Loyalty Programs Are Not the Problem
By John Hennessy
According to Jane Johnson and Web Fletcher, writing for Direct magazine, the conventional wisdom followed by many retailers hampers the success of loyalty programs. They
continue that few loyalty programs are differentiated based on solid customer insights.
Breaking out of this syndrome includes making your loyalty effort an integral part of a broader customer-centric strategy that creates a sustainable advantage based on the unique
needs of distinct customer segments.
The authors pose several questions to determine how your loyalty program shapes up:
- Do you truly know what your customers value and are willing to pay for?
- When customers come across your membership card in their wallet, is there something special they’ll remember about you?
- Will you be able to predict customer behavior and take actions that will make them think, “Wow, this company really knows what I need and what I want”?
They urge retailers to use the insights available from their loyalty programs to shift the terms of the battle.
Two key competencies are identified as necessary to take a program to the next generation:
- Advanced analytics that allow retailers to understand specific loyalty drivers for each marketable customer segment, and;
- Integration capabilities to convert insights into segment-specific offers.
Moderator’s Comment: Is lack of customer data analysis truly what is holding back the success of loyalty programs? If not, what is?
I both agree and disagree with the authors.
I agree that price is not the end game. Using purchase history to demonstrate to your shoppers that you understand their preferences is more powerful than
price and a way to differentiate your store.
Put differently, if you know what shoppers like and act on that knowledge, you don’t need to discount as heavily. The shopper likes the product and doesn’t
need much incentive to buy more of it. Selecting products to promote based on the preferences of a shopper also demonstrates your loyalty to your shoppers in a way others retailers
do not.
I disagree with the definition of Next Generation loyalty programs provided by the authors. They shoot low in defining it as superior analytics. Superior
analytics are available today. The limitation has been the inability to execute.
Next generation loyalty programs execute in real time, based on ongoing analysis of purchase data. They don’t generate discoveries. They generate sales
results.
Shopper preferences don’t sit still. You need to keep moving to keep up.
[Full disclosure: developing and executing relevant offers based on the automatic, daily assessment of shopper preferences derived from daily analysis
of purchase data is what Concept Shopping does for major supermarkets and consumer packaged goods companies.] –
John Hennessy – Moderator
Loyalty programs are vehicles of a customer relationship management effort. Although explicitly implemented in brick-and-motor businesses where they trade exclusive benefits for additional customer data, they are intrinsic in e-commerce. Loyalty programs make the sequential purchase habits of these customers visible, at the cost of the inconvenience of carrying the card and alienation of non-loyalty customers.
Few customer relationship management analyses make use of all the available data. Analysis efforts rarely increase to match the expanded loyalty-program data. Without loyalty data, general product trends and associations are available. With loyalty data, the interrelationship between the customer and the products, and the time sequence of purchases becomes available. This additional information is not perfect and is partially hidden, because the customer may well also be shopping intermittently with the card.
As a result of an analysis of loyalty data, sequential market basket analysis would expose sequential or even cyclical buying habits of customers, such as an annual book purchase as a gift, or that increased milk purchases result in increased diaper purchases which cease 3-4 years later. Evidence of such calculations are not apparent in even the top e-commerce retailers where such data is innately available. Amazon and many others will offer item one of a trilogy when the customer is looking at item two.
These calculations do have a profound impact. Without loyalty data, all customers are alike. With loyalty data, customers are segmented and targeted by group or even individually. Undoubtedly, this increased information yields increased ability to “truly know what your customers value and are willing to pay for.” Taking special notice of their habits, for example reminding them of a birthday gift or tailoring a set of discounts directly to them, will create a relationship between the store and the customer and, therefore, make them value the relationship should that relationship benefit the customer.
Lastly, it is predictive analytic features, i.e. personalization, that are so highly lauded as the driving force behind customer satisfaction. Taking these features a step further to better understand and cater directly to a customer will further increase customer satisfaction. Since tenths of a percentage point in customer retention result in millions of e-commerce company profits/losses, keeping the customer satisfied and retained is of high importance.
