Now’s the time for ISOs and agents to convince mom-and-pop merchants to adopt loyalty schemes, experts say.

“We’re really at an inflection point in the market where those things are starting to turn in favor of small businesses,” said Lou Honick, CEO of Host Merchant Services, an ISO based in Newark, Del. “Right now, in the ISO space, loyalty is where the opportunity is to acquire new customers.”

While loyalty programs have proliferated at large and multi-location retailers, only a few small chains and single-location merchants are successfully using them in a way that exceeds simple punch cards, Honick said. He cited the programs’ costs, complexity and technological requirements as challenges, but he views those obstacles as subsiding.

That’s why Host Merchant Services is developing a system that will enable its merchants to manage their loyalty programs through their point of sale devices. The company’s building the system not just to reward customers but also to gather customer data that can increase revenue, he noted.

“Even if you can make a very small difference in merchants’ business, it can be dramatic, especially in an industry where frequently your value proposition is, ‘I can save you 30 basis points,’ ” Honick said.

ISOs that increase merchants’ gross sales by just 1% to 2% stand out in a crowded marketplace, he maintained.

Data generated from loyalty programs can provide insight into customer behavior that can drive those increases. For example, one of Host Merchant Services’ restaurant clients tracks when and how often loyalty program members visit. If a customer regularly dines on Friday evenings but suddenly stops, the restaurant sends an offer by email and tracks the customer’s response.

However, many merchants fail to reach that level of targeted efficiency, in part because they fail to realize that loyalty programs require consistent effort, says Donna Embry, senior vice president, strategic development, for Payment Alliance International, an ISO based in Louisville, Ky. That, in turn, makes programs appear less effective and less attractive to smaller merchants.

The programs don’t require merchants to do too much, Embry added. “They just require them to do something. And in many cases, it’s not their core competency. They don’t think about it.”

To succeed with loyalty programs, merchants should first shift their mindset: it’s best if they think of loyalty programs as a type of advertising, which is something they do nearly every day, Embry said. It’s simply advertising that is especially efficient at targeting customers.

For example, a convenience store owner may place an ad in the newspaper or issue a coupon for a discount on a two-liter bottle of soda with a $10 purchase, an offer that may draw new customers who are unlikely to return. The store may be better off giving the discount to regular customers instead, she said.

“They’ll see the benefit if they can keep repeat customers and it’s more loyalty as opposed to couponing,” she said. “These are some of the same retailers who probably pay small fortunes for advertising.”

The next step is to promote the programs, said Scott Anderson, CEO of OMEGA Processing Solutions, an ISO based in Fort Thomas, Ky., and ISOs can help with that task. OMEGA works with its merchants to develop customer mailings and suggests merchants hand out gift cards at local events.

“Sprinkle the things like fairy dust,” Anderson said. “Put a small value on the cards and put them out there in the hands of customers. The cards never have an opportunity to come in if they’re all sitting in your desk.”

When redeemed, the merchant converts the gift card to a loyalty card and can credit the customer for the product or service purchased that day.

OMEGA’s marketing department sends reminders to its merchants with suggestions for promotions, which Anderson says reinforces the value of the program and gives merchants an opportunity to ask for suggestions on how to run their programs. Anderson also advocates reminding merchants they have customers who qualify for rewards. For an automotive service shop client, OMEGA may suggest calling customers who have earned a free tire rotation and suggesting they come in for an oil change at the same time.

OMEGA doesn’t view gift and loyalty programs as revenue streams, Anderson said. Instead, the ISO charges clients at or below cost for the programs, and it packages them with other services to acquire the merchants’ bankcard business. The biggest benefit OMEGA has enjoyed from the offerings is reduced attrition.

“Merchants see value in the new traffic, and they see savings, in part because we keep the cost way down on the gift and loyalty program,” Anderson said.

ISOs that review merchants’ reports and remind them of their results are more likely to reduce attrition, said Tessa Burg, vice president, product and program management for Cleveland-based SparkBase Inc., a provider of loyalty and gift card software.

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