Neiman’s Loyalty Lessons

There’s a new topic of conversation now in and around payments and that is about how to get and keep customers loyal. It’s become front and center for retailers, for sure, these days who are being attacked on all fronts by consumers who enter their stores with mobile phones that help them buy stuff cheaper at other places (all while standing right in front of their merchandise) and by belt-tightening consumers whose loyalty is to the best deal regardless of who offers it. And there are schemes galore popping up just about everywhere by any number of players who promise to deliver those “loyal customers” by integrating payment with loyalty schemes, offers and coupons tied to purchases and more.

But those schemes don’t amount to much if there’s uncertainty or confusion about just what a loyal customer is anyway. There’s no shortage of definitions though, often tied to metrics that measure frequency of visits to a retailer. But I think I heard the best ever definition of a loyal customer the other night at a dinner that I hosted with a small number of players in the payments space. That definition (and I quote) was “a customer who spends 40 percent of her disposable income with us – and ours do.”

Holy guacamole, that would certainly meet my criteria for a loyal customer if I were a retailer — wouldn’t it for you?

Now, any idea what retailer made that claim? It was Neiman Marcus. And, not only do they have loyal customers, they have managed to attract and keep their customers loyal and profitable, in spite of the current economic malaise.

Now, before you roll your eyes and say, “Oh, sure, but that’s Neiman Marcus and their customer is really different.” True enough. Their typical customer is different, but there’s a lot about how they create profitable customer loyalty that others can learn from.

First, a little history lesson. Neiman Marcus was the brainchild of Herbert Marcus, Carrie Marcus and Abraham Lincoln Neiman after they ix-nayed the idea of investing $25,000 into a Coca Cola franchise right around the turn of the 20th century. Their first store opened in 1907 in Dallas and it was quite a scene. It is reported that the merchandise in that store was different than anything ever seen in Texas. It was merchandise acquired by Carrie after a buying trip to New York. Within a few weeks, the inventory was completely gone. Neiman’s mark as an exclusive — and profitable — fashion purveyor was born.

Neiman’s has perpetuated its brand in that way over the years. Its legendary Christmas Catalogue was Stanley Marcus’ idea of taking the notion of extravagance to another entirely new level, sparked by a request from Edward R. Murrow who wanted something unique to offer his radio audience one year. That gift — a live Black Angus bull and sterling silver barqueue cart — was offered for $1,925 to his radio listeners. In 2012, a Limited Edition McLaren 12C Spider for $354,000, a personal jetpack for $99,000 and his-and-her matching watches and trip priced at $1.09 million were among the gifts to be exchanged among the rich and famous. At one point in the 1960s, Neiman Marcus Christmas catalogues were the item most stolen from recipient mailboxes.

But Neiman’s also recognized that its brand, and its customer base required an attention to personal service that went “above and beyond” for its well-heeled patrons. And it did that by embracing the concept of big data before it was, well, big. In 1961, it introduced what we know now to be “recommendations” by matching purchase history with store inventory to generate a top ten list of things to buy for Neiman’s customers (or to have others buy for them). And, when Astronaut Jim Lovell was circling the moon during the Apollo 8 mission during the Christmas of 1968, it was a Neiman’s driver in a Rolls Royce that delivered his wife her Neiman Marcus mink coat, all gift wrapped in paper the color of the blue earth! Moon commerce actually pre-dated eCommerce!

But, it’s Neiman’s loyalty program, InCircle, introduced in 1964 that is perhaps the real key to its customer loyalty — and the 40 percent disposable income reality.

InCircle has three components — points, tiers and redemptions. The more a Neiman’s customer spends on her Neiman Marcus or Bergdorf Goodman credit card, the more points she racks up — pretty much like every other credit card rewards program. But, it is the tiers that is the difference and creates the stickiness. The higher the annual spend at Neiman’s, the more points earned per dollar spent – which start at two per dollar and max out at five for those really big spenders. Certain days of the year, those points are worth double or triple their value — and those aren’t days when merchandise is on sale, but just when the value of the points racked up buying full price stuff is higher (which, of course, is just another form of discounting but one that is higher based on prior “volume” of spend). Customers plan mega shopping trips around these days, and sales associates, who are all commission based, scurry around to help customers hoard their favorite styles in their sizes so that the stash is well-edited and points are maximized. (She says with great authority based on personal experience.) To make the InCircle points flow even faster, sales associates across all Neiman Marcus stores now have iPhones and iPads. That helps them keep in touch with their customers via email and to even facilitate “online to offline” sales by emailing photos of items and charging them to their accounts on file for in store pick up later that just makes it easy to buy and to buy often! Then there’s redemption. Redemption is both encouraged and easy. InCircle members are sent prepaid cards with the value of their reward on them at the end of each year – cash back to the max – who view the money as “free” or applied to subsequent purchases throughout the year. Members can also redeem their points for merchandise too. In 2011, someone is said to have redeemed her five million points for a new car. (Even at 15 points for every dollar, that is still a lot of Louboutins — like $330k worth!!!).

