Retail Loyalty: Getting Real About Programs

© 2010 Metzner Schneider Associates, Inc.

Our recent article, “Retail Loyalty 101,” resulted in a lot of feedback and interest; the article was re-published with our permission in a number of venues in the U.S. and around the world. Given last year’s Jupiter research reporting indicating that 43% of multichannel merchants without loyalty programs planned on launching some kind of program in the next twelve months, we weren’t that surprised at the interest in retail loyalty.

While that article focused on how to craft a program successfully in the retail environment, we realized we left a rather obvious question unaddressed:

Why should a retailer launch a program in the first place?

So it’s time to take a step back to consider why a retailer would want to launch a loyalty program; what a retailer can realistically expect a program to accomplish; and more importantly, what a loyalty program should not be expected to achieve.

There are many successful retailers who do not have loyalty programs and a few are quite vocal about not planning to add them. According to an article in the Wall Street Journal on June 6, 2006, Asda, a retailer in the UK owned by Wal-Mart, claimed that their market level research was advanced enough to accomplish the same function at a much lower cost than a loyalty program which tracks individual customers rather than markets.

The point of the article however, was about the runaway success of Tesco and its Clubcard program, which appears to have successfully resisted the entry of Wal-mart into their home market by intelligently using the data they have gathered on individuals. For example, Tesco introduced ethnic spices and other specialty items into stores in highly ethnic neighborhoods by using the same market level research as Asda, their Wal-Mart owned competitor. Sales increased. However, Tesco noticed that their upscale non-ethnic customers in the area were also buying the new specialty items. They proceeded to test the specialty items in other upscale neighborhoods with highly profitable results.

It was a brilliant retail opportunity that existed only because of the brilliant use of a retail loyalty program. Asda confessed that their profits were down because “We took our eye off the customer.”

With that story of the possibilities in mind, let us move on to what are realistic expectations for what a program can and cannot do.

Realistic purchase expectations: A program can consolidate the behavior of customers who are splitting between retailers that are effectively at parity on merchandise mix, merchandising sophistication, pricing, and location. However, a retailer with poor merchandise selection, weak presentation, significant price discontinuities, inconvenient locations or a complicated online user interface cannot buy loyalty with a program, no matter how rich the rewards offered.

Customers know when they are being bribed and they don’t like it. They will do the minimum required to get the value out of the situation and then defect. This phenomenon can be observed in the frequent flyers who fly just enough to earn status on each of 2 carriers rather than keep flying on one without getting to the next level of status.

Realistic private label credit expectations: Many retailers expect a program to accomplish their goals for their private label credit card, which are to produce a revenue stream through card related fees and to reduce costs from merchant fees on other credit cards. They limit the program only to users of the private label card in the hopes that the program will kill two birds with one stone – increase loyalty to the retail brand and acquire new applicants for the retailer’s card.

Instead of two birds/one stone, the operative metaphor is that a loyalty program cannot serve two masters. Expecting a loyalty program to drive private label credit application is flat out not realistic given how customers want to earn various rewards such as frequent flyer miles or distribute their credit spending across multiple cards.

The mission and best use of loyalty programs is to stimulate and retain desirable purchase activity. Therefore a program can and should be used to stimulate usage of a private label credit card by current cardholders. The most effective use of a program is to structure the program to allow accrual with all forms of payment and then provide incentives for private label card use such as double points or special shopping days.

Realistic profiling expectations: Even the best modelers and data compilers serving the retail industry cannot accurately model the complete spending profile of individual customers, especially in any environment where there is a significant percentage of cash sales. Even the linking of credit information, which is where most modelers excel, is increasingly hard to do within the privacy laws.

One retailer we know found during their program pilot that the actual annual spend per customer was almost double what their best model had predicted. Their program gave their customers a reason to identify themselves for all their purchases so the retailer discovered that:

	•		Strong credit customers also had a significant percentage of cash purchases – the retailer had thought there was a large “cash only” customer segment that needed to “easy to obtain credit” products when in fact the cash only segment was not large and unlikely to provide a significant market for new credit cards
	•		Best customers were using as many as four different credit cards within a quarter, including the private label card – indicating a need to enrich the incentives to use the private label card for all purchases
	•		The performance hurdles needed to be increased for the higher program reward payouts -- fortunately, they discovered this before rolling out the program in more than one country

Leveraging the profile information gathered is where most retailers run into trouble. Most never use the information. It sometimes seems as if there is an expectation that a program and its data platform will magically produce information that will auto-generate the next offer. Someone has to look at the data, interpret it with a creative imagination and then write the business specifications that facilitate audience selection and offer delivery.

Another large percentage use the information to stimulate new behaviors – sending customers coupons for merchandise they are not buying but which is profitable to the retailer. This again falls into the category of customers do not like to be bribed to do things they do not want to do. They will rightly perceive the program at best as stupid—“They don’t know what I like”—or at worst as being cynically manipulative.

Leveraging profile information has been the genius of the Clubcard program sponsored by UK grocer / retailer Tesco. The Wall Street Journal article previously mentioned also detailed how Tesco noticed that families with new babies bought more beer as well diapers, wipes and baby food. Tesco and their data consultancy theorized that perhaps new fathers were drinking their beer at home rather than going to the pub, but more to the point, they took the action of providing beer coupons to more families with new babies and noticed their beer sales increase.

One of the amazing quotes from a Tesco customer in the article was: “They’ve never sent me anything totally off he the mark.” Few retailers, both those with and those without programs would have customers saying that about them because they think opportunistically about what they want to sell rather than creatively about what their customer wants to buy.

Realistic communications expectations: Many retailers use program membership databases and even the online channel in general as yet another means to distribute weekly circulars. They will find that open rates plummet for a noticeable percentage of customers—in theory, these customers are the ones who are not shopping for weekly deals but are in fact the ones who might buy at full price if provided the right option at the right time for them.

The customers who continue to open the emails regularly are the hard-core coupon clippers willing to scour the web as well as the Sunday paper. Best Buy found that many of this customer segment were actually value destroyers and they made headlines by “firing” those customers. At the very least, using outbound email only for the communication of promotions trains customers to wait for the sale.

The right way to use the program member base and also the online channel is to think in terms of fostering dialogue and community. A conversation between 2 people breaks down if one person does all the talking without listening to the other person. A profile serves as an automated listening tool that allows customers to customize content to make it relevant for them.

The trick is to structure and use the profile intelligently—one company we know only gave customers exactly what they had requested on their profile and then ran into declining open rates as customers grew bored with unchanging content. In contrast, Hewlett-Packard’s Newsgram profile reduces wear-out by asking for interests as well as current products owned—I may currently own only an HP laserjet for business purposes but I may be researching digital photography and would be more likely to consider HP cameras or color printers after the HP Newsgram provides me with relevant and useful content.

The same principle applies to less obviously information intensive sales—focus on what the customer wants and when they want it. Target markdowns on the minimum amount needed to drive traffic—one person may respond to an incentive on jeans while another comes in for cosmetics specials and by targeting the promotions using a program database, each customer will receive one markdown instead of both customers getting both markdowns because both were included in one electronic version of the Sunday circular.

Realistic ROI expectations: The 2 components of ROI are more revenue and less cost. When a retailer looks at adding a program, the two obvious actions are charge a fee to create a new revenue stream and find a way to reduce markdowns.

On the fee side, every retailer dreams of the experience of Blockbuster when they introduced Blockbuster Rewards with a fee of $9.95 – several million customers became members turning the program into an overnight profit center. For every Blockbuster tale (pun coincidental but apt) there are many more retailers wondering why their fee program is simply a bust. The difference lies in understanding that the customer has to perceive that they are receiving far greater value than the fee with maybe one or two more purchases than they would normally make. No one in any industry should put a program in place without understanding how to provide the customer with what they perceive as a value at a reasonable cost. However, what happens far too often is that the company launching a program delivers only what they perceive as a value, which frequently does not coincide with the customer’s perception.

Another key factor is the category itself; some products and services are inherently higher-involvement than others. High-involvement categories are much more fertile ground for programs in general, and particularly for fee-based programs.

The second part of having realistic ROI expectations is more specific to retail – managing markdown costs. In theory, a program allows for markdowns to be targeted only to customers with the capacity for incremental purchases rather than being a broadly available blanket price initiative. It is in fact a reasonable expectation that a loyalty program can reduce markdowns or at least self-fund program costs with reduced markdowns, however, most retailers do not succeed.

Organizational pitfalls can limit program effectiveness. Often, the barrier to program success is not so much a lack of marketing insight but one of organizational structure. Programs are almost always run by a separate marketing group from the merchants managing markdowns and the promotional communications that advise customers of the markdowns. Each group runs separate promotions with separate communications and then wonders why customers are double dipping and the promised cost savings have not materialized.

It took two years for even a smart retailer like Best Buy to combine Reward Zone coupons with their promotional mailings and coordinate the messaging to address their target segments (“Barry” the home theatre buff, “Jill” the soccer mom buying electronics for the family, et al)—the groups managing the different communications were initially not talking to each other.

Conclusion: If your expectations for a customer relationship or loyalty program are realistic; if your program is integrated with other promotional, advertising and marketing communications efforts; and if your company is organized to take maximum advantage of the benefits a program can deliver, then you should seriously consider launching a well-designed loyalty program. Our previous article, “Retail Loyalty 101,” includes many guidelines that can be helpful in determining which program elements and tactics best apply to your business.

Remember, in retail or in any business, a customer relationship program should always be designed to generate incremental sales while reinforcing your company’s brand message and personality; a program should be a logical, comfortable extension of your core business. And remember, too, that a loyalty program can only be effective when you’re committed to being loyal to your customers – to offer them the best products, service and pricing, and to tailor your offerings to their needs.

By Kate Baumgart Hogenson for Metzner Schneider Associates.

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Copyright 2010 Metzner Schneider Associates, Inc.