MarketLoop #9, June 1998

Where Next for Loyalty Programmes?

In the UK, many retailers and other service companies have developed so-called loyalty cards as part of their marketing mix. By counting only the supermarket loyalty cards, 20 million cards have been issued in the last two years alone. Today, according to Mintel, about 63% of adults participate in a loyalty scheme run by one of the leading retailers. However, more than 40% of us have more than one card in two different competitive retailers. We can shop in a number of competing retailers in the knowledge that we will be rewarded, regardless of how often and how much we purchase.

With so many in circulation, it is necessary to ask how much value retailers add with these cards. Too often, it appears that these loyalty schemes are viewed from a supply perspective only, the cards representing a way of collecting customer data and enabling more closely targeted marketing programmes to be developed. At Through the Loop we analyse marketing issues from both the demand and supply perspectives, looking at how Consumer, Brand and Market-place Forces of Change work together. None of these operate on their own, so it is important to understand how they converge to be able to develop the best solutions. In our view, these loyalty schemes would be more effective if they are taken to the next level beyond simple points collection and money-off schemes.

Limited Usage of Loyalty Cards

Most retailers offer vouchers, discounts or money-off coupons through their loyalty cards. Giving special discounts or vouchers certainly helps customers to stay and reap the rewards, but that does not necessarily make them loyal or, even better, an advocate of the retail chain or brand. Retailers have to develop a long-term strategy in order to gain genuine loyalty from their customers. This extends far beyond just lower prices. Discount vouchers tend to be a short-term strategy not providing added value for the customer. The net result is that every retailer offers, more or less, the same scheme. This involves collecting data but not giving anything discernible back to the customer except money-off coupons. From the consumer perspective, would it not be easier to simply lower the prices in the store?

The main role of the loyalty cards should be to act on the basis of building a relationship with individual customers. By using the customer knowledge acquired through usage of the cards, retailers have a huge potential to focus on communicating better and learning how to add value to the individual customer relationship. This is key to moving loyalty schemes forward and exploiting the potential offered.

Learn to Add Value for Consumers

Retailers should use the cards to understand the real reason for the customer to be loyal. There are some basic rules to gain loyalty:

• Enough knowledge about the brand

• Relationship/ exchange of information about products and services

• Pleasurable shopping experience

• Honesty, i.e. no promise that cannot be kept

• Respect privacy

• Not to overwhelm consumers: for example by reducing the deluge of promotions or coupons, reducing mail and special offers on anything for anybody

• Stocking products and services that customers value the most

Here we can see how retailers can use their customer data to ensure that appropriate promotional material only is sent to consumers. However, this is still looking from the supply perspective, possibly building a two-way flow of information but hardly what we would call a relationship or engagement.

Through the loyalty card, retailers have access to information on individual habits and preferences. They know that some customers go shopping twice a week or more in their store but may spend not much than £20 each time. How do you encourage them to spend more? Others shop once a month and spend an average of £250 each time. Would you like to increase their visit frequency? Others are shopping regularly in rush hours. Could the retailers offer them a discount advantage to shop at another time of the day, during a less busy period? Furthermore, it appears that retailers have tended to offer added value frequently to those who may not be their best customers, such as opening quick check-out lanes for those with small amounts of shopping. So the less profitable customers are rewarded while the ones you value the most are waiting in long queues.

By analysing the database, retailers can identify shoppers who spend a lot of money on wine, for example. Value can be added through the identification of these consumers and inviting them to a wine tasting evening at the store. This not only helps to build a relationship but it also offer the opportunity for the retailer to encourage consumers to trade-up to more expensive or more profitable wines. If marketers can identify those who frequently purchase organic food, they can arrange lectures by an organic food specialist and show new products in that category. For the best customers, for example with children, surely it is possible to encourage them to use a home delivery option, without a delivery charge, or at least have bulky products delivered direct to the home.

One successful example of moving forward is Boots the Chemist with its Advantage card. Analysis of the database has enabled the company to organise a special Almay beauty evening which was well-attended by existing customers. Sales grew remarkably in the following weeks.

One problem facing retailers is the huge diversity of their customer base. It seems difficult to develop a one-to-one relationship with each of them. However, most retailers know that, for example, 25% of their customers account for 75% of revenue. These customers are worth special treatment or greater attention. This is where loyalty needs to be encouraged. FMCG marketers can learn from business-to-business disciplines. Genuine loyalty must be won and maintained. It is not about simply offering money-off. The retailer is looking for consumers to provide data about themselves. From a customer perspective, there should be some tangible return for this data, money-off coupons do not offer this.

A Better Understanding of the Consumer

Loyalty cards are a great marketing tool that should help marketers to learn more about and provide a better service for their customers. They have the opportunity to generate a relationship with the consumer but, in order to achieve this, they have to understand what is required in a relationship. They should look for the tangible benefits from the customer's perspective that can only be achieved through an understanding of buying habits.

Through the Loop's work in this area typically includes Best Practice studies where we look at the strengths and weaknesses of different types of loyalty schemes. In particular, we are interested in how they look to add value to a brand and develop a significant and sustainable level of differentiation. Our Horizon™ process has also been developed to enable marketers to look beyond their own "supply" characteristics and understand possible development themes from a consumer perspective. What are the future consumer drivers?