Tuesday, December 27, 2005

Buying Loyalty -- The Barnes & Noble Approach

Loyalty marketing has become a game of bribes, rebates, points and promises which forces marketers to sell the perceived value of the reward harder than the original product or brand experience. In a world where only air miles and iPods are universally perceived as useful currency, you have to work really hard to convince skeptical customers that your formula or your bauble is worth a repeat or an upsized purchase.

Enter Barnes & Noble. They don’t give me anything. They sell me, and anyone else interested, a membership card for $25 that entitles me to a 10 percent discount on every purchase and every product in every channel for a year. They get twenty-five bucks. I get as much benefit as I’m willing to purchase.

But the unadvertisized multiplier lies in the way they administer the program. Your membership card is keyed to your phone number. You don’t have to present the card, which my daughter lost in her first 30 days of membership. Instead you give them the phone number at the point of purchase. The computer validates your membership and presto! Your purchase is discounted by 10%.

We gave Allison a membership because she and her pals hang out at Barnes & Noble haunting the graphic novel and young adult sections. In the course of a year she’ll buy 20 manga books at an average price of $15 and another 20 books with words and type at an average price of $18 and she’s good for three $25 gift cards as birthday gifts for friends or cousins and an occasional CD, DVD or snack

The net present value of this 15-year old “heavy user” is roughly $750. B&N gets this purchase level for a marketing investment of fifty bucks (the ten percent membership discount of $75 minus $25) or net 7% of her total revenues. God only knows what the margin on her purchases is.

Yet because of the way the program is loosely administered and because my wife and I and her mother all end up meeting her or fetching her at the store, Barnes & Noble harvests another $500 per year in impulse, gift and gratuitous purchases. So the membership value of a family using this card is $1250 which costs B&N the same seven percent.

This loyalty benefit rings up to the chain regardless of the experience we have in the store, our perceptions of the brand, the competitive set or any added promotional activity or usage stimulation marketing they undertake. Although these factors could increase or decrease the frequency of our purchases.

For $25 bucks they initiate a steady stream of purchases and we walk away feeling good.

Do the math. Multiply our family by 100 or 200 or 500 per store and the membership program becomes a baseline annuity which throws off not only profit but prompts continuous repeat behavior.

I’m not sure it’s replicable, though I suspect that a similar plan might appeal to heavy users of a wide range of products or services. But selling memberships is certainly a cost effective way to buy “loyalty” and a revenue stream simultaneously.


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