Insight vs oversight: How to build a loyalty programme strategy

24th Apr 2014

With the economy gathering momentum, and competition for customers heating up, there is a temptation for those organisations that have yet to roll out a loyalty programme to hop aboard the bandwagon for fear of losing out. Even those organisations with established customer loyalty programmes will be exploring whether a fresh approach would better position them to capitalise on the improving financial picture.

But businesses should think twice before rushing out a programme in the vain hope that they’ll be quids in.

“It is all too easy for a retail organisation to think up a loyalty programme, briefly test it and then roll it out. This is the wrong approach,” warns Simon Towner, divisional director of retail at Omnico Group. “Making a mistake with a big loyalty programme will leave you faced with a scheme that costs money, is extremely difficult to re-implement and risks upsetting the few customers that use it. In short, no one is happy.” 

Components that businesses will need to dedicate serious consideration to include goals and definitions, customer benefits and data management. In short, a robust strategy is required to underpin the whole exercise. 

“Businesses should develop a loyalty programme strategy because the improved utilisation of customer insights derived from loyalty data can improve performance at all levels of operations,” says Dennis Armbruster, editor-at-large at COLLOQUY and LoyaltyOne Consulting managing partner. “From marketing to merchandising to operations, company leaders should empower their organisation to use data-based insights to enhance the customer experience and make strategic and tactical business decisions. The results will be dramatic.

“A tactical approach suggests that the campaign or programme may very well generate short-term wins, however the persistent use of customer insights over time is truly where long-term sustainable results will be realised.”

Rachelle Headland, MD of Saatchi & Saatchi X, adds:  “It is easy to fall in to the trap of thinking solely about loyalty reward schemes such as Clubcard, Airmiles, Nectar, etc. as a means of retaining your high spending customers. If you do that you can miss out on the core principles of loyalty marketing; understanding your customers, recognising them when they talk to you, and talking back in a personal and relevant way.

“Tesco’s success with the Clubcard is testament to this in a very simple form, through targeted offers and rewards that recognise not just how much I’m spending but what I like to spend it on. The big deal for Tesco was the data and insight they were able to gather on their customers across their store and in a very targeted way then encourage people to shop across more categories, more often – and also pick up on other life events such as pregnancy, birth and starting school, through people’s buying behaviour. And this is why a tactical approach will never work as well as a long-term strategy.”

Laying the groundwork

So with a strategic approach so important, where should you start? Unsurprisingly, it is vitally important that you first of all establish that a loyalty programme is necessary at all.  

“The first thing you need to establish if you need it – what are you going to do differently tomorrow if you have this programme; are you really going to manage the data to increase sales; are you really willing to pay the price it is going to take to make the programme attractive?” says Tim Keiningham, global chief strategy officer and EVP at Ipsos Loyalty, and author of Why Loyalty Matters. “Because you don’t necessarily need a loyalty programme to be successful. Wal-Mart proves it every day – it doesn’t have a loyalty programme because it’s not a Big Data-driven company. It has a different strategy and it works for that company.

“But if practical Big Data is going to be a part of your strategy going forward, then you really want to come up with how you optimise this programme ad put the best one in place so that you are collecting this information and integrating it with other information. Because if you don’t have a thought-through process for why you’re getting this programme, then it’s a bad strategy.”

If, upon consideration, it is still appropriate for your business, then your next task is to tackle definitions.

“An important part of any loyalty strategy is defining what the term ‘loyalty’ means to the business,” notes Barry Nielsen, client services director at Eclipse Marketing. “It often represents more than just encouraging subscription to a brand’s newsletter for example. Instead it’s grounded in nurturing repeat business and building brand advocates. Once the meaning of loyalty has been established, businesses are able to select the right measures to target these individuals across the organisation in the long-term. A strategic rather than purely tactical approach will create that longevity and with it advocacy rather than just short-term results.”

Towner recommends the following exercise to help the organisation define what the organisation really wants to achieve.

“Step one is to create a clear and compelling vision of what success looks like, that engages the whole organisation in a practical way to fully support it,” he explains. “A great tool for this is to write the dream news article that would appear in the retail press and major tabloids in three to five years’ time. This technique is really useful to help people define and own what the organisation is trying to achieve.”

He suggests these guidelines:  

  • No more than 500 words – it has to be clear, concise and evidence-based. The shorter it is the more people will read it and absorb it.
  • Explain the results that were achieved in terms of how customers have responded, give some quotes of what customers might say if interviewed, and Include a description of how the scheme maintains an active dialogue with customers
  • Include broad metrics that show the results in simple numbers that everyone understands, such as the growth in membership numbers, the increase in customer satisfaction,  and the benefits that customers have gained
  • Explain briefly how the loyalty programme has out-gunned the competition
  • And finally use plain English – no marketing or techno speak. It has be to understood by everyone who reads it immediately and clearly.

Towner adds: “This may sound easy, but don’t be fooled. This is a very difficult task but the output is dynamite because it clearly articulates the vision, and having involved all the key stakeholders in its development makes it a powerful tool to drive through the change necessary to make it happen. What’s more the organisation from top to bottom now has a readily understandable goal against which progress can be measured. Having this clear and concise statement enables the organisation to understand the gap from where they are today so they can start to build the plan of how to achieve their goals.”

Important considerations

At this point it is also important to consider the kind of programme you want to use – whether that be a bespoke programme built in-house, a programme developed in conjunction with a provider, or joining a coalition programme with existing member partners.