But here’s the payoff: Neiman’s CEO said that in 2011, more than 100,000 customers who are enrolled in InCircle spent $1.3 billion and accounted for about 50 percent of its business — with both membership and average spending per participant growing. And, in that year, its profits increased nearly 30 percent (better than its competitors). Profits in FY 2012 increased more than 35 percent from 2011 levels.

I think there are a few important takeaways from this.

First, Neiman’s has created a brand that stands for exclusive merchandise because it knows that’s what its customers want. Ever since the doors opened in 1907, they sought to give its customers a selection that was not only different but also not widely available, limiting the greatest of all fashion faux pas — that fashionista A turns up at a party seeing fashionista B wearing the same thing. Neiman’s, to this day, doesn’t carry a lot of product (even less now post financial crisis), so once an item is gone, it’s gone for good. Its customers, generally speaking, don’t want to run that risk so they buy when they first see something. Scarcity equals sales at full price for them.

Second, it has sales. In fact, right now it is running its famous Last Call sale, which discounts what’s left from the Fall/Winter season at 75 percent. But there’s a difference. Neiman’s doesn’t use ongoing discounts or weekly or monthly sales to drive people into the store. Neiman’s famously, and even proudly, doesn’t do what’s known as “breaking sale” with the designers that it carries — so it never puts Donna Karen stuff on sale before Donna Karen’s retail stores do (its competitors are often criticized for that) which means that Neiman’s often gets better selections from designers who want to protect their brand too. That means that most of the time when consumers walk into Neiman’s, stuff isn’t on sale.

Now, Neiman’s isn’t immune to the purse string tightening of its clients. During the financial crisis of 2008 and even the last part of 2012 with concerns over he fiscal cliff and rising taxes, its customers, like everyone, stopped buying. It saw sales drop. In response, Neiman’s accelerated its sales dates (in 2008), tried new things (Target + Neiman’s in 2012) and shifted the InCircle double and triple points cycle to stimulate buying, but managed to keep its customers buying whatever merchandise it was buying, from them. So, its customers may not have bought as much then, but Neiman’s was still their first choice, even if the 40 percent of disposable income spent wasn’t as much as it was before.

Third, Neiman’s takes customer service seriously, and if their sales associates want to make a decent living, they better as well. So, sales associates are adept at letting customers know when new merchandise is arriving, putting things aside for those famous double and triple point days, and encouraging sales. The following emails and phone messages are not uncommon: “You know the navy jacket you bought a few weeks ago? Well, we just got in two really cute skirts that would look great with it — and one in your size. I’ll hold them both for you — when do you think you will be in?” Then, when the willpower fails and customers break down and go into the store, the savvy sales associates has the shoes, blouse and matching scarf ready in the dressing room, increasing the odds they walk out with all of it. Which, of course, they probably will, since they are racking up those InCircle points right and left! The combination of sales associates who build customer relationships with a loyalty program that actually delivers a meaningful reward is powerful.

Of course, not every business has a luxury client base, but the framework that Neiman’s uses to attract and retain profitable customers is both practical and replicable, I think.

• Scarcity. The less that there is of something, the more that people want and value it. Neiman’s has used scarcity as a substitute for discounting. Everyone can use the same tool to give consumers an incentive to buy and buy before what they want is gone for good.

 

• ROS. Neiman’s has introduced consumers to something I call the “return on spend” concept – the more cardholders spend, the more their points are worth. InCircle sets up the concept of a volume discount that gets steeper the more cardholders spend. And, the higher the ROS for consumers, the higher the profits for Neiman’s! It certainly has worked out much better than discounting as an inducement to bring customers into the store, which as we have seen sets up that retail Pavlovian experiment that when the discount is removed – customers stop coming.

 

• Service. Neiman’s makes a point of building a relationship with a customer. Not all (or even many) retailers have a long tenured sales associate team, but the combination of valuable information (The designer you love has a trunk show next week.) and service (I know you are busy so I will send you pictures of what I think you might like based on what you have purchased before so you can tell me what to put aside.) increases the odds that a customer will (a) buy, (b) buy at full price and (c) stay loyal. As long as sales associates anticipate customer needs and make it easy to buy, they will! Mobile technology can level the playing field for lots of retailers by putting the relevant information about customers in the hands, literally, of the sales associates who can use it to help increase sales and basket size – and build relationships (and data on customer preferences).

 

• Utility. Neiman’s going in proposition is that it wants 100 percent of its customers to redeem their rewards. And, they even up the ante by increasing the number of points per dollar spent based on total spend and offering double and triple points on full price merchandise several days a year. Of course, those dollars are redeemable only at Neiman’s, but what a nice way for consumers to get a good head start on building up their points for the next year – by spending those dollars on double and triple points day! Now who, other than the baby on the Capital One cash back commercial, doesn’t like cash back! And pegging discounts to past spending means that Neiman’s is in full control of calibrating just how much of a discount customers get.

 

There’s surely a lot more to talk about on this topic, but I think I’ll stop now. There’s an InCircle cash balance in my account burning a hole in my pocket and a triple points sale in process!

I’d love to hear how you think these concepts apply to stores other than Neiman’s.