Customer value & loyalty: Why the show must go on
Many industry observers have suggested that loyalty programmes are past their prime as a concept, and that consumers are growing tired of 'playing the points game'. So why is it that there are more loyalty schemes now than ever before, and the number continues to grow, asks Andy Wood, managing director for UK direct marketing firm GI Insight.
The answer, Wood suggests, lies in what loyalty schemes actually deliver - for the operator, the partners, and the end consumer - and in their success (or otherwise) in providing an incentive for additional consumer spending.
Research commissioned by GI Insight in 2006 found that the number of loyalty programmes in operation had actually doubled in a decade. Despite a crisis of confidence in the late 1990s loyalty programmes are stronger than ever, despite some obvious set-backs with various partners choosing to leave seemingly strong coalition programmes (such as Barclaycard leaving Nectar in late 2005).
It's all for the data The fact that the number of loyalty schemes in operation has grown suggests that most companies are convinced that they work, particularly to stem customer defection or 'churn'. In the best cases, however, companies do not only use their loyalty programme as a commoditised money-back technique: Indeed, the more advanced operators (such as Tesco in the UK) are using the information the programme provides to gain a better understanding of each customer.
These companies use their loyalty programme to cross-sell and up-sell additional products to customers who are really likely to be interested in them. And they understand who their most valuable customers are, and often go as far as creating additional rewards for the highest-spending or most profitable customers. In other words, a truly effective loyalty programme helps the company to satisfy and keep customers and to increase their spend level.
Knowing customers, individually Loyalty programmes have come a long way since the days of collecting stamps that had a fixed value. It is now relatively quite commonly accepted among marketers that loyalty programmes are more about identifying who the customer is, understanding their tastes and preferences, understanding who is valuable and how that value is changing over time, and providing the customer with obvious value and relevance that encourages them to stay with and spend more with the company or brand.
According to Wood, "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."
Not a quick fix - ever Loyalty programmes can't be used to hide the cracks in a company's basic proposition. Consumers are all - to some degree - promiscuous, and their loyalty is only earned by getting the product, service, price, experience, and brand values right.
If the basic value proposition is well formed, then informed data-based marketing can help to consolidate and retail a customers' spending, and also defend against unexpected surprises such as competitor activities and brand disappointments. But if the basic proposition is not entirely sound, no loyalty programme is going to provide a significant return.
Indeed, even when a retailer's core proposition is well planned and executed, a so-called "loyal shopper" will still probably try competitors' offerings as well. But this should not be seen as a problem, Wood says. Indeed, establishing a contrast in the customer's mind with a less effective competitor can provide a useful and confirmatory benchmark for them.
Principles of loyalty and customer value The principles of loyalty are basically the same as those of an effective database marketing or customer relationship management (CRM) initiative:
- Acquire more new customers;
- Get existing customers to spend more money, more often;
- Minimise customer defections.
When looking at customer value, snapshots are relatively useless in building customer development strategies. Instead, you need to look at how each customer's value is changing over time. It's a basic statistical technique: you need to see the trends.
How to monitor customer value For example, if a customer is spending £300 per annum, the goal should be to defend that business, and increase it if possible. So the merchant needs to know several things in order to assess the customer's true value:
- Acquisition cost per customer segment;
- Marketing communications cost per customer segment;
- Customer service & marketing overheads per customer segment;
- Other business overheads per customer;
- Credit scoring;
- Time from first purchase to final purchase (lifespan);
- Attrition score (likelihood of decreasing revenue or churn);
- Annual revenue trend per individual customer;
- Annual revenue trend per customer segment;
- ROI per customer from each marketing campaign/mailing;
- Revenue trend from non-loyalty programme members.
All of these metrics are easily obtainable from basic transactional and campaign data. With this information in hand, profitability can be calculated over a 2 to 4 year period, and incentive strategies can be developed for each groups of customer (e.g. which customers to defend, which to grow, and which to forget about).
Watch their redemptions too Careful redemption analysis is also required so that rewards can be continually refined, and so that each customer can be presented with rewards that mirror their own preferences wherever possible.
As the sophistication of loyalty marketing platforms increases over time, customers come to expect to receive cross-selling and up-selling offers. They become warmer, more responsive customers, and they tend to spend more: At least, that's the logic that drives many companies to offer a loyalty programme in the first place. However, this aim is only achieved if rigorous ROI strategies are established, and if the loyalty programme is linked to business strategies, and if rewards and offers are truly relevant to loyal customers.
The motive and the result According to TNS, approximately 85% of UK households have at least one loyalty card, and this figure is likely to increase over the next few years. But companies that start a loyalty programme as a quick fix for a deeper customer retention problem are wasting their time and resources. As Wood warned: "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."
But with so many loyalty programmes emerging, one of the biggest challenges for loyalty marketers today is be able to make the programme stand out from the crowd - to differentiate the programme, whether that's based on privileges, earning options, redemption options, or all three.
According to Wood, loyalty marketing activity is growing rapidly because it is such a fundamental tool for database marketers. But the temptation to over-complicate the issue has often led to consumer disillusion and bewilderment. Successful loyalty methods must be simple. They must be applicable in the real world, they must help deliver productive incentive strategies, and they must help the whole database marketing process deliver a better return on investment.
For detailed explanations of the necessary principles, metrics, calculations, management reporting, and practical know-how, The Wise Marketer has recently published its 950 page, no-nonsense guide to loyalty programmes and strategies, The Loyalty Guide (see TheLoyaltyGuide.com).