Introduction to the Loyalty Industry
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. 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. 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. In the UK 85% 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. 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 everincreasing number of sales channels the need to provide a single customer view has become paramount, which 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 business-to-consumer where the sheer numbers of customers and channels creates different challenges.
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NEEDS Know who your customers are, where they live and what they look like
SOURCES • • • • • • • • • • • • • • • • • • • • • • • • • • Data capture & cleansing Lifestyle & attitudinal databases Classification systems Focus groups 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 Direct marketing Mailing Internet Call centres WAP Campaigning Advertising Media
Identify them at the point of purchase and communication channel 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
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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Knowing the customer
It is not possible to run a loyalty programme without knowing who the customers are; nonpersonalised 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. 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 (e.g. 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.
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.
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Loyalty Scheme Components
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 one trap fallen into by earlier schemes. 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 often 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 Nectar) provide some degree of collaboration between non-competing organizations. There has also been an explosion of these on the Internet with the likes of MyPoints.
Understanding the Customer
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 have 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.
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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. 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.
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