Customers Claiming Their Rewards
By
Bernice Hurst, Contributing Editor, RetailWire
You
have to speculate to accumulate, so the theory goes. But if speculating
means spending, and spending increases your ability to accumulate rewards
which can be redeemed faster, then perhaps Tesco’s new policy of giving
two points instead of one for each £1 spent will actually increase
loyalty.
Guardian journalist,
Rebecca Smithers, says that she rarely has enough points from anywhere
to get anything because she isn’t loyal and shops around. But, by doing
that, she and other consumers may be getting a much better deal from
retailers who prefer a formula based on low prices and promotions.
That way they save money and can spend what they save anywhere on anything
rather than being tied in to whatever is on offer for the points accrued.
Tesco’s
data mining arm, dunnhumby, is renowned (or notorious, take your pick)
for knowing what will get customers to respond. Nearly 1.5 million
shoppers reportedly responded to Tesco’s recent offer to “Double Up” their
points for selected categories including clothes and entertainment.
But analysts and the media focused on shoppers not tempted, hinting
that the new move showed desperation because the retailer has not been
growing as vigorously as its non-points-awarding competitors.
Marcus
Leroux, in The Times,
interprets Baruch College research to conclude that consumers prefer
discounts that they feel they have earned although Asda boasts its “intelligent
offers” help customers use spare cash for paying down debt.
Impatience
with what could be seen as investing in retailers has led to more people
waiting a shorter time to get their payback. Sainsbury’s Credit Cards
researchers claim that “54 percent of credit cardholders with a reward
scheme have claimed all or some of the rewards they have earned in
the past year” compared to “just 23 percent of those polled who said
they had claimed some of their rewards a year ago.”
In
a June 8 discussion here on RetailWire (The
Loyalty Card Conundrum), George
Anderson and most participants endorsed simplicity. Shoppers’ behavior
in cashing in, or rejecting points in favor of low prices, would seem
to support such views. Staying loyal to a single retailer, and accumulating
maximum points, can be rewarding. But saving money rather than accumulating
points can provide greater choice. Which leads to the question – are
shoppers more concerned now than ever before with cashing in?
Discussion
questions: What are the pros and cons of Tesco doubling the payback
on its rewards programs? Do rewards for loyalty motivate shoppers more
or less now that the economy is so tight? Would shoppers rather have
a choice of rewards or everyday low prices?
- Tesco ‘propping up’ trading
with £200m Clubcard promotion – Telegraph - Sainsbury’s
Credit Cards: Credit card holders are ‘starting to benefit from their
reward schemes’- Cardsmart - How loyalty
cards for supermarkets such as Tesco encourage spending – The Times - Asda continues
to defy downturn – Guardian - Tesco to give
shoppers double points on Clubcard – Guardian - Store cards
from clubcard schemes – Guardian
Tesco has long been known for its loyalty program and despite some recent losses, still has almost double the market share of its closest competitor. That being said as the articles do point out, the others are gaining share and growing sales at a faster rate.
Having just tried the two for one scheme on a limited number of categories, Tesco gained fist-hand knowledge of the impact such a change would have. The gamble for them is, will it have the same impact on the rest of their offer as it did on clothing, entertainment, etc?
There is no question that people are seeking value more than ever. The real issue is, does the loyalty program offer customers more perceived value than the claimed lower prices of its competitors? If so, then it’s a great more. If not, then Tesco will be incurring the cost of double rewards without the gain it needs to support the move.
The biggest downside for doubling the payback on a rewards program might be the fact that it is functioning as a subsidy, rather than a tool capable of generating incremental sales. I would expect that if consumers are not regularly engaged in a loyalty program (in other words reaping benefits on a regular basis) then it is unlikely many would perceive a future reward to be more compelling than the immediate benefits of lower pricing.
In my own experience, I have always been most influenced by reward programs that provide me with immediate gratification such as late check out at hotels, access to an airlines express line and lounge at the airport.
Tesco’s scheme of doubling points is certain to have some positive payoff. Programs that allow accumulation of rewards can drive both retailer loyalty and basket size, since every additional trip or dollar in the basket pays back a certain percentage to the shopper. Considering the “Churn and Burn” that most retailers face (Brian Woolf published data on one food retailer that lost more than 50% of their customers and gained back about that many new ones over the course of a year), retaining even a fraction of a chain’s defecting shoppers can have a huge impact on the bottom line. I suspect the additional 1% reward that Tesco is providing will pay for itself in shopper retention alone.
The danger with a non-rewards model (such as EDLP) is that your grip on your shoppers is only as strong as your pricing edge over your competition. Sure, if you have Walmart’s scale and efficiency, you can attract and retain a strong customer base. But if you are a traditional-format supermarket, you risk losing your customers to the next chain as soon as they undercut your prices. And no one wants to be in that type of race to the bottom. Of course, when shoppers are counting every penny, nothing calls out to them more clearly than the promise of saving meaningful money on groceries.
So, EDLP or Rewards? For Tesco in the U.K., the math is much simpler–since more of the store is private label and retailer margins are higher, the rewards cost can be absorbed by the retailer without the outside brands’ buy-in. In the U.S., with lower private-label penetration (20% is common) and lower retailer margins, EDLP is simpler to implement–simply demand the lowest possible price from each brand, and pass along the savings to the customer. Rewards requires either the bravery to risk giving 1% back to customers in a business with 1%-2% profit margins, or else it requires a scheme to get the manufacturers to chip in. CVS’s ExtraCare program (though not in grocery) accomplishes the latter by getting brands to fund “ExtraBucks” that get distributed to shoppers. It may be because they have better margins than grocery, but even so, the ExtraCare model could be an interesting one for supermarkets to emulate.
Loyalty, retention and engagement marketing are the focus of most retailers, banks, employers today. The transition from direct acquisition of transactional customer to long-term, engaged, data-driven communications/offers/rewards is where the marketing arena is going.
Reward programs are still growing, with organizations such as Jiffy Lube, Big Y, and others recently launching programs. Also, Colloquy just released a survey that shows that program participation is growing in Canada. We also know that program functionality and the breadth of the offering continue to grow.
The key is “voice of the customer.” You need to actively listen to and engage with your customers to create an interactive dialogue that provides value for you and your customer. Not many do this.
The challenge with point programs is the bad reputation airlines gave them over the years. You save all these miles and then struggle to use them on a flight that you want. In retail I see a lot of exciting programs being deployed. This week for example I had meetings at Giant Eagle and their Fuel Perks program is very exciting and easy to understand and use. Buy groceries at Giant Eagle and get cents off your next fill-up. The cents are stored on your Loyalty card. It’s easy and it is saving the consumer money on a product (gas) no one enjoys buying, but must.
Another example of an easy-to-use and rewarding program is Marriott’s reward program. Stay at a Marriott and receive points. Points can be used for free nights and they accumulate quickly. A frequent hotel user can easily earn 7-8 nights in one year. They created some extra point bonus programs over the last few months and I can only assume they are working.
CVS is also doing a great deal with their loyalty card. Consumers share data with CVS and in return receive coupons off their next shopping trip. Not bad.
If done right, points can be a real influencer for consumers and a great way for a retailer to gain additional insights about their customer. Don’t create a points program unless you plan on keeping it simple, make it worth while to the consumer and plan on mining the data you collect. If these can’t be accomplished, focus your energy on lower price and cross your fingers.
The message here has been loud and clear–loyalty programs are strategy that has to be intelligent, well executed and sustainable. The good plans understand their customer needs and aspirations, and make the rewards important for them.
Engagement is key. Best plan in Canada is Shopper’s Drug Mart–points are easy to accumulate, totals reported every time you purchase, special promotion days draw huge crowds, bonus points for more upscale purchases, and more. Redemption thresholds give the choice of saving on larger purchase of everyday items or applied to bigger ticket indulgences.
It works because people understand the value they get for shopping at SDM–essential to the strategy employed by the retailer. If it doesn’t deliver on the value proposition and build long-term loyalty, stick with EDLP.
One tactic does not make or break a loyalty program. Consumers evaluate a number of items when making choices. Making a change in one item alters the equation but if one item is great and others begin decreasing in value, there is no net gain.
My UK based associate Mike Atkin has just written about the current situation with Tesco’s in this article: Will UK Grocer Price War Trump Tescos Club Card
I can only add that consumers do seem to respond well today to rewards that are more easily attainable and also to rewards that can be redeemed and enjoyed at the point-of-sale.
As will all things, there is something for everyone. Some segments continue to accumulate and redeem for more significant rewards. Others like the velocity approach.
If engagement is what we are after and return store visits are in favor with retailers, then short cycles of accumulation and redemption should be an effective solution for retailers.