“There are no hard and fast rules because it very much depends on the level of investment you’re willing to make, and the nature of your customer base, but there are two things to consider,” says Richard Madden, chief strategy officer of Kitcatt Nohr. “The first is that if you are going to partner with a very established loyalty scheme like Nectar or Air Miles, ask yourself the very serious question of whether people will be loyal to the brand or to the scheme. So if you are trying to engender emotional loyalty as well as rational loyalty, are you just talking to the next Nectar base and bribing them to come to you, or are you really winning a share of their mental basket with your brand rather than the pulling power of Nectar.

“The other piece of advice I’d give is if you’re going to create a kind of collective of like-minded brands who get together to pool rewards, I would suggest that the brands you choose need to be very closely aligned, not just to the brand usage of your target audience, but also the aspirational brand values of your organisation.”

If it is decided that you’re going to build your own programme, then you will need to ensure you have the technical infrastructure to support such an initiative. Customer loyalty programmes are data-driven and customer-centric, so the right technology is critical if organisations are to harness customer insights and enable accurate segmentation. As part of your initial strategic work, it is a good idea to perform an IT and data audit to check what necessary architecture is in place and what is required.

Headland notes: “The most important thing is – do you know who your customers are? Seems an obvious question, but are you able to tell who your top spending customers are? Is individual data stored in a marketing database vs a transactional database? If you have several points of interaction are all systems talking to one another? And can your marketing stakeholders access and understand what the data is telling them?

“If you ticked all the above, then you need to review your ability to communicate from your in-house systems and resources and the level of investment you will need to communicate in a regular and meaningful way. Technology has reduced the cost of entry and increased the ability to track customer behaviour and communicate in a highly personalised way. Most companies who are successful in this area have spent several years refining their loyalty programmes, testing, evolving and refreshing the programme as they go along.”

Towner suggests that the technical foundations of a loyalty programme require two traditional core components alongside a typical CRM package.

  • An analytics engine that enables the retailer to understand member behaviours and how that changes or is reinforced as a result of the loyalty programme. “It is imperative retailers ensure their chosen tool enables retailers to readily understand the contents of baskets and the affinity between products in the basket, draws out the customer shopping profiles across the product hierarchy so it is easy to find who is buying or not buying certain product categories, readily identify who is shopping frequently or less frequently, and identifies spending patterns and how they are changing across channels,” says Towner. “The key use of such a tool is to report on the success of the scheme and create micro customer segments for refined targeted of message, offers and deals.”
  • An engagement engine that connects across all channels and delivers the loyalty programme in a consistent manner no matter how the customer chooses to shop. “The engine drives the action tracking progress of continuity deals, holding transactions, calculating points, authorising the redemption of coupons and points, holding messages to deliver to members and so on, all on demand whenever required.”

Karmesh Vaswani, VP and head of Europe – retail, CPG and logistics at Infosys, warns: “One of the most common mistakes that businesses make is failing to use their loyalty schemes to target customers in the right way. By overcomplicating the mechanics of a programme and failing to harness existing customer data, organisations end up sending irrelevant offers or communications, which actively drives consumer disengagement in the long run. One of the reasons for this is that organisations often focus too much time, money and energy on the ‘front-end’ components , such as creative and proposition and not enough on the back-end IT considerations. While the look and feel of any programme has to be right, if it is not supported by a robust analytics infrastructure, it will ultimately fail to hit the mark with consumers and fail to drive loyalty.”

The value proposition

While your strategy should cover the aforementioned definitions, goals and frameworks, as well as measurable strategic and financial targets, Armbruster also recommends that an organisation’s strategy should hash out the following three key areas, which will ensure that you are not falling in the trap of simply rolling out another ‘me-too’ offering:

  • How will your brand value proposition deliver on the un-met needs of high value and high potential value customer segments?
  • How will your solution assist in brand differentiation (an innovative solution that is difficult to replicate in the market)?
  • How will your solution fully leverages the organisation’s operational strengths and brand assets?

“In the end, the customer will be the judge as to the value of the strategy relative to the strategy’s public-facing value proposition,” adds Armbruster. “Therefore, it is important for an organisation to identify what portion of the value proposition will be overtly communicated to the public (and the competition) and what will be covertly distributed via omnichannel communication strategies and tactics and via operational changes that enhance the overall customer experience.”

While this process of strategy building and preparation can be time-consuming, it is worth remembering that there is a huge prize for the organisation if they get it right.

“Tesco’s Clubcard is the usual example of success, but don’t forget how HMV introduced Pure points to gain a foothold in the games market and then extended the scheme to allow their customers to spend points on rewards that ‘money can’t buy’ such as concert tickets, signed autobiographies from famous musicians and so on,” says Towner.

“Also consider Anglia Co-operative Society who has used continuity programmes to drive spend during the Christmas period and was rewarded with a 36% increase in like for like sales as they prevented their valuable member base from using the competition for their festive purchases. Iceland too needed to re-energise their loyalty programme, and through targeted couponing increased active membership by over 25% in 18 months.”

He concludes: “All these are great examples of retailers taking time to think their loyalty programmes through carefully before pushing the button and making the big commitment. When each reached the decision-making stage, they had overwhelming evidence to know that the scheme would work. As usual campaigns like this are all about planning, planning and more planning, and having a Board that allows the architects of the scheme to have the time to get it right.”

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