Loyalty schemes critical to recession survival

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By: Wise Marketer Staff |

Posted on June 18, 2009

Loyalty schemes critical to recession survival

As a result of the recession, many marketing budgets have already been greatly reduced. As a result, is has become critically important to use marketing budgets more wisely than ever before, according to Andy Wood, managing director for GI Insight.

GI Insight has recently commissioned several studies to identify the current state of loyalty schemes, with the aim of confirming loyalty's role as a worthwhile area in which to invest today's reduced marketing budgets.

In these studies, finance directors and managers have generally given their support to loyalty schemes, with 80% of finance directors or managers in British firms believing that companies with a loyalty scheme will come out of the current economic downturn with a 'significant competitive advantage'.

An axis of support for the importance of loyalty activity has appeared between finance and marketing - suggesting that loyalty initiatives have moved from being discretionary to 'must have' tools in the marketing mix. This high opinion of loyalty activity from an audience which has traditionally been sceptical about the commercial value of loyalty schemes reveals how embedded and essential such initiatives have become in the British business psyche.

But while loyalty schemes are considered fundamental to corporate health, robust performance and 'competitive edge' during an economic downturn, not all sectors are necessarily able to deliver effective customer retention and development through loyalty schemes.

A further study found that the return on investment for loyalty programmes during an economic slowdown varies according to the sector it operates in. For example, supermarkets were found to be best placed to use loyalty schemes to retain and develop customers. Given recent interim statements from major supermarket groups, there is evidently a performance polarity between value retailers and middle-market chains, implying not only that the value end of the sector is obtaining better return from loyalty programmes, but also that the revenue slide in the mid-market would be even more severe were it not for loyalty initiatives.

Mobile phone companies and DIY/gardening firms were also found to be very well-placed. Because supermarkets are currently clear leaders in loyalty best practices, their top position is perhaps not surprising. But the research also pays tribute to the work that mobile phone companies have put into their customer management strategies over the past few years. This has been confirmed by earlier research which reported a sharp drop in mobile phone churn in the UK.

In contrast, the fashion, restaurant and computing/electronics industries appear to be least well positioned to use loyalty programmes to combat the effects of the economic slowdown.

The company's most recent research into loyalty activity also investigated the proportion of people who have made the switch from premium to value retailers, and also how those consumers are going to act when the economy picks up.

A significant proportion of consumers have, in the past year, moved downmarket to value-based suppliers for a significant amount of their food shopping and clothes shopping (35% and 39% respectively). Although this may not mean that their total supermarket, or clothes shopping, spend has switched, it still represents a significant loss of revenue for premium providers - and an equally significant gain for value outlets.

Interestingly, the proportion of those consumers who say they will move back upmarket to 'quality' supermarkets and brands when the economy has recovered is significantly lower (14% for supermarkets and 20% for clothing brands), resulting in a net loss of custom (21% and 19% respectively) even after the economy recovers.

Evidence of a move to prevent loyal customers from seeking cheaper alternatives has emerged across the retail industry. Last year Tesco introduced a range of discount brands aimed at discouraging shoppers from going to value alternatives such as Lidl and Aldi and, in the run-up to Christmas 2008, Marks & Spencer held two one-day sales cutting prices in store by 20%, while Waitrose has recently re-branded its own label products, now selling them under the 'Essential Waitrose' brand.

According to Wood, premium retailers should now also be trying to identify, through transactional analysis, those customers whose spend is not dropping. This information can be used to drive campaigns to recruit similar kinds of shoppers in a bid to replace lost custom. However, stores should also keep in touch with lapsed customers in a bid to draw them back again when consumer confidence returns. This is particularly important because the value retailers will fight hard to keep their new-found customers when the economy recovers.

The popularity of loyalty programmes continues to grow, indicating that the mainstream of British business has recognised their value - at least when they are well executed, and when the data they produce is used effectively.

"Loyalty programmes have the double benefit of strengthening customer relationships as well as providing strategic data for attracting new clientele. When properly supported and monitored, loyalty schemes have the potential to offer short- and long-term benefits to companies and consumers struggling with recessionary woes," Wood concluded.

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