How to form the best customer loyalty strategy

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By: Wise Marketer Staff |

Posted on February 7, 2011

How to form the best customer loyalty strategy

Most marketers accept that they need to know more about their customers, and that this knowledge should be centrally recorded so that it is available to employees when they need it. But the days when it was enough for 'Mary in Haberdashery' to know all about which lace sells and which one doesn't, or who the best customers are and what they like, have long gone...

That's the point of a loyalty programme. Loyalty cards enable customer information to be recorded reliably, and are therefore seen by many marketers as being an essential part of retail. In other words, a retailer could judge the usefulness of a loyalty scheme by how it can help run the store more efficiently and profitably.

What the retailer sees in loyalty In fact, retailers without any means to consistently identify regular shoppers and link them with their transactions will become increasingly disadvantaged, usually underperforming compared to their peers and being penalised in the financial markets, according to studies by Hawkins Strategic, which found that there is a growing divide emerging in the retail industry between two classes of retailers: those that are 'customer aware', and those that are not.

The idea behind becoming 'customer aware' is that the marketer must separate the means of linking the shopper to the transaction (i.e. the loyalty card or programme) from whatever marketing initiatives may be enabled by that capability (e.g. up-selling, cross-selling, customer engagement, win-back campaigns and so on).

In other words, a loyalty scheme gives us a way to tie a shopper to the things they buy. But while any loyalty schemes use plastic cards to identify members at the checkout, many other mechanisms are becoming viable options. For example, biometrics, RFID (radio frequency identification) cards and tags, mobile phones with NFC (near field communication - a subset of RFID) and other equally innovative technologies are able to replace the humble card. It's very much like the almost inconceivable move from loyalty stamps to mag-stripe cards so many years ago.

These new mechanisms, when combined with digital communication, show real potential for truly personalised marketing - far beyond the simple database segmentation techniques that are pressed into service by even the largest loyalty operators today.

What the customer sees in loyalty But customers have a different view of loyalty programmes. To the customers, the programme exists solely to reward them for their custom. If they think that they would prefer to be rewarded in some other way, they dismiss the programme as being unnecessary. The people on opposite sides of the counter assess the usefulness of loyalty programmes in totally different ways. With that in mind, it's not surprising that many customers, when given the choice, opt for simple discounts instead of a loyalty programme - they are not taking into account the hidden benefits that a programme provides for them - the more effective stock control, the better merchandising and the greater personal relevance of marketing messages.

However, it's what the customer thinks of the programme that really matters. That's why it's important to listen to their views and to do whatever is possible to correct their misapprehensions. It must also be understood that loyalty cards are not a substitute for getting the basics right, even though they do add value to the retail proposition.

During a recession, however, customers want even greater value than normal. But value is a hard thing to define because each customer has a different opinion about what they would find valuable. However, most would agree that value is essentially about convenience, quality, reliability, brand image, and most importantly the overall customer experience (starting in-store and continuing right through to the usage of the product).

The benefit of loyalty cards to shoppers is two-fold: direct and indirect. Direct benefits are typically one of two types, being either price reductions or added value rewards such as flights or days out. Indirect benefits are less tangible, relating to the collection of, and response to, consumer data by retailers and suppliers to ensure that the products and services provided meet customers' needs. Shoppers are less likely to consider these as benefits (for example, improved sales forecasting which improves store efficiency, and the resultant cost savings that are then passed on to the shopper through lower prices).

What do consumers find most rewarding? Rewards range from 'soft' rewards (benefits and privileges) to 'hard' rewards like discounts or points. Hard rewards are nearly always popular - in general, consumers like to get money off - but the actual value of the reward is usually quite easy to relate to the amount spent. Much customer research has been carried out on what rewards customers prefer.

The ideal loyalty programme will provide a blend of hard and soft rewards. For example, customers in lower tiers might be given hard rewards (e.g. discounts, points toward prizes, and so on) while customers in higher tiers get soft rewards (e.g. pampering and recognition).

There are several categories of loyalty reward that have been tested by time and proved effective:

  • Untargeted discounts Straight, untargeted discounts are generally of little value in building loyalty. They embody many of the disadvantages listed below. A business built on discounting without any other feature that attracts customers is very vulnerable to competition. Profit margin is eroded and products are devalued. In fact, an attempt to return to normal pricing is seen as an increase in prices.

    Advantages of untargeted discounts include:·  They are easy to implement;·  Customers can understand them easily;·  The cost of the discount is predictable;·  Customers like discounts;·  They can attract new customers as well;·  They are seldom vulnerable to fraud;·  They present cross-selling opportunities;·  They present multiple purchase opportunities;·  They need no database;·  Customers cannot complain of discrimination.

    Disadvantages of untargeted discounts include:·  They can drive a bargain-hunt mindset;·  Customers' loyalty can be to the discount, not the brand;·  Uptake can be hard to predict;·  They can cannibalise future sales;·  They erode the profit margin;·  They can be easily matched or beaten by competitors;·  Multiple discount offers can create unrealistic prices;·  They can lead to product devaluation;·  They reward all customers equally.  

