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Issue Date: Vol. 49, No.3, March 2009, Posted On: 3/15/2009


CUSTOMER RETENTION 101: Offering Added Value, Imaginative Services Can Increase Profit


by Allan Z. Gilbert
Allan Gilbert, vending, vending business, vending route, vending machine, automatic retailing, office coffee service, OCS, foodservice, coin-op, coin machine, vending news, small business, business trends, service economy

In the October 2006 issue of Vending Times I wrote an article entitled "Customer Retention 101" that outlined a program for convincing your locations not to jump ship. Unfortunately, difficult economic times bring out the worst in our competitors. Therefore, this might be a good time to revisit the topic, and maybe to come up with some new approaches. Without rehashing the first article, let's review the basics. Quality products, legendary service and fair pricing are the primary building blocks in any customer loyalty program. If you can't deliver these basics, don't waste time developing an elaborate retention program; first work on those basics. If the basics are not in place, a good retention program may slow the rate of customer attrition, but you will still lose clients over time.

With regard to legendary service, think about how Nordstrom department store grew from a single store in the northwest to a national chain so quickly. Their employees were taught to treat every customer like a visiting dignitary. And they offered services (e.g. free, same-day custom alterations or even free home delivery) that no other department store offered. Customers remember this kind of treatment and they keep coming back.

Or consider the experience offered by some high-end hotels. At the Lansborough Hotel in London, I recall being greeted, by name, by the chambermaid when I left the room. And at least two other hotel employees smiled and wished me "Good morning," as I made my way to the restaurant for breakfast before checking out. When I approached the restaurant hostess with my carry-on luggage, she also smiled, greeted me and offered to hold my luggage at the hostess desk so that I could comfortably enjoy my breakfast. Notice that she didn't offer to check the bag with the bell captain, which would have cost me another tip. Little things like this add up to satisfied customers.

The remainder of the 2006 article dealt with establishing open and regular communications with the client, through which positive ideas are exchanged. I compared this approach to the more typical vending norm under which we only meet with the client when there are problems to solve. I also suggested that it is better to relate to the client as a likeable professional than to attempt to be his friend. Finally, I discussed the role of appropriate client entertainment and gift-giving in customer retention, as well as the needs for better internal reporting and to quickly adopt proven new technology.

With all due modesty, it was an interesting article, and you may choose to re-read it as prologue to the additional initiatives discussed below.

The point of any customer loyalty program should be to retain clients so that the enterprise can remain profitable. In vending, OCS or contract foodservice, the primary target is obviously the location. If you lose the location, you lose all of the sales, and profits obviously suffer. So goal No. 1 for a loyalty program is to lock out the competition and retain the location. If at all possible, a secondary goal should be to design a creative program that actually increases your profits at the same time that it locks out the competition. I realize that this sounds impossible because loyalty programs cost money. However, I assure you that it can be done.

We are all familiar with airline frequent flier programs. Many people believe that it costs airlines a fortune to award customers free travel based upon the number of points they accumulate. The fact is the airlines only offer seats on flights that they cannot sell at retail, and it costs them nothing to allow you to fill the seat. The plane has to fly whether you are on board or not. They also have "blackout dates" for time periods when they are busy and can sell all of the seats that are available. Finally, when you book a travel award directly with the airline, you probably have noticed that the flights are offered at the least convenient travel times or with the most convoluted connections. However, it is free, so most people tend to consolidate their travel with one airline in order to earn the greatest number of points earned.

All right: Maybe it doesn't cost the airlines much money -- but how do they earn money with it?

Airlines are able to earn money on their loyalty programs because they cleverly convinced other entities, such as credit card companies and banks, to offer airline travel rewards as part of their loyalty programs, too. When you redeem Visa points for air travel, Visa in effect has to buy the seat from the airline. And the airlines are able to charge Visa more for those seats than they can get from their own customers at retail.

If the primary goal of a loyalty program is to "lock in" the location and "lock out" the competition, the best loyalty program for vending, OCS and contract foodservice companies has got to be an enforceable long-term contract. However, most locations are unwilling to sign one unless they feel they are getting something of value in return. Let's consider some options.


LEVERAGE YOUR BALANCE SHEET

If you have a strong balance sheet, you can offer to fund location commissions in advance. Back in the 1940s (and to some extent even today) it was common for cigarette, music and game operators to offer a loan to their bar and restaurant locations, with interest, to be repaid out of the commissions earned by the location. The location was required to sign a loan agreement and a long-term contract with the operator. Because the location typically needed the cash up front, the operator was able to negotiate lower commission rates, higher selling prices, or both. Under this type of agreement, the operator was able to lock in the location and earn higher profits while doing it. Good operators even earned money on their loan portfolio by charging the location an interest rate high enough to cover their own cost of borrowing, as well as the expense of any loan losses they incurred.

