Imagine a world where it doesn’t matter what you’re selling or how you sell it—all that matters is whom you get to buy your product.
That day may have arrived.
“We’re in an age where the products that you sell, the distinct channels that you have, are not any longer sources of competitive advantage,” said Forrester Research analyst Emily Collins. “Today your customers are really your only source of competitive advantage, and those customers have more choice than they’ve ever had before.”
Although today’s shoppers are met with more options—whether they come in the form of bricks-and-mortar or online stores—they’re responding in a surprising way. According to a recent study by PwC, consumers are shopping at fewer stores than they did in the past, preferring to stick with a small set of “go-to” retailers.
When shown a list of 30 well-known domestic retailers, 58 percent of respondents in PwC’s global survey said they had shopped at five or fewer of the stores in 2013. That compares with only 43 percent who did so in 2012. On the flip side, 42 percent shopped with six or more retailers—a drop from 57 percent the prior year.
As such, retailers are recognizing the importance of building a loyal customer base. According to a Forrester survey of more than 50 loyalty program marketers, nearly 60 percent of respondents said loyalty is considered a top three strategic priority for their company. They’re also upping their spending on the programs, with 36 percent increasing their budgets by more than 5 percent last year.
“Companies are starting to realize the importance of the customer, but it’s a slow shift,” Collins said.
What’s driving the shopper shift
According to Forrester, 71 percent of U.S. online consumers belong to at least one loyalty program. On average, an online shopper who uses loyalty programs belongs to eight.
Several factors determine how they decide who deserves their loyalty. Tom Johnson, a principal with PwC’s Retail & Consumer practice, said big factors include who has the right prices, who has consistent product availability, and most importantly, who offers convenience. Convenience can range from an online checkout saving a user’s credit card information to knowing a store’s format well enough that consumers can quickly pop in and out.
“The way a retailer lays out a store and consistently executing that layout in the store is pretty important,” Johnson said.
Building loyalty also comes down to customer service. PwC’s report called attention to luxury department store Nordstrom, which is known for its dedicated shopper base. All of the retailer’s employees carry business cards, are trained on what the brand stands for, and know how to deal with just about any customer issue, the report said.
But the most important aspect of creating a loyal customer base is trust, experts said. Shoppers are willing to give up their information under the assumption they will receive value—whether it comes in the form of coupons, points or something else. In light of recent data breaches—including the Target saga that compromised the information of up to 100 million shoppers—they also want to be assured their information is safe.
“The breaches, et cetra, aren’t going away,” Collins said. “Loyalty is usually based on trust, so ensuring the security of your customers’ information is a key component of that trust.”
Other factors in building trust is treating customers well during the return process and by listening to their concerns, Johnson said. He emphasized that social media should not only be used by companies to blast deals—it should also be used to communicate with shoppers and respond to complaints.
“Loyalty is a two-way street between the consumer and the brand,” he said.
Dominica Pezzolla, a 27-year-old who lives in Hoboken, N.J., belongs to six loyalty programs, including CVS, DSW and Express. She joined these programs for the rewards and savings, saying she redeems perks every few months at the retailers and a few times a month at the drugstores.
“It’s especially beneficial for us as customers when you receive rewards at stores that you already shop at on a regular basis,” she said. “You would be making purchases there anyways, so having reward points just makes it that much better.”
Getting it right
Creating a successful rewards program offers retailers a new set of challenges. Just as the shopping landscape is oversaturated with options, so, too, are loyalty programs.
Personalization—which includes offering shoppers deals based on past purchases—is a must, experts said. Collins added that personalization can come in a broader form, with retailers catering their rewards toward their specific customer base.
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VF Corp.‘s The North Face is one label that successfully incorporates its brand story into its rewards program, Collins said. Like any other program, the outdoor apparel brand allows shoppers to earn points that can be used on future purchases. But the points can also be used on outdoor activities, such as free lift tickets or lessons with a famous skier.
“When you think about the rewards themselves, it’s all really aligned with the North Face’s brand promise,” she said.
LVMH‘s Sephora also has a solid rewards program, as its tiered strategy gives shoppers an incentive to spend, Collins said. The Beauty Insider program, which has grown to 14 million active members since its 2007 launch, gives shoppers a point per dollar spent, with different rewards that can be unlocked when reaching between 100 and 10,000 points.
Sarah Choi, vice president of Sephora Beauty Insider, said its loyalty members spend more per trip than the average nonmember, and they shop there more frequently. The company has found that members of its VIB Rouge level—which is reserved for those who spend $1,000 or more in one year—spend four times more than its other customers.
“We believe our program has been highly successful because we have built this program around the client insight that she loves product, and have built our loyalty eco system around giving her more of what she loves,” Choi said.
Although loyalty programs’ main purpose is to drive spending among existing shoppers—by getting them to buy new items as opposed to subsidizing existing purchases—Forrester found that one-third of companies see them as an opportunity to acquire new customers. PwC had similar findings.
“We’re not just fighting to get them in the door. We’re fighting to get them back out of the other retailer’s door or website,” PwC’s Johnson said.
And with many analysts forecasting a wave of store closures ahead, PwC found it reassuring that when faced with a retailer shuttering its closest location to shoppers, nearly 60 percent said they would find the retailer’s next nearest location and go there. Forty-four percent said they would remain loyal and would start or increase their ordering from the store’s website.
Still, it should be sobering that more than 4 in 10 shoppers also said they would be willing to turn to a competitor when faced with a local store closing. As a result, when under pressure to close underperforming stores, PwC recommends assessing online sales in a particular region before deciding to shut down a store.
“There’s the pressure for underperforming stores to be decommissioned, but at the same time, if you lost that customer to your competitor’s brand you may have lost them for life,” Johnson said.
—By CNBC’s Krystina Gustafson. Follow her on Twitter @KrystinaGustafs.