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Where are loyalty schemes going wrong?

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9th Sep 2009
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Despite cynicism towards them, loyalty card penetration rates are impressive. But research has revealed that most promotions received by card holders are totally irrelevant to them. So what's going wrong?

Marketing budgets have suffered during the recession. But, in an economic downturn it is even more important to spend and use the budget wisely. One of the best areas to invest in for customer acquisition, retention and development is loyalty schemes.
Loyalty schemes are as popular as ever. Research we commissioned last year found continued growth in their popularity – over two fifths of top companies now operate a loyalty scheme. Even now, in the depths of recession, loyalty activity is prevalent:Tesco has relaunched its 15-year-old Clubcard scheme, Barclaycard plans to launch a scheme and HMV has launched PureHMV.
Loyalty schemes provide marketers with transactional data and customer spending habits on every member, thus making the job of targeting specific offers at individuals much easier. However, our last research report found that this is not really happening at the moment. It found that 57% of UK consumers had noticed a very significant increase in the volume of price promotions and special offers they were receiving through direct marketing - but 68% said the vast majority were totally irrelevant to them.
With this in mind, we wanted to ascertain the degree of loyalty card penetration in the UK. We asked consumers to state whether they owned one, two, three, or four or more loyalty cards from different companies. The results revealed that 87% own at least one card while over a fifth have four or more.

Men were found to be more likely to own just one loyalty card (29%) compared to women (18%). However, women were much more likely to own two or more cards (74%) than men (53%). 35-44-years-olds are most likely to own four or more loyalty cards from different companies The over 55s are most likely to own up to three cards and second most likely to own four or more. This is the group with the most disposable income so getting customer communications right with this segment is critical.
 
Consumers in the East of England are most like to own at least one loyalty card (91%), while loyalty scheme membership is well below average in Lancashire (76%). Scots are most likely to own four or more cards (27%).
With this level of penetration established the cynics of the late 90s have certainly been proven wrong. The question is: why are we not seeing the high level of targeting and personalisation we would associate with increased loyalty scheme membership?
  • Too few experts - Too many businesspeople believe that automated CRM systems can give them all of the answers if fed with large volumes of customer data. However, the ability to analyse and manipulate large datasets to produce meaningful and actionable insights is a sophisticated and rare skill. The most proficient analysts and database marketers tend to be those who have had experience within a third party provider. Since they are used to looking at data in many sectors and contexts, these professionals are able to conduct their interpretation in the context of a wide-ranging knowledge of consumer behaviours. This level of variety also tends to provide the best analytical brains with the greatest stimulus, making it difficult for single corporations to attract this kind of calibre into an in-house position.
  • Too much irrelevant data - There are well known examples of retail loyalty schemes that cost millions to build but actually collected far too much data to be functional. Ideally the data that is truly significant for managing and encouraging customers to stay loyal and spend more should be identified right at the start but, all too often, this is not the case. Consequently, marketers are often not aware of what data is needed to identify, manage and encourage the behaviour of loyalty scheme members. Collecting too much data, and failing to understand which information is truly important, is in many instances preventing well-targeted, relevant customer communications from happening.
  • Attitude of inertia - Resistance to change is undoubtedly getting in the way of marketing campaign relevancy. A certain level of inertia has appeared in the market because people are afraid to do things differently. Between 2002 and 2007 the economy was booming and poor practice, along with disappointing results, could be overlooked. Now, in the midst of a recession many of those who had not previously been using customer insight properly are panicking and simply continuing the same old poor practices, but at an accelerated rate. Customers are receiving more offers and communications, but only a third of it appears to be relevant to them.
So what does best practice look like? A really effective loyalty scheme helps both to satisfy and keep customers and to increase their spending with you. It identifies who the customer is, understands their tastes and preferences, who is valuable and how that value is changing, and provides the customer with obvious value and relevance that incentivises them to stay with you and spend more.
The major mistake that unsuccessful schemes make is to look at transactional information only on a snapshot basis. Successful players track how transaction and customer value is changing over time. The most successful schemes are those that drive additional sales using analysis that matches customer profiles to spending patterns and do this across all media touchpoints.
Careful redemption analysis should be carried out so that rewards can be continually refined, to mirror customer 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. As a result they spend more.
The high level of loyalty penetration established by the research tells us that a vast amount of customer intelligence is being gathered, but we know it is not being used to its potential. Marketers need to address the reasons for this and start operating according to best practice if they are to get the most from their loyalty schemes. If customer data is used smartly marketers could benefit hugely from increased loyalty activity at a time when it matters most.

Andy Wood is managing director at GI Insight.

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