Loyalty Truth

On April 1, Borders Group CEO Ron Marshall and CFO Mark Bierley held their 4th quarter earnings call for the investment community. I give them credit as they displayed courage, confidence, or both in having the call on April Fools day! Transcript of the call can be found by visiting the Seeking Alpha web site.

Acknowledging a weak fourth quarter where Borders Superstores saw same-store sales decline by 11.7%, the executives mapped out details of their 4 key priorities for the business. The second item on the list was “Reengaging with our customers ….. reclaiming our status as the book seller for serious readers ….. and further leveraging our Borders Rewards Loyalty program”.

On giving customer centric marketing a priority, Mr. Marshall explained “For the last couple of years our outreach has primarily been directed at our best customers. The nearly 32 million members of our Borders Rewards loyalty program increasingly we have relied on discount offers to entice them to shop and over time these offers have lost effectiveness. We are focused now on improving gross margins through being smarter and controlling promotional offers and in-store discounts.”

Realizing that the value of short term promotions and discounting was eroding, Borders experimented last year.  Mr Marshall continued “we did a test late last year removing many of the ongoing in-store discounts in a control group of stores. Customers didn’t miss these discounts and we saw an appreciable up-tick in margin. Now we’ve rolled this out to all stores and are pleased with the results.”

The Borders Rewards program is interesting in structure and starkly different than Barnes & Noble Membership, a retention strategy put forth by the competing chain.

Borders Rewards members join at no charge and earn 5 Borders Bucks for every $150 spent in store. That averages to a 3.3% return for members. During 2008, the company has been inviting members who register online to take advantage of Borders Rewards Perks, an online mall program extension.

Barnes & Noble Membership requires a $25 annual membership fee and in return offers savings of 40% on hardcover bestsellers, 20% on adult hardcovers, and 10% on “everything else”. Depending on the mix of items purchased, B&N Membership would appear to return at a higher rate, though the annual fee is an enrollment hurdle for many customers.

In the Q&A segment of the call, Mark Bierley explained that the Rewards program would continue to play an important role in the marketing mix “It really is all about the next significant investment that we’ve made in terms of promotional discounting which is our Rewards program.” He continued “We have 18 segments and we want to get to being able to communicate more on the content side, talk about authors that they may like as well as other value or content messages versus just a discount. I would say that that is probably the single largest next opportunity that we’re focused on.”

This commentary serves to illustrate two lessons of Loyalty Truth:

1. Untargeted product based discounting is an ineffective marketing strategy that yields poor results. Borders has evolved to this understanding as Ron Marshall said “promotional spending and discounting is important but you need to do it with a plan.”
2. Companies that understand the importance of their loyalty program data and actually leverage it to match customer preferences with product offers are on a path to success.

In the very near future, Hanifin Loyalty LLC will publish the results of a year long study of how industry leaders use email to communicate with their Loyalty Program members. I’ll preview some results with you as they pertain to Borders. As the principal, if not the only, communication channel for Borders Rewards members, the company is a prolific emailer, averaging approximately 14 per member per month.

Of the total, roughly 75% were blasting discounts (40% off coupons) and promotional offers (special one day sales, author highlights) while 22% were promoting Borders Rewards Perks.

Over 67% of all mail was sent in mid-week (Tues, Wed, Thurs) and over 73% were sent while we slept (between hours of 11pm – 8am).  Across the board, Borders initiated about 1 survey per quarter.

The weighting of emails towards discounts has to be seen as lost opportunity for Borders as these untargeted mails are essentially a digitized version of newspaper coupons that have lost favor over the years. One can only imagine that if Borders changed the make-up of its surveys and constructed offers with tangible links to survey responses, that the membership would be energized.

The company might also want to sharpen the language in its Borders Reward Perks promos, adding context to their message that members have enjoyed benefits from “592 merchants and savings of $212.32 per active member per quarter”. The problem with mythical savings numbers is that consumers don’t understand their origin. Are they based on MSRP which noone pays and the difference is counted as “savings”? Or is the number similar to the “savings” figure on grocery receipts?

This bird’s eye view into plans for “reengaging customers” spotlights how smart marketers work. Messrs. Marshall and Bierley didn’t blame lack of results on Borders Rewards and kill the program. Instead, they are planning key improvements to the program that should yield tangible and measurable results. Combined with a renewed emphasis to have booksellers improve customer service standards, I can’t wait to read the next chapter they are writing in the story of Borders Rewards!