  • Targeted discounts Discounts can be targeted at certain customers only, by either sending them via the mail or by issuing them electronically at the checkout via a mobile phone, or by controlling them via a loyalty card. Access Pricing is a good way of giving targeted discounts to better customers while at the same time increasing the customers' involvement in the programme.  
  • Points-driven programmes Points are the most popular reward mechanism in most countries, although they are not a reward in themselves; they are a means to the reward. The range of possible rewards in points programmes is virtually unlimited. Points can be used to 'buy' discounts at a later date, they can buy privileges, they can lead to cash back or, quite frequently, can be used to obtain rewards from partners in the programme. This makes points-driven programmes very versatile.

    One of the great advantages of points is that the level of points issuance can be solidified at the beginning of the programme but the actual reward that a certain number of points earns can be adjusted according to circumstances during the life of the programme, without confusing the consumer.

    One of the main problems that operators of a single-company loyalty programme faces is that it may be difficult for loyalty programme members to build up enough points to obtain a worthwhile reward in a reasonable time. If points are the currency of the programme, then issuing partners as well as redemption partners can be included in the programme, giving members more opportunities to build up points.  

  • Soft rewards As the technology that enables tighter targeting improves, loyalty programme members are being rewarded with more and more personalised products and services, including concierge and personal shopper services, sports and theatre tickets, points-based internet auctions and family rewards.

    Most often the rewards that are remembered longest and are discussed with others are the soft ones; not simple discounts but memorable, greater-than-expected pampering. Exceptional service during and after a transaction is recounted much more often than the level of discount. And the delight is even greater if the reward is something other than the usual products and services offered.

    Companies with high value customers have known this and used it for many years: loyalty has been cemented in boxes at the opera, in seats at premium sports events, and in lavish dinners. But the concept isn't limited to those very high value customers. Retailers who run continuity programmes have found that if the rewards are bought in specially for the programme - rather than taken from normal stock - the effect is greater. If a supermarket calls out an emergency repair service at no charge to the customer because her car will not start in its car park, the warmth of feeling is deeper than a similar value discount would produce. And feeling counts where loyalty is concerned. It is not surprising that the market for loyalty programmes that can provide these special, personalised rewards is growing.

    But privileges are probably the ultimate reward, usually reserved for the best customers (e.g. the Elite tier). Privileges are widely used by airlines in frequent flyer programmes. One of the big advantages of bestowing privileges is, because they cannot usually be bought, they have extra value. They also tie members in very strongly: once they have experienced the pleasure and convenience of the privilege (say, use of a special lounge, a limousine pick-up, a personal shopper or concierge) they are reluctant to do anything that may cause the loss of the privilege. In addition, a privilege can usually be used to build a stronger relationship or bond with the customer. Someone who is invited to a premium wine-tasting evening in a supermarket for instance will get to meet the manager and other high-level store employees. On future visits to the store, they will greet each other with more warmth, and the relationship will deepen even more.

What's the perfect reward offering? As we have seen, a loyalty programme's rewards catalogue is absolutely crucial to its success. In fact, the rewards catalogue is arguably the most important weapon marketers have at their disposal because it can influence participation levels and therefore the success of both customer and partner relationship management programmes.

A rewards catalogue has the potential to greatly influence a loyalty programme - either for good or for bad. Just as a well conceived and properly constructed rewards catalogue can boost response rates phenomenally, a badly constructed one can drive response rates down drastically. But the impact doesn't end with response rates. In the mildest cases it can lead to what is known as "redemption inertia" (where participants in the programme accumulate enough points but never redeem them because the rewards just aren't exciting enough). In more severe cases it can result in poor participation rates, high attrition in the programme and - most importantly - high levels of irritation among programme members.

So what are the factors that lead to redemption inertia and low participation levels? Well, at a broad level it's often down to insufficient attention being paid to the construction of the rewards catalogue. But more specifically, the main reasons are:

  • Little or no excitement value Rewards catalogues often fail because they don't excite the minds and emotions of the audience they're aimed at. Even though it's hard to believe, this is an every-day occurrence in loyalty programmes around the world.  
  • Not enough variety This can cause a loyalty programme to stumble badly. A catalogue that contains only a few items at each redemption level provides very little choice and leads to certain redemption inertia.  
  • Width of reward intervals Another thing that's often overlooked is the width of the redemption interval; in other words, what is the points gap between different items in the catalogue? If insufficient attention is paid to the reward intervals, it will lead to irritation for programme members, as well as large unusable points balances in their accounts (a high 'breakage' level).  
  • Lack of aspirational rewards Closely related to the excitement value, the aspirational threshold determines the upward pull the catalogue exerts on sales. In other words, if there are no aspirational items (or if they are placed so far beyond reach of the average programme member), the aspirational threshold starts acting as a depressant for sales when consumers start to feel there's no point even trying for the big rewards.

The Wise Marketer recently published its latest 1,300+ page report, The Loyalty Guide 5, detailing every aspect of customer loyalty marketing and customer engagement. The report explains the ideal structures for various types of loyalty initiative and rewards, providing guidance from experts in the field, best practices, market data, forecasts, ongoing trends, and a wealth of case studies showing how to construct the perfect rewards catalogue to engage members and achieve real sales growth as a result.

Find out all about the principles, practicalities, measurement, analysis, and bottom-line effects of customer loyalty, and gain expert guidance from dozens of loyalty marketing thought-leaders worldwide. Find out how to gather and use customer data to increase customer profitability, reduce churn, and to monitor and increase customer frequency, spending, and share of wallet. Most importantly, find out where competitors are succeeding or failing, and why.

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