Card Rewards Make a Point With Small-Business Owners

  In recent years, point programs have become a necessary cost of entry for issuers marketing payment cards to small businesses. With the programs now common, the challenge for issuers is to differentiate their loyalty programs yet still turn a profit.
  When traditional point programs associated with commercial cards came into full force, the easiest value proposition an issuer could use against a competitor focused on the speed with which businesses could earn points for purchases. And this worked well for the early adopters, says David Peak, account manager with Carlson Marketing Group, a Minneapolis-based international marketing consultant.
  Indeed, Visa USA's research long has shown that card products linked to rewards programs have higher commitment levels and generate more spending on average than do cards offering no loyalty benefits. But with the card associations, their card-issuing members and some business-to-business service providers all trying to slip plastic into small-business owners' wallets, points increasingly are proving to be only part of the overall equation.
  "You've got to offer more to stand out from your competitors," says Steve Georgeou, president of Geocom Inc., a New York-based marketing and loyalty consultancy. "Differentiation is important in a very competitive market."
  Creating a loyalty program specific to a business or a business segment builds the relationship, leading to greater spend on the card, says Peak. "Value-adds are the means to driving authentic loyalty," he says.
  Acknowledging this need, some leading issuers and forward-thinking retailers are creating programs that combine card points with special deals with appropriate merchants. Further, these leaders are applying what they have learned from consumer card target marketing to small-business owner cardholders. This approach, referred to as recognition, appears to be gaining traction as a loyalty builder.
  The business card market is worth the expense of adding rewards, Visa's research shows. The San Francisco-based association estimates the business-to-business market will total $16.2 trillion this year.
  Card penetration has grown, though slowly. In 2003, cards accounted for 2.3% of BtoB spend, up from 0.3% in 1992, according to Visa's Commercial Consumption Expenditure Index. Visa includes spending on MasterCard, American Express and its own cards in its estimates. MasterCard and AmEx do not break out business spending on their cards.
  Sales volume on Visa's commercial cards, for both small and large businesses, was $126.5 billion for the four quarters ended June 30.
  In response to this potential, Visa, MasterCard International, their members that issue business cards and American Express Co. have added softer benefits-those that do not cost the issuer hard dollars-to their rewards programs. Allying with merchants that serve the small-business space, for instance, gives issuers new customer segmentation, measurement and modeling opportunities along with a connection to their partners' customer databases. At the same time, cardholders receive promotional and experiential benefits that help them run their businesses.
  Visa offers its business card issuers access to Visa Business Partner Advantage merchants, which include Cingular, Bally's Total Fitness, Forbes and Franklin Covey. Visa followed up the partner-provided cardholder discounts with Visa Information Source Select, a financial-reporting tool that helps improve business performance, control expenses and ensure tax compliance.
  "Small businesses tell us they want to use the latest technologies and products to realize efficiencies just as large corporations do," says Raghav Lal, Visa senior vice president for small business. "With today's technology, there is no reason why small businesses can't have access to the same type of time- and money-saving solutions as larger organizations.
  These benefits help to differentiate business rewards programs, Peak says. "While you can't put a dollar value on some of the benefits that can be created, the customer can see the emotional benefit that can be derived," he says. "The more emotional benefits are used to build the relationship and turn the customer into a brand advocate and move the relationship."
  Visa's Lal agrees. "Not only are our member financial institutions seeing greater and more fruitful relationships with their business clients," but transaction volume is building, too, he says. "When you look at the volume of business card transactions that run over the VisaNet switch each year, it's easy to see that business owners recognize the value of these cards."
  MasterCard also provides its member banks targeted and segmented reward programs they can offer to their small business customers, says Bruno Perreault, the Purchase, N.Y.-based card organization's senior vice president of global small and medium-size enterprises for corporate payment solutions.
  "We're working through our issuers to design the most relevant solution for each segment of the small-business marketplace," he says. "Through customer research and analysis, we find that at different stages of the business life cycle, small-business owners utilize different benefits."
  For instance, startups are likely to use extended-warranty and purchase protection when they are setting up their offices, Perreault notes. The professional-services segment and small-business travelers use MasterCard-coordinated benefits such as airline-club access and lost-luggage insurance.