Advance commission/loan agreements are popular even today, particularly in concession or vending contracts with "nonprofit" venues such as orchestras or theatre companies. Organizations like this are always in need of money, and it can be a win/win for both parties. It may also have value for smaller startup public locations such as sports centers or health clubs. The typical B&I location, on the other hand, is not likely to be swayed by the offer of a loan or even a prepaid commission. However, with minor variations, you can create programs for them as well.

Instead of offering a loan to the location you could, for example, offer to build, remodel or re-equip the location's breakroom with new tables and chairs. B&I locations hate to use their own capital for projects like this because there is no measurable return on the investment for them. As part of a long-term operating contract, the operator would recover his capital investment by withholding commissions until the total cost of the project was amortized. Since you are not charging the location interest on your capital investment, you should calculate an interest charge at least equal to your cost of borrowing the money, and add it to the total cost of the project to be amortized. And the fact that you are willing to make this level of capital investment in the location should certainly be considered a bargaining chip when you are negotiating commission rates and selling prices. In this type of agreement, if the operator's contract is terminated for any reason, the location should be required to purchase any portion of the project cost that has not yet been repaid.

When I was a relatively young operator, I solicited the vending business at a meatpacking plant that employed 650 people, including approximately 100 who worked a second shift. Although they occupied a large building, they were using every square inch of the facility for production. There was no space for a breakroom. They had approximately a dozen candy and beverage vending machines scattered around the building, and they relied on four mobile catering trucks to feed their people for coffee breaks and lunch.

I offered to build a breakroom for them, in return for an exclusive no-commission 10-year contract, if they would agree to keep the mobile catering trucks off the property. They agreed.

I wound up building a no-frills 2,800-sq.ft., corrugated-steel building that abutted an exterior plant wall, through which we cut the entrance. We equipped it with an elaborate speedline offering hot and cold commissary-prepared sandwiches, salads and platters; freshly brewed coffee and tea; postmix cold drinks; and a full line of vending machines for the second shift. We also supplied tables and chairs. The location provided all utilities, trash removal and floor cleaning. We enjoyed a very profitable 15-year relationship with that client -- and the question of selling prices never came up.


LEVERAGE COMMISSION EXPENSES

Another approach to a loyalty program is to quote commissions two ways; we were willing to pay them in real dollars, or to pay a higher amount in what we called "Lemon Tree Dollars." Lemon Tree was the name we gave to our commissary-supported manual cafeterias. When we bid a new account, we would do a pro-forma analysis to make certain the location met our return on investment (ROI) requirements before quoting any vending commissions. Assuming we could afford to offer the location a normal vending commission of 5%, we might, for example, quote 5% in real dollars or 8% in Lemon Tree Dollars. Lemon Tree Dollars could only be spent buying products or services that we supplied. Needless to say, all the other services supplied were offered at full list price.

In our case, these other services included such things as office coffee/filtered water services; party platters for business meetings; full-function catering; Christmas parties; summer barbeques and authentic New England clam bakes.

The Lemon Tree Dollars also could be spent directly on the serving line. The client could, for example, periodically authorize a free coffee day for all of the employees. Because of the additional value offered, almost all of our clients chose to receive Lemon Tree Dollars. And our competitors couldn't understand how we could afford to pay such high vending commission rates.

Because we were offering what appeared to be much higher commission rates, we were booking more business than our competition, with long-term service contracts and advantageous terms. This enabled us to lock up the location, which was goal No. 1. And as the locations spent their Lemon Tree Dollars, we benefited from the additional profitable business, which satisfied goal No.2. In virtually every case where the client chose to receive Lemon Tree Dollars as vending commission payment, the account spent the full amount of that commission, usually many times over, each year.

It was a very simple program to administer. When we calculated monthly vending commissions, we simply posted a credit for the amount due to the location's receivable account, instead of cutting a check to the location. On the monthly client invoice for additional products or services, this credit was referred to as the Lemon Tree Dollar Credit. Each month they could see how much they were saving. It sure sounds like a win/win to me.


ALLAN Z. GILBERT founded New England Vending Corp. (Lowell, MA) in 1959, and led its expansion into a leading regional provider of full-line vending, coffee service and foodservice management. He founded Data Intelligence Systems Corp. (DISC), a computer software publisher and system integrator for vending, and Lemon Tree Systems Inc., which franchised a vending-and-cafeteria concept. He established Merrimac Financial Associates in 1984, and it made an initial public offering through the New York Stock Exchange in 1998. He became managing partner of The Merrimac Consulting Group in 1988.


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