Building Customer Loyalty

One of the huge challenges of marketing telecom services in today's cut-throat market is building customer loyalty. How do you get them to stay with you when a competitor decides to slash prices?

Some CLECs try locking customers into long-term contracts - enforced loyalty in other words. A few have loyalty programs that typically involve nothing more than offering a small discount to customers who buy a bundled package with more than one product or service.

Cannect Communications, a reseller and soon-to-be-CLEC based in Toronto, Canada, thought longer and harder about customer loyalty and ended up implementing an innovative and, so far as we know, unique loyalty program. Cannect customers earn eMagic points by signing-up in the first place, upgrading to take additional services, and referring new customers, and collect points with every $10 that they spend.

Customers can redeem eMagic points for rewards that range from book and music store gift certificates, to subscriptions to industry journals, to outdoor "adventures" for as many as 20 people. Examples of the adventures include a full day of parachute training at a sky diving school, kayaking expeditions on Canada's Pacific coast and rock climbing trips.

"The idea," says Dean Pacey, Cannect's vice president of marketing and strategic planning, "is that customers will collect eMagic points over time, then once they redeem them the first time, they'll go, 'Oh, yeah, now I understand what the rewards program is about' - and it becomes an ingrained part of how they do business with us."

Apparently it works. Since Cannect introduced the eMagic program in September 1999, the customer churn rate has been well below two per cent. Pacey estimates industry averages at between two and four per cent. The company receives 100 eMagic redemption requests per month on average - with a high of 350 in December 1999. An estimated two to three percent of the customer base is redeeming points each month.

The loyalty program is a key part of Cannect's marketing strategy. While most CLECs think offering small and medium-size customers discounted service bundles is the way to go, Cannect believes customers are too wary of making such big commitments all at once.

Its approach is to start small, persuading the customer to try one or two services, a fax line or a T-1 connection, for example. It hopes to earn trust over time - and ultimately the rest of the customer's business.

Cannect sees the loyalty program serving three strategic purposes. It provides an incentive for the decision-maker to take a risk on moving from an ILEC to an "upstart" like Cannect in the first place. On an ongoing basis, the program helps make decision-makers office heroes. Most important, though, eMagic reduces churn.

"We want it so that when a competitor walks in with a price-only proposition, the customer is going to remember he's doing a sales incentive trip with one of our adventures or getting a useful magazine subscription," Pacey explains. "When that happens, it becomes highly unlikely that they'll leave us for an insignificant price difference."

When Cannect decided a rewards program was the way to go, it started by researching what other telecom companies were doing. The answer turned out to be, not much. So the company modeled its program on airline frequent flyer plans.

To help figure out what kinds of rewards to offer, it did some demographic analysis. The decision makers in its small to medium-size enterprise (SME) customers - typically the office manager or an entrepreneurial owner - tended to be in the 35-to-40 demographic. That meant a bent for outdoors activities and lifestyles. The adventures idea fell out of that research.

Cannect pays rack rate for some of the rewards - including the adventures - but gets discounts on others where vendors see eMagic as an advertising and promotions opportunity for their products.

There are additional costs involved too. Cannect spent $40,000 developing software to automate the administration of the program and keep the online rewards catalog updated.

The company employs a full-time loyalty program manager. She helps source new rewards - new items are added all the time - and supervise the redemption and notification processes. A part-time admin assistant helps send out the eMagic accounts letters each month - they're separate from the main Cannect statement and go directly to the decision maker. Co-op college students round out the program staff.

So why not take those funds and apply them instead to reducing service prices? Cannect doesn't see it in those terms. The company knows it has to be competitive on price anyway - although it would prefer to avoid price wars. The loyalty program has an entirely different objective.

"The way we look at it," Pacey explains, "this is what it costs to reduce churn. And we think the loyalty program is absolutely the most cost effective way to keep churn rates down."

Keeping churn rates down may in fact be the most important marketing objective of all for a CLEC. As Pacey says, "There is nothing more expensive than acquiring a new customer. And nothing cheaper than maintaining a good customer.