WHY SOME MARKETERS TURN AWAY CUSTOMERS

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Mike Seidenman was a loyal Delta customer. The Fairfield, Ohio, sales rep had achieved Platinum Medallion status, the highest level in the airline's Skymiles frequent- flier program. But he did so by earning 100,000 miles a year at the lowest fares available, bypassing high-priced flights in a Cincinnati hub Delta dominates for cheaper flights in nearby Dayton and racking up perks with short-hop connections.

Two years ago, Delta sent him and possibly thousands like him packing for other airlines as it changed the rules of Skymiles, making it harder to get free upgrades.

Delta is one of a growing number of marketers punishing penny-pinching brand loyalists and instead embracing more profitable consumers in response to brutal competition from hyper-efficient discounters. Retailers have started tracking driver's license numbers and refusing refunds to frequent returners, joining banks and insurers that have instituted steep fees on less-profitable accounts or refused to renew policies of homeowners who make as few as one or two claims.

Regardless of industry, targeting high-value customers and trying to upsell less-profitable ones is more likely to be effective than overtly redlining unprofitable ones, said Kelly Hlavinka, director-consulting services at Frequency Marketing, an agency that created the Reward Zone loyalty program for electronics retailer Best Buy. "It is controversial to redline customers. But done correctly, it really is simply about saying I have a limited pool of money, and I need as a business person to spend that money where I can get the most return."

To find those customers, Best Buy hired Larry Selden, a professor at Columbia University's Graduate School of Business and author of "Angel Customers and Demon Customers." Weeding out the costly devils, it's dropped affiliate agreements with some bargain-oriented Web sites such as Fatwallet.com, culled less profitable names from its mailing list and tightened policies to discourage abusive returns. But it's the incentives for Best Buy's angelic top-spenders that are paying off the most.

The company's Reward Zone, launched in 2003, broke loyalty-program norms by charging consumers $9.99 to join and aimed recruitment more at profitable customers than trying to maximize participation. Reward Zone members account for only about 30% of transactions today at the chain, but spend $844 a year, compared to about $400 for other customers. Data generated by the program is helping Best Buy tailor test stores toward various high-value consumer segments.

supermarkets next

While Best Buy's same-store sales last month missed targets, rising 2.5% vs. the projected low-end of 3% for the quarter, comps in the chain's 67 stores that have been revamped toward high-value consumer segments were double the overall rate, said CEO Brad Anderson in a call with analysts.

Supermarkets may be next. For years, food and drug retailers have been compiling data from frequent-shopper cards but doing little with it, said Scott Klein, CEO of Information Resources Inc. But IRI recently signed a deal with a major retailer to mine shopper data to help it target marketing toward the most profitable customers. He expects more to follow soon.

Larry Aronson, a former Procter & Gamble Co. and Revlon executive who markets a similar analytic service via his firm, Cartwheel, said frequent-shopper cards initially paid out. Little marketing or analytic savvy was required because about 30% of consumers never use them and retailers pocket the discounts earmarked for them, Mr. Aronson said. After the first year, however, such windfalls disappear, requiring retailers to get more creative to get a return on investment.

"If you've got a customer spending $4,000 a year, the notion of spending $150 to directly market to them is not terrible," he said, but is considerably more than what low-margin food and drug retailers normally spend.

P&G's Lesson

As far as the devils go, "retailers are less likely to overtly drive [unprofitable] consumers away," he said. "But if they're looking at discontinuing one of two items, and one is favored by their better shoppers and another by cherry pickers, when they make the choice, they de facto start that process."

But turning away the parsimonious customer has been less successful for package-goods marketer P&G, as it learned a decade ago.

As part of its value-pricing movement, P&G pulled back on coupon and trade-promotion spending while boosting ad spending and cutting list prices in the early 1990s. "Coupon spending is highly inefficient," said former P&G Chairman-CEO Durk Jager, who spearheaded the value-pricing movement. "The cost per net extra case [for couponing] is about twice the net sales coupons generate, or about eight to 10 times its profit contribution. Put another way, you can throw a case in the Ohio River and still be better off. I indeed believe we should spend our money on the loyal consumer and not on the `promiscuous' ones like coupon clippers."

