INTRODUCTION TO THE LOYALTY INDUSTRY Chris Jacobs, Business Assyst Limited www.businessassyst.com
Who said, “Money Can’t Buy You Love”? A useful metaphor, though, to help understand the true concept behind customer loyalty. Loyalty programmes are about developing sustainable, mutually beneficial relationships. Price incentives can generate a short-term sales uplift but will not engender long-term loyalty. Customer loyalty has long been recognized as essential, whereas (electronic) customer loyalty systems are still relatively young. The man in the corner shop has practiced the art all his life; the electronic version was invented to overcome the limitations of the human brain to remember more than a few hundred customers personally. “Stock ‘em High sell ‘em Cheap”, whether they be groceries, airline seats, hotel beds, electricity units, or whatever, works as long as your competitor doesn’t “sell ‘em cheaper”. And it only works for a certain segment of the market; the segment that is, by definition, least profitable and most promiscuous. Most organisations eventually discover the benefit of focusing on the more profitable customers and the ones they can more easily keep. British Airways has come full circle recently. After following a successful strategy of providing a superior service and focusing on the business traveller where the margins are high, it was distracted into attacking the low end of the market by setting up GO to compete in the cut price fares market. After pouring millions into fending off the likes of EasyJet, it found its margins in decline and its image tainted. It’s now gone back to its old roots and once again focusing on the business sector. As the utilities sector deregulated it became increasingly easy as a consumer to buy services from a number of different suppliers, most of whom sought to gain share with ever lower and lower prices. Many of these suppliers made quick wins, but equally quick losses as competitors adopted the same ‘price as the carrot’ strategy. How easy it is to attract disloyal customers who by their very nature defect very easily, but how difficult it is to sustain revenue growth against a background of a volatile customer base and decreasing margins. The high street banks pay great attention to acquisition and, until recently didn’t need to worry about retention. Never ones to miss a money-generating trick, they work hard to attract teenagers to open an account, and will offer all sorts of incentives to do so. Not surprisingly this yielded very little in the early years but it certainly paid off, more than handsomely, over the following forty or so years! This is not so easy any more as the choices are so wide, and the inducements to switch never greater. They now have to concentrate on after sales service and work hard at retention as well. M&S now realize that loyal customers can’t be taken for granted. Having established a unique position with a very loyal band of followers, which it exploited by pushing up prices (and hence margins), ignored what they wanted and we all know what happened next. Follow the logic through, allow for the odd ‘knee-jerk’ reaction by the likes of Safeway, who stopped its ABC scheme to cut costs as a quick fix to declining sales, and most companies will eventually conclude that customer focus delivers in the long term. Hence, the value of the Customer Loyalty Industry. The customer now has even more choice, even more buying channels, even more offers and promotions and incentives. Customer loyalty has never been more important. The industry has matured. It started with Green Shield stamps many years ago, moved to electronic points in the early 90’s, and is now about collecting information, and, more importantly, using it. In the UK 75% of the adult population are members of a loyalty scheme. The benefits can be huge with some organisations claiming sales uplifts of up to 30%. Members of loyalty schemes, on average, spend four times that of non-members. These are the customers most likely to join in the first place, of course, but a scheme enables them to be identified, and then cherished. The biggest gains come from retention where a small increase can double the lifetime value of the customer base.
