Loyalty schemes – the show goes on?

Loyalty schemes have been written off in the past, yet there are now more loyalty iniatives in place than ever before. Nevertheless, doubts still linger. So, can loyalty schemes really create loyalty and incentivise additional purchasing or not?

By Andy Wood, GI Insight

Just after the turn of the millennium, many pundits started claiming that loyalty schemes might be falling out of fashion. Safeway cancelled its scheme, whilst Sainsbury decided to join a coalition scheme rather than run its own.

However, the gloomsters and doomsters were denied satisfaction. There are now more loyalty schemes in operation in all sectors (but especially retail) and number continues to grow. Research GI Insight commissioned last year found that the number of loyalty schemes in operation had actually doubled in a decade. So despite a crisis of confidence in the late 90s, loyalty schemes are back on the block.

Nevertheless doubts still remain with various partners leaving the Nectar consortium loyalty scheme over recent years. Adam’s Kids, for instance, left at the start of 2007 preceded by Threshers last year. Vodafone and Barclaycard bowed out in 2005.

So, many players still have to ask themselves the fundamental question what it is that loyalty schemes deliver. Is the outcome actually ‘loyalty’, or something that uses the word ‘loyalty’ simply as a convenient label? Do loyalty schemes actually incentivise additional purchasing or not?

Success is connected with conviction

The fact that the number of loyalty schemes in operation has grown certainly means that companies are convinced that they work - particularly to stem defection. In the best cases, however, companies do not just use their loyalty scheme as a commoditised money-back method. Intelligent firms use the information that loyalty schemes provide to gain a better understanding of each customer. They use the loyalty scheme to target additional products to customers who are really likely to be interested in them. And they understand who their really valuable customers are and often create additional rewards for those high revenue customers.

A really effective loyalty scheme helps both to satisfy and keep customers and to increase their spending with you. It is now accepted that loyalty schemes are more about: identifying who the customer is; understanding their tastes and preferences; understanding who is valuable and how that value is changing (+/-); and providing the customer with obvious value and relevance that incentivises them to stay with - and spend more with - you.

The success of a loyalty campaign is intimately connected with the conviction that lies behind the decision to launch, maintain and build upon the programme. A successful loyalty initiative depends upon a marriage of clear objectives from the outset, buy-in from board level to front-line staff, and significant investment in expert personnel.

Loyalty schemes must be developed through a disciplined research process – both qualitative in order to pinpoint the desirable components, and quantitative in order to prioritise and cluster them. If sufficient research is not carried out, the result will be a one-size-fits-all approach to the customer base, and this will offer very little insight into individual customer wants and needs. This, in turn, will make it far harder to increase customer profitability.

Nor can loyalty schemes paper over the cracks in a company’s basic proposition. We find in practice that people are all to some degree promiscuous, and their loyalty is earned by getting product, service, price, experience, brand values right. If this basic value proposition is well crafted, then informed data-based marketing can lock in customers’ spend and defend against unexpected surprises.

If the basic proposition is not sound, then a loyalty programme is going to provide negligible return. Even if the core proposition is well put together, a 'loyal' shopper will still try competitors. In our experience, this should not be regarded as a problem. Contrast with less effective competitors provides a useful and confirmatory benchmark for the customer.

Snapshots of customer value

The principles of ‘loyalty’, then are exactly the same as those of a effective database marketing or customer relationship management (CRM) initiative:

• More new customers.
• Getting existing customers to spend more often.
• Getting them to spend more.
• To minimise attrition.

However, snapshots of customer value are useless in building effective and appropriate customer development strategies. One must look at how value changes over time.

For example, if a customer is spending £300 per annum, then what I care about is defending this and increasing it if I can. How he spends his extra £100 to give me £400, at the strategic level – I do not care. The task is incentivising and managing customer revenue and profitability, no more or less. Therefore, I want to know the following:

• Acquisition cost per customer segment.
• Marketing communications cost per customer segment.
• Customer service/marketing administration/overhead costs per customer segment (some segments will have different costs than others do not just keep it at the top level).
• Other business administration and overhead costs per customer.
• Credit scoring.
• Time from first purchase to final purchase (ie how long do you keep them).
• Attrition score (likelihood of decreasing revenue / lost customer).
• Annual revenue trend per individual customer (not averaged – but tracked to J Bloggs specifically) and per customer segment.
• ROI from each mailing from each customer.
• Revenue trend from non loyalty club members (if relevant).

Unlike some of the loyalty metrics mentioned earlier, all these metrics are easily obtainable from basic transactional and campaign data. With all this information in hand, profitability can be calculated over a two/three/four year period and incentivisation strategies be developed concerning which customers to defend, grow, or not bother too much about.

Additionally, careful redemption analysis is required so that rewards can be continually refined, and each customer is presented with rewards that mirror their preferences. As the sophistication of loyalty schemes increases over time, customers come to expect to receive cross-selling offers. They are warmer, more responsive customers. Consequently they spend more. That’s the logic that drives companies to offer loyalty schemes in the first place. However, this aim is only realised if rigorous ROI strategies are established, the loyalty programme is linked to business strategies, and rewards and offers are truly relevant to members.

The quick-fix delusion

Approximately 85 percent of UK households have at least one loyalty card and this figure looks set to increase, as consumers are showing no indications of reducing their sign up to new and existing schemes. But businesses that labour under the illusion that loyalty schemes offer a quick-fix to a customer retention problem soon founder. The decision to embark upon a loyalty programme must not be taken lightly, but, once that decision is made, full commitment and a shift in corporate culture is required to take the scheme from an added extra to long-term programme that will deliver return on investment in spades, as the loyalty momentum effect takes place.

Of course, we cannot ignore the fact that the more loyalty schemes exist, the more of a challenge it is to to make one’s own scheme stand out from the crowd. On the other hand, this is not a brand marketing exercise where differentiation is so paramount. The people one is dealing with have already decided they want to use a particular brand, outlet or product provider. The exercise is not to catch their attention in the first place, but to harness and foster their existing enthusiasm and turn that into increased sales and profits.

In summary, then, loyalty activity is growing because it is such a fundamental tool in database marketing. However, the temptation to over-complicate the issue has led to the disillusion of bewilderment. Successful loyalty methods must be simple, must be applicable in the real world, must help deliver productive incentive strategies and must obviously help the whole database marketing process deliver better return on investment.

Andy Wood is managing director of GI Insight.