But competitors largely didn't follow suit. A 2001 study published in the Journal of Marketing across 24 categories found P&G cut coupon spending 54.3% and trade promotion 15.7% while increasing ad spending 20.7% between 1990 and 1996. The net effect was to raise P&G's prices 20.4% and cut its market share 18% without a measurable increase in brand loyalty, the study concluded.

When P&G competitors did join it in testing coupon-free marketing in upstate New York in 1996, they faced antitrust litigation, which they ultimately settled by distributing $2 coupons to affected consumers.

Under Mr. Jager's successor, A.G. Lafley, P&G has loosened reins on coupon spending-hiking coupon distribution 42% in the past two years and 15.8% last year, according to TNS Media Intelligence's Marx Promotion Intelligence, while boosting ad spending similarly.

But it's doing so differently, via its P&G Brandsaver coupon insert, a 10-time-a-year program that pools the coupon buy across all P&G brands and makes newspaper coupons more cost-effective.

P&G research found that coupons, despite their appeal to price shoppers, ranked just behind TV and ahead of magazines among its media impressions with consumers, said one former promotion executive.

Jay Woffington, a former P&G brand manager who's now president of Bridge Worldwide, Cincinnati, agency for the online version of Brandsaver, said he still encounters P&G marketers concerned online offers will draw price-focused shoppers from bargain-hunter sites. "My argument is: So what?" he said. "I don't know if there really are any unprofitable consumers [in package-goods]."

"I remember [former P&G Chairman-CEO] Ed Artzt saying `Never give a consumer a reason to leave your franchise,"' said Amanda Kelly, who heads the HomeBasics relationship-marketing program for rival Unilever. "It may be different in a service industry, but when it comes to us, there are no undesirable consumers. There are undesirable marketing tactics. If we can't make money selling a product, that's not the consumer's fault."

The goal of HomeBasics is to pool Unilever marketing resources across multiple brands to reach some of the highest-value consumers with direct-mail and online messages aimed at getting them to increase their spending, Ms. Kelly said.

Also key are how the programs are communicated. It's not so much the strategy as the term "devil consumers," which popped up in The Wall Street Journal coverage of the Best Buy initiative, that could cause trouble, said Pete Blackshaw, chief marketing officer of Intelliseek, which tracks consumer opinions online. "There's a very real cost to pissing off consumers you consider to be lower value," he said, "and there's a lot of evidence of the price shoppers making a lot of noise on the Internet."

Just ask Delta. In December 2002, the airline changed its Skymiles program to give passengers using its cheapest fares only a quarter of the miles toward upgrades and other top perks that first-class passengers got.

save the skymiles

Before that, all miles were equal, and that was a problem for Delta. "We were spending a heck of a lot of energy and resources on delivering benefits to customers who weren't even covering the costs of delivering the transportation," said Rob Borden, director-loyalty marketing at the time in a 2004 interview with Colloquy, a magazine published by loyalty-marketing agency Frequency Marketing, Milford, Ohio.

Delta's solution sparked an uproar. Earlier changes already had prompted disaffected members to start a Web site, SaveSkymiles.com. The December 2002 changes sparked a louder revolt. Some passengers filed a class-action lawsuit and SaveSkymiles raised money to buy ads in USA Today criticizing Delta.

Delta's changes were aimed to increase revenue and earnings, but ultimately they didn't do much of either. Its passenger revenue was flat in 2003, despite the beginning of a post-Sept. 11 recovery for the industry. While revenue rose 5.9% in 2004 after Delta restored some flights cut in 2002, that wasn't enough to make up for surging fuel costs. Delta was pushed to the brink of bankruptcy, which was averted via new labor contracts late last year.

Mr. Borden left Delta in June and declined to comment for this article. And earlier this month, Delta reversed much of the prior changes to Skymiles as it also instituted a simpler, more egalitarian fare structure. Essentially, first-class passengers get 150% as many points toward upgrades and other perks as customers paying the lowest fares now, vs. 400% before.

The recent changes simplify the program and cut costs as part of "Delta's corporate transformation to improve the overall customer experience and address the majority of our customers' biggest concerns," said Jeff Robertson, the new managing director of Skymiles, in a statement. "We will continue to provide richer benefits to high-revenue customers while making our program more attainable for customers who purchase lower fares."

But Mr. Seidenman no longer cares. Once an activist in SaveSkymiles.com, he's now a Northwest frequent flyer with full perks. "Delta made me open my eyes and see that there was an equal or better product out there," he said.

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