  "We perform analyses of the industry segments where cardholders spend, and more importantly, where they want to spend," he says. "Then we align with the top vendors in each industry."
  Issuers then can supplement and enhance MasterCard's Offers for Business program to reach the microsegments they target.
  MasterCard business card issuer Advanta Corp. built a proprietary partner group to supplement Offers for Business and uses it to market these benefits. On any given day, cardholders can visit the Advanta Web site to view deals for discounted office equipment, low-cost business printing, and other products and services.
  Horsham, Pa.-based Advanta credits the marketing program as one reason for its growth to 823,000 customers at the end of June from 778,000 last December. Advanta's sales volume rose 18.6% in 2004, to $8.3 billion, and is on track to surpass $9 billion this year, according to Advanta reports.
  More Revenue
  Chris Curran, Advanta vice president of investor relations, says the issuer partners with companies that offer the products and services that small businesses need. "These relationships supplement our traditional business card offerings, which include cash back and rewards," he says.
  Because of the growth in its portfolio-receivables increased 10% in 2004 to total $3.3 billion-and increased transaction volume, income from interchange fees has been growing, Curran says. The BtoB card reward programs are generating revenue growth that adds to the slower increase in balance-transfer fees, says Curran.
  Effective loyalty programs must incorporate customer recognition with the points and partner discounts, Geocom's Georgeou says. "Recognition is really the next step in the evolution of loyalty," he says, adding that most BtoB cards have not incorporated the personal approach to their programs.
  CompUSA, the Dallas-based retailer of computers and business equipment, is taking Georgeou's argument to heart, applying the airlines' customer-centric approach to its new proprietary, non-payment CompUSA Network for Business card.
  CompUSA serves an important BtoB subset, the small office/home office, or SOHO, marketplace. Alliance Data Systems Inc., a Dallas-based provider of loyalty and merchant card programs, reports that the SOHO market covers 40 million businesses with technology buying exceeding $70 billion annually.
  CompUSA teamed with Alliance Data to create Network for Business, a rewards program for its small-business customers that offers such services as a free annual computer tune up and free online shipping along with MemberConnect preference tracking. MemberConnect keeps records of member purchases, identifying the technologies in place in their particular offices.
  No longer will buyers wander the aisles of CompUSA for printer supplies, cursing themselves for not making note of the brand and model of the hardware they have in place. At least, that's what CompUSA says.
  The CompUSA program includes a members-only toll-free phone number and a Web site with customized purchase suggestions, based on observed needs. Members also are privy to exclusive sales and shopping events that let them get in stores, get the things they need and get out. And when new technology hits the market, members will have first dibs on the products, according to CompUSA.
  The retailer is playing up its existing general services to the Network for Business customers: the usual in-store service reps and technology experts are supplemented by a network of 20,000 independent technologists that make house calls to customer offices.
  Growing Room
  "We want to make CompUSA the ideal one-stop shop for SOHOs, their first stop," says Mark Anderson, director of customer loyalty. "This is a way to answer competitors' offerings but to go one step farther in business benefits."
  CompUSA plans to add more benefits, reward partners and tiered programs in response to feedback from its small-business cardholders, says Anderson. "In one way this is a me-too points program," he says. "But it's more than a me-too because of the service benefits."
  The small-business card market still has growing room. Issuers that want to join should provide current point programs as a foundation for their offerings. Those that want to lead should consider targeted recognition and advanced reward programs that give VIP treatment to their small-business customers.
  News Flash
  Although cash rewards are popular with cardholders and some issuers, issuers will not be able to sustain them because of technological changes that will reduce the interchange revenue used to support such programs, F. Alan Schultheis, director of Edgar, Dunn & Co.'s New York office, predicted during a panel discussion at the recent Foreword Financial/Tower Group Bank Card Conference in Memphis. Schultheis gave examples of several new payment mechanisms that can circumvent cards, including biometrics and cellular telephones. With biometrics, customers enroll by having their fingerprints scanned and choosing a payment method to use in the future. Although biometric payments can be connected to credit cards, some merchants encourage customers to select payment methods that cost them less to accept than a credit card. This also can apply to payments made with cellular telephones. One of the cheaper alternatives is the use of the automated clearing house system in which the payment is directly withdrawn from the purchaser's account using bank-routing information from a personal check.
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