bill. Now, statements will have to drop nearly 30 days prior to the due date so that there is assurance that the notification period is met. This means funds will come sooner to the banks… and with earlier returns on the interest.
• Annual fees – These can now be removed because the APRs are going up. Conversely, program fees for loyalty are under different rules and can remain unaffected.
• Minimum Finance Charges? They will go up.
• Over Limit Fees? These may go away, not only because Congress is rabid about them, but because APR, in some cases, can be raised by 7-10%.
• Balance Transfer Fees? They will go UP, maybe by as much as 3-5%.
• Allocation of Payments – Interest and fees will continue to get paid, first. But, banks must then allocate any payments over and above interest & fees to the higher balances before the lower balances.

In aggregate, with APR changes and fees going up on a number of daily and typical banking occurrences, banks (especially the healthier ones) are in a position to make more revenue on the new legislative mandates in comparison to what they’re giving up with compliance to the more consumer friendly Bill of Rights.

Ironic? Beautiful? Maybe not as onerous as it seems? Now what?

“Can we play the Fiddler?”

There are always, in any period of time, things we can do to move from paying to playing the fiddler. As all the best ideas come from the people I interact with, here are just a few from some of the best brands in the business:

• Make bold and foundational moves, which address your customer experience.
• Ensure that your consumer-focused program encompasses your employees and partners.
• Invest in your clients and invest in your consumers. Help them through the hard times, and know that your investments will pay off longer term.
• Do good work – if your client’s bottom line is met, even at your sacrifice, your bottom line will be met as well.
• (Re-) Focus your resources – and demand the best of your teams. They’ll deliver it. Reward your stars – employees, consumers, and partners – as they will carry you through the tough times.
• As reaction to UDAP will show, there are always ways to monetize. Find and leverage them appropriately.
• And finally, measure everything. Loyalty programs are an investment, not a cost center, and they should generate a positive return.

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Michael F. Hemsey is President of Kobie Marketing, Inc. – a full service loyalty marketing agency based in St. Petersburg, FL – and frequent writer, contributor and industry speaker.