Top retail customer loyalty pressures revealed
Two-thirds (65%) of retailers currently lack fully automated loyalty tools at the point-of-sale, and both card and non-card loyalty programmes need to be simplified for retail employees, according to a survey of 165 retailers by Aberdeen Group.
This inadequacy at the point of sale suggests that there is a significant gap between customer service processes and technologies at the focal point of retail customer service. Considering that the store still accounts for the greatest share of sales for the average multi-channel retailer, this gap undermines the retailer's ability to build long-term, profitable customer relationships.
The report, entitled 'Cutting edge customer loyalty: Retail best practices', also found that 50% of the best-in-class retailers identified already use fully automated loyalty processes at the point of sale, which are responsible for improved performance metrics such as a 16% year-on-year increase in customer retention.
The company's original 'Responsive Customer Loyalty' report in June 2008 showed that loyalty has become one of the most critical factors that impact retailers' sales and customer retention performance. But in order to ensure effective results, loyalty platforms and points solutions need to be combined with the key loyalty-related process workflow functions: planning, implementation, evaluation, and analysis.
The focus of large retail companies has largely been on the upgrade of legacy loyalty systems that are five to ten years old, or sometimes even older. These systems require constant updates for new loyalty scenarios and business attributes and, in the past three years, both ERP and best-of-breed loyalty companies have turned their focus toward providing loyalty solutions for small and medium-size retailers. These segments are most likely to grow and adopt loyalty solutions within the next two years, while large retailers will continue to update, improve, and adopt solutions that are function-specific (such as CRM, business intelligence, personalised e-mail, gift cards, private label credit cards, and rewards cards).
Interestingly, the 2008 report indicated that the top pressure for 58% of best-in-class retailers was the need to develop Customer Lifetime Value (CLV), which was defined by the report as "the present value of future cash flow through long-term customer relationships".
However, in 2009, year the top pressure facing 61% of companies is the pressure of survival in global recessionary conditions that have changed the consumer spending landscape and made it more unpredictable than ever. Moreover, the second biggest business challenge (for 35% of best-in-class retailers) is the need to reduce customer acquisition costs in a recessionary market that is characterised by the high cost of goods sold. Best-in-class businesses cited the following key pressures:
- Increased competition in a tough economy: 61%;
- Need to reduce customer acquisition costs: 35%;
- Need to reduce customer retention costs: 30%;
- Need to increase brand awareness: 22%.
Among the 2009 survey's key findings and recommendations for retailers:
- 90% of the best-in-class retailers indicated some level of success from their loyalty programmes. In contrast, less than one-third of Industry Average and Laggard retailers reported success from their programmes;
- Best-in-class retailers were found to be 1.8 times more likely than Laggards to develop customer behaviour-based promotions that ultimately drive greater loyalty;
- Best-in-class companies were also found to be 70% more likely than their peers to develop multi-tier rewards plans for their most profitable customers.
- In order to achieve best-in-class performance, retailers should conduct customer wallet share and market basket analysis, measure the net profit margin impact of customer loyalty expenditure, adopt rules-based and POS-integrated customer loyalty systems, and upgrade their loyalty infrastructure on an annual basis.
The 2009 survey also found that grocery, department stores, luxury, and retail financial service institutions are particularly affected by the need to reduce customer acquisition costs. In the entire customer loyalty lifecycle process, the acquisition of a customer is the most difficult and expensive process, due largely to a fiercely competitive retail landscape. In today's down economy, customer acquisition costs are even more risky due to uncertain consumer spending and downward pressure on both prices and margins.
Currently, with same-store sales in decline, retailers are using every possible price-based 'customer pull' strategy to drive incremental sales through untapped customer segments that have any amount of buying power. Such short-term customer acquisition tactics drive costs upward as retailers sacrifice their net profit margin to increase sales volume.
According to Sahir Anand, analyst for Aberdeen Group, the difference between the 2008 and 2009 customer loyalty-related business pressures is primarily due to current market conditions which have led retailers to adopt desperate, short-term tactics to survive the downturn rather than focusing on long-term customer relationships.