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The focus has changed from being promotion driven to being marketing driven. The objective is now to establish that all-important one-to-one relationship with the customer. With an ever-increasing number of sales channels the need to provide a single customer view has become paramount, which has resulted in the birth of CRM (customer relationship management). Easy to implement in business-to-business where contact management is not new, but not so in businessto-consumer where the sheer numbers of customers and channels creates different challenges. More about these issues later. The loyalty industry has grown rapidly with the annual investment in IT now over £1 billion in the UK alone. The suppliers in the industry are many and varied. Some have specialized in delivering a single element, a small number provide a total, end-to-end solution. These components arise from a variety of needs:
NEEDS
SOURCES
Know who your customers are, where they live and Data capture & cleansing what they look like Lifestyle & attitudinal databases Classification systems Focus groups Identify them at the point of purchase and communication channel Cards PIN Internet user name EPoS Loyalty terminals Head-office systems Kiosks E-commerce Points for prizes Vouchers Reward currencies Gift fulfilment Data mining and analysis Profiling & segmentation
Track their behaviour, purchasing habits and susceptibility to change
Reward them for their cooperation and loyalty
Understanding them better and what their needs and interest are
Communicate with them on a personal level
Direct marketing Mailing Internet Call centres WAP Campaigning Advertising
Market to them effectively
At the heart of the operation is the customer database, a central repository of information relating to the customer. This provides: Membership database to hold personal details of the members Transaction database to control and manage the loyalty programme from an operational point of view Data warehouse which can be ‘mined’ to gain a deep understanding of the customer Marketing database from which to communicate with the members
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Purchasing Transaction s
Membership Registration s
Lifestyle & Attitudinal Data
Response Data
Consumer Classification s
CUSTOMER DATABASE
Personalized Cards Data Analysis & Mining
Reward Programme Mailing & Fulfilment Direct Marketing
Marketing Campaigns
Knowing the customer It is not possible to run a loyalty programme without knowing who the customers are; non-personalised schemes are discount offers in disguise. In addition, it is difficult to design an effective programme without some understanding of the existing customers. The dichotomy is that one of the purposes of a scheme is to gain an understanding of the customers. Some qualitative research may be needed first to segment the customers and isolate where the potential benefits are most likely to be achieved. A pilot programme is usual to test the assumptions before committing to a costly rollout. Basic customer profiling can be determined from personal details, which, if not already available, can be captured from the registration form. The information would include name, address, age, sex etc. Given a name and address, geodemographic, lifestyle and attitudinal data can be accessed from a number of available third party sources. Although classifications, using standard codes such as Mosaic, Acorn and TGI, are very useful, actual customer purchasing data is the eventual aim. Purchasing data is more powerful because it represents the customers’ actual buying patterns not what they are predicted to buy according to where they live or what they claim to be interested in. Identifying the customer A key component of a customer loyalty scheme has been the plastic card; in fact many refer to them as loyalty card schemes, and the phrase smart card has almost become a generic term for electronic points collection schemes. The card is important, of course, but only necessary if there is no other way of identifying the customer at the point of purchase. In many cases customers have to identify themselves in order to transact with suppliers, for example: financial services, airlines, utilities, home deliveries, leisure clubs, and when dealing on the Internet. Many organisations issue a card when it isn’t necessary; many have to issue a card (eg bricks and mortar’ retailers) because there is no other convenient way of identifying the purchaser. Whatever the reason loyalty cards are big business with over 70 million issued in the UK alone. There is an endless debate as to whether these should be magnetic stripe cards or smart cards and whether they should hold the balance or not. Other forms of cards have also being used, including paper, bar coded and visual. In fact, if we all had good memories perhaps our National Insurance number would be ideal since it is unique. 3
Tracking customer behaviour The key aspect of a customer loyalty system is to track the customer’s actual behaviour rather than claimed or predicted behaviour. Purchasing behaviour includes spend, frequency and the contents of shopping baskets. Response history tells us which promotions are of interest, what turns them on, what makes them spend more, visit more often etc. In many cases the technology is already in place to collect transaction data through EPoS systems, reservation systems, central systems and so on. However, in many cases it isn’t, which has resulted in the growth of the specialist loyalty terminal. The type of card used, magnetic stripe read only, magnetic stripe read/write, smart card and so on, dictates the features of the terminal. This captured data is transferred to the central customer database. The database holds a complete history of activity, by customer, and is used for managing the operational aspects of the scheme such as statementing, member queries, redemption etc. Rewards and Incentives The purpose of the reward is to encourage the customer to identify him/herself at the point of sale and to part with personal information. Its purpose is not to engender loyalty, which is the trap fallen into by the earlier schemes, and the trap some of the dot.coms are about to fall into as they desperately strive to gain a critical mass of customers. It can be used tactically for specific promotions and it can be used to measure change in behaviour, but will not have a major effect on retention. This is the reason why consumer surveys conclude that loyalty points don’t affect where people shop, and are not useful indicators. The other trap is not actively encouraging redemption, in order to save costs. The customer needs to see a value and will only do so if they experience a tangible benefit. Rewards and incentives are big business and are the single biggest cost area of a loyalty scheme. They come in many different shapes and sizes and, to be effective, need to be tailored to the interests and needs of the customers in the segments targeted by the scheme. They can be ‘soft’ or ‘hard’, and tiered to promote elitism amongst the ‘best’ customers. Reward currencies (such as Air Miles, Premier Points) provide some degree of collaboration between non-competing organizations. There has been explosion of these on the Internet with the likes of Beenz, MyPoints, iPoints, WebRewards etc. Understanding the Customer As Abraham Lincoln once said “The possession of facts is knowledge, the use of them is wisdom”. The vast volume of data produced by these schemes has deterred many organisations from even attempting to use it, even if they knew how. However, improvements in, and the reduction in the costs of, hardware and data mining software has put this technology within reach. Its use is in getting to know the customers better so that their needs can be better served and strategies can be devised to attract and keep the most profitable. Segmentation provides a way of understanding the different types of customers, what they want, how they behave and respond to particular promotions and campaigns. The costs of marketing, and the returns, will vary enormously by segment, therefore it is possible to measure the return on investment by segment, and adjust the marketing spend accordingly. Marketing Campaigns The effectiveness of direct marketing campaigns can be measured more accurately by tracking the actual purchasing activity by segment from the information stored in the database. The effectiveness of above-the-line marketing can also be measured in the same way. This opens up the possibility of targeting different market initiatives at only those segments most likely to respond. For example a television campaign might show different response rates by region, in which case there may be no point in running the advertisement nationally. By accurately measuring effectiveness, new and better campaigns can be devised to improve the success rate. Testing promotions or new products in a similar way can also benefit the supply chain by providing a means of estimating the likely take-up nationally.
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Interest in customer loyalty has never been more avid. After a number of years when such schemes always seemed to be on the brink of taking off - but never quite managed to reach expectations - the last few years has seen a real and dramatic increase in their uptake. This has come with the acceptance that knowing about your customers is even more vital in an increasingly competitive world. Putting aside the superficial reasons for installing a loyalty programme, such as everyone else in the same sector appears to be ‘doing something’, or fear that the main competitor might steal a march by implementing a customer-focused strategy, the key consideration is whether such expenditure can be cost justified. Will it measurably help to build long term profitable relationships with customers? Can the investment required in a sophisticated customer loyalty system be justified on the basis of anticipated increased profits? The potential benefits are many and varied: increased turnover and profit higher customer retention increased frequency of visits cross-selling opportunities long term relationships improved product awareness reduction in the need for mark-downs improved effectiveness of direct marketing developing advocacy However, a loyalty scheme will not work if there isn’t an attractive, sustainable proposition in the first place. It most certainly cannot be used to try and disguise a bad product or poor level of service. It costs a lot less to retain than recruit. Loyalty is strategic and about the long-term retention of the organisations’ most valuable asset – its CUSTOMERS.
Contact Details Chris Jacobs Business Assyst Limited 11 Southern Haye Hartley Wintney Hampshire RG27 8TZ United Kingdom Telephone: 0845 838 7592 (UK only) Outside UK +44 (0) 1252 843543 Mobile: +44 (0) 7799 606064 Email: Chris.Jacobs@businessassyst.com
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