Loyalty HAS ITS REWARDS.

Incentives in the form of merchandise, travel awards and cash are an effective way to keep your customers coming back.

Strong customer loyalty is important to a bank's health. Research has shown what we know instinctively--that building lasting customer relationships translates directly to bottom line profitability. Conversely, losing customers leads to loss of employees and investors--and lower earnings and stock prices.

In the past, most banks built their customer relationships on the foundation of face-to-face meetings. Today, thanks to technology advances, customers can communicate and do business with banks without ever setting foot in a branch. With the recent phenomenon of frequent bank mergers, many customer have been left confused, their traditional sense of loyalty under strain.

One way that banks can build trust and loyalty with their customers is by implementing loyalty and performance management programs. Through such programs, financial institutions can increase sales while continuing to build customer loyalty. Loyalty programs allow banks to reward their customers with a promotion currency for successfully accomplishing certain goals, actions and transactions. Rewards can include such things as merchandise, travel and cash.

Travel is a motivator

Travel and merchandise are effective motivators that have lasting, high perceived value to award recipients and are effective marketing tools for program providers. Everyday customers are rewarded with incentives such as cruises, trips, cars and even unique items such as grand pianos. By simply awarding incentives for volume increase and quality service, banks can stimulate loyalty.

Prior to offering an incentive program, a bank needs to determine which incentive package fits best with the target audience and the budget. The bank should work with its incentive-program consultant-vendor to develop direct-mail programs, statement stuffers and bank signage informing bank customers of the offer. Often, the bank will set a loan amount for a certain type of loan (such as mortgage, second mortgage, car loan) and offer the incentive based on the consumer taking out that loan within a specified time period (usually 90 to 120 days).

Vacation trips, particularly three- and four-day vacation packages, are popular incentives for banks to offer. The advantage of a travel incentive is the scope of resorts from which customers can choose from and the flexibility of scheduling travel within a 12-month time limit. Banks should ensure that details of the travel incentives are communicated clearly so that customer expectations of the travel are not higher than the actual experience that is delivered.

Banks also need to ensure that the chosen incentive program offers a real opportunity for the recipient to achieve the reward. Programs must be attainable. You cannot, for example, offer a three-day trip to customers and require that they take out a $75,000 second mortgage.

Banks may choose to develop an incentive program independently, but most financial institution work with a consulting vendor. Such vendors are often called in during the "idea" stage and can help the bank to structure, launch and communicate the incentive program to customers.

Some case studies

Here are some examples of some actual bank incentive programs.

A bank in the Northeast with $10 billion in assets wanted to increase the volume of new- and used-car and boat loans by 30 percent. Customers received a vacation with any new loan. The bank promoted its program through newspaper advertising, radio, fliers, customer banners and in-branch videos. Originally slated for 45 days, the program, due to its success, was extended to 90 days. As a result, 6,400 vacations were awarded, and some branches experienced up to a 60 percent increase in new-vehicle loans. In comparison to the same period in the prior year, the bank achieved a 40 percent increase in approved vehicle loans.

Another example: A bank with $1.2 billion in assets in the Midwestern region set a goal of increasing direct installment loans and home-equity lines of credit (HELOC). The theme of its program was "Get A Loan... Take A Vacation On Us!" Customers received a vacation with any qualifying loan of $10,000 or more. A few requirements for the program included a 12-month term and new loan money. First mortgage or commercial loans were excluded and home-equity lines of credit had to be funded for a minimum of $10,000 within 90 days of closing. The promotion was originally scheduled to run for eight weeks but due its success it was extended another eight weeks. In its second year running, the program continued for 12 weeks. As a result, overall loan volume increased 100 percent, HELOC activity increased 150 percent, the average loan dollar amount grew by 51 percent and more than 3,000 vacations were awarded!

Points programs are another tried and true method for encouraging loyalty among customers. A large Southeastern bank developed a program focused on building long-term loyalty and frequency of the finance and insurance specialists. Previously, this bank issued $10 store gift certificates for every loan received. However, the bank returned to previous levels when the promotion period ended. A points-for-travel package provided it with a results-oriented, long-term program opportunity.

The program called for the bank to set monthly quotas for each dealership, such as a total portfolio increase of 10 percent. When the monthly quota was achieved, the reward points would be paid retroactively. The basis of the program equaled 500 miles per loan.

As an added incentive, bonus miles were also awarded. For example, each dealer received 10,000 bonus miles for its first lease and 500 bonus miles for selling total loss protection or "gap" insurance. The insurance was underwritten by a particular insurance company, which also paid for the miles expense. Specialists also received 5,000 bonus miles for selling a new balloon-loan product. The points were allotted to various items, and those points were "cashed in" by the dealers for merchandise, trips and other rewards.

The points program provided the sales force with a new tool that resulted in very positive response from F&I specialists. Sales soared from $24 million in sales per month prior to the program to $90 million in monthly sales by the end of the second year of the program. The dealers sold 231 "gap" policies, up from 84 prior to the beginning of the program, resulting in a whopping 275 percent increase in volume. Once word got out, loans started coming in from dealers who had not conducted business with the bank in three years. The presence of these 10 dealers brought an additional 14 million miles to be awarded. The senior vice president of indirect lending attributed 80 percent of the increase to the points program.

Loyalty and the bottom line

As customer relationships thrive over the long haul, so do a company's revenues. There is no doubt that market performances are greatly affected by loyalty--or the lack of it--among customers and employees. Consider this important financial fact: It costs less than a tenth as much to keep a good customer relationship as it does to acquire even a mediocre new one. The result of retaining customers is mind-boggling. Increasing customer retention by just 5 percent increases profits by 25 to 95 percent!

Loyalty programs work best when tied to an overall corporate value system. In a world where relationships can be initiated and terminated with a simple dick of a mouse, finding ways to slow down the chum and retain the right type of customers creates winners. It builds unassailable franchises, loyal customers and in the long run, business success. Banking organizations that build solid, step-by-step processes to define, attract, service and continually delight loyal customers will be successful in this or any age.

Mylle Mangum is chief executive officer of MMS Incentives, an Atlanta-based company that creates loyalty programs to enable companies to build personal, loyal and client-centric partnerships.