Loyalty counts
Customer loyalty schemes have come a long way over the past few years, growing in sophistication and number as the technology underpinning them has developed. Why, then, do so many still fail to deliver their full potential?
Rising tide
No-one knows precisely how many loyalty schemes there are now across the globe, but when the multi-retailer scheme Nectar was established in 2002, the company running it, Loyalty Management, counted 160 in the UK alone. The UK is arguably the most sophisticated – and saturated – loyalty programme market in the world, but it is far from alone in its enthusiasm. Germany will have around 100 million customer cards by the year 2007 – more than one per head of total population – according to a study by strategy consultants Roland Berger. That is up from 60 million in 2003.
Dream scheme
The schemes are seductive: they promise the ability to track individual customer spending patterns and all that implies in terms of supply chain management, marketing and product development. They also help the retailer give the customer a voice, says Daniel Bernard, president of investment company Provestis. Until earlier this year, he was
president and CEO of French hypermarket chain Carrefour – it was under his leadership that Carrefour launched its loyalty scheme in the early 1990s. “For 30 years supermarkets pushed products to the customer,” he says. “Now, through new technology and better information, the customer is pulling.”
Keith Ellis, Head of Food and Drink, 3i
Flexible friends
The schemes have also enhanced retailers’ flexibility in certain European markets, such as France and Germany, where the government has historically set a floor for retail prices. The French Loi Galland regime, for example (which was replaced in mid-2005) had stated that retailers could not offer prices lower than those fixed by the vendor (usually the producer). Introducing loyalty schemes meant that French retailers had an alternative means of pricing competitively.
A mine of information
For Tesco, the scheme is at the heart of its growth strategy (see case study). That said, few other retailers have experienced the same success. Supermarket chain Safeway abandoned its ABC scheme after just a couple of years of operation, claiming that, at around €75m a year, it was too costly to run. Even those that survive aren’t necessarily reaping the full benefits.
“Most large players in Europe have loyalty schemes, but many haven’t worked well,” says Paul Alexander of marketing consultancy Dunnhumby, the company that advises Tesco on its Clubcard programme. Part of the problem is to do with implementation, he says. “Customer loyalty is about rewarding behaviour that you seek.
To make schemes work, you have to know exactly what it is you want from your customers. Is it more frequent visits? Fuller shopping baskets? Or buying higher-margin goods? Just having a loyalty scheme in place does not earn you loyalty – it is simply a tool.”
It’s also to do with how the information is used. “A lot of retailers use their loyalty cards as discount cards and don’t do anything meaningful with the data they collect,” says Keith Ellis, head of food and drink at 3i. “And that makes it expensive. If you don’t use the data, then you may as well just do away with the card and reduce prices.”
Untapped potential
The problem is that a lot of schemes are set up with the best of intentions but not enough thought. “Some programmes are simply add-ons to a retailer’s accounting and inventory systems,” explains Brian Sinclair, client services director at Loyalty Management. “To make it work, the marketing database has to be integral to the project.”
The programme also has to have buy-in at the very top. “You often see retailers building great insight departments, but they wait for the directors to ask questions,” says Mike Green, chief executive of Him!, which conducts market research, mainly in the convenience store market. “You need a board level champion of the scheme – if it’s left to middle management, it just won’t work. You need the insights to be driving the strategy rather than the other way round.”
Close co-operation
Inviting suppliers to join in the act is another key to success, says Alexander. “I think people have missed a trick. The benefit of the data isn’t just for the retailer – there’s a lot of value in packaging it on and selling it to manufacturers.” When successful, this strategy can transform the traditional relationship between suppliers and retailers – an adversarial one – into a more co-operative one. “If both sides have the right information, they should be looking for the best product at the right price for the particular consumer they are targeting,” explains Alexander. “And that doesn’t always mean the lowest price for the manufacturer and the highest for the retailer.”
For those that get them right, loyalty schemes of the future could offer still more rewards for retailers – and manufacturers. Data-mining is a well-honed art, but Bernard believes retailers can glean more from the schemes. “There is still a lot of mileage in the information these schemes can collect,” he says. “There is permanent progress.”
Playing tag
With the advent of Radio Frequency Identification (RFID) technology, the options beyond simple data-mining are almost endless. “I can see a world where a customer stops at the toothpaste section and an ad appears on their trolley for a brand of toothpaste that the retailer knows the consumer hasn’t bought before,” says Alexander. “You could offer them some incentive to try that new brand. Technology is an enabler of better communication with the customer.”