I used to walk into the buyer’s and merchandiser’s offices at Wakefern and see stacks and stacks of computer printouts sitting in the corners. This was the data on sales at specific stores and for specific categories, and they would stay there for weeks until they were replaced by new stacks. The stacks of paper are now gone due to the dramatic decrease in computing storage space (the world’s forests thank the likes of EMC), but one has to wonder if the data is still sitting there in the corner of the computer as unused as ever. While Wakefern and many others are able to track buying patterns and really target their promotions, they rarely take advantage of the analysis at their fingertips. Part of the challenge, at least in retail grocery, is that much of the bottom line is still being made on the buy side, so resources — computing and human — are dedicated to procurement activities to the detriment of merchandising and other demand creation activities. Also, financial questions are often being asked of the data when operational and marketing questions should be asked. This is a result of analysts having more sway than real merchants at many organizations.
John, as you typically do – you have raised a compelling issue and provided an interesting perspective for us to chew on. I agree it is not ONLY price and that distinguishing oneself from others is key.
I find that the most progressive companies pay attention to what is bought, who bought, what else was bought at the same time, etc. The offer of pricing is not enough to sway shoppers when everyone offers it.
There is a ‘yes’ answer; and a ‘no’ answer! Yes, there is data, — after the fact’ purchase info available from the retailer. But how is this data interpreted, utilized, and implemented as part of a total marketing plan, to include a strategy and tactics for the consumer target, and whatever segments are broken out? It isn’t!!!!
Without understanding the consumer and what he/she wants, and states, issues and needs, the above data becomes almost useless, as evidenced by the status of grocery/food retailing.
The ‘no’ answer part is that our grocery industry in general doesn’t survey or question its shoppers or non shoppers with research, on a consistent basis, to start building the proper, and most useful loyalty program.
So for a very few grocery operations, loyalty programs are what we all know them to be, a new price driven vehicle.
When answering a question such as this, we tend to think of the best and the brightest. The vast majority of companies do not have the data – never mind the analysis. Those companies that do have the data vary widely in how well they analyze and implement it.
For example, to speak on one of the giants, we all applaud Amazon as a model of great data integration and use, and yet I continue to disagree. They do not differentiate between those books I send to myself and those I send to other people, and continue to make recommendations based on all the books I buy. How clever would it be if they recognized that my father (or to their mind – a man with the same last name as me who lives in another state) receives a marketing book from me every April. Would it not, at some point, be smart, if in March, they made suggestions for books I might want to send to that man in SC?
While I have only bought one cookbook from Amazon (making this a minor category for them), I have bought good (and expensive) chef’s knives and high-end appliances. Why would they not bundle this data and assume I cook and ramp up the cooking suggestions?
Regarding those loyalty cards from local suppliers I now refuse to carry in my wallet, not one of them inspires me to shop more – the price/value correlation is just not strong enough. I buy pizza down the street because it’s convenient and tastes good, not because they gave me a card that, after a dozen pizzas, will give me a free one. The value is simply not high enough to inspire loyalty when other factors clearly are more important (location and flavor). Ditto the car wash.
The answers are very different depending on the size of the company gathering and using the data. But I fundamentally agree that despite the mountains of data collected, the analysis is weak.
Most loyalty programs are really just “me too” volume customer rebate programs. Most don’t encourage additional purchase variety. They just incent people to buy “more.” It takes some imagination and initiative to design programs that encourage sales of the unobvious, especially if those sales are at a profitable margin. By giving away margin to the heaviest volume customers, the retailer often succeeds in minimizing his profit.
If a customer doesn’t even bother to carry the loyalty card around, he/she is really saying,”Your store is just not that special.” Copying everyone else’s loyalty program won’t make a store special. It just makes it seem like everyone else.
What can better analytics and even execution do? Maybe I’m being over-simplistic here, but are we only talking about selection and price, and maybe service-points?
Our national random survey of 6500 grocery shoppers a little over a year ago revealed:
– Consumers feel that having to have a card in order to get a lower price is a disservice, even among consumer who use such cards. They don’t like loyalty programs, even if they use them.
That may be the key.
Two thoughts. The first is that most don’t know the difference between numbers or “research” that focus on ‘effects’ and those that focus on ‘results.’ An ‘effect’ is where you look at part of your business process. You may be proud, for example, that 23% more customers signed up for your loyalty card than predicted. A ‘result’ is the outcome of the total system flow. Did that great sign-up rate result in higher revenue and profit? The latter is the only thing that really counts in the long run.
Where I see this even more clearly involves companies obsessed with “cutting costs.” Many retailers cut costs by hiring fewer and less skilled sales people without a thought as to what that does to the total system. They cut costs by 20% and their profit by 40%! That’s when they usually launch the customer loyalty program in a desperate effort to recover.
My second thought comes from a great HBR article by Roger Martin, Dean, Rotman School of Management. He distinguishes between “Reliability” and “Validity.” Most of our measurements are reliable – they are accurate and objective – but also lack insight, meaning and purpose. He writes “Unfortunately, companies’ obsession with reliability hasn’t prevented them from getting on the wrong side of customers or being ambushed by new rivals.” What’s gone wrong, he concludes, is that for the most part we lack the will and/or ability to see the meaning behind the customer research we keep crunching out.
Some retailers need to extend the concept of loyalty shopping and consumer analytics to beyond what just happens with the 4 walls of their store. I was once privy to a conversation with a dominant player in the Canadian drug/pharma channel who freely admitted that they were not interested in anything that happened with their shoppers once the shopper left the store.
So to have 100s upon 100s of pages of flow charts and Zen diagrams depicting up to the minute consumer purchase patterns and trends is, one might argue, more than useless unless it is coupled with market-level data for that channel. Great, consumers are flocking to Brand X and Brand Y, and what else are they buying that your store could/should have? Or maybe your store has it and they’re not buying it in your store — why not? Is the set properly merchandised? Do the planograms need revising?
I’d rather know 2-3 key aspects of what the customer does in my store and in the market, than 100s of ideas on what the customer does only in my store.
Forget about analytics – how about imagination? The whole point is to treat your most loyal shoppers differently – and (ideally, but we won’t go there) better! How about inviting “platinum” loyalty members to exclusive events, or giving them bonus coupons that they can give to employees who provide outstanding service? Make them feel engaged, make them feel like they have an active voice in what happens in “their” store. And forget about sending them coupons or discounts for things they never buy – because your customer data analysis still isn’t operationalized.
I do believe that getting insights is hard, and that it impairs loyalty programs – but I also think loyalty programs focus too much on the wrong things.
The consumer in me takes issue with some of the means that stores use to collect information. I don’t care if they track what I purchase, roll it up to make recommendations on products I may be interested in or even provide incentives for me to continue to shop their store. I also realize that they don’t even need my name, let alone my address, phone number (or any other information that I may need to worry about how they store and share with their trading partners) to accomplish this task. I get enough junk mail already whether it is in my mail box or my inbox(s). Simply link it so that I control when it is used and give me an interface to use it with, whether that be my PDA or a kiosk in the store, the check out etc. and I am set. The price should be the price and if I am valuable enough to reward, then simply place a credit on the card at check out and I will likely return to use it. If that credit is supplemented with offers on the table from vendors to give it significant value, there is your card promotion and supplemental sale. Allow me to determine whether I want to use internet services but have them ready to fill all of my needs when I decide to, not just tell me where a store is in my area.
As an industry worker, if the data were more anonymous in nature, would it not be easier to share the data with partners in order to glean the most insight and use for the data? I see mountains of data and a few, focused groups with access to it. Many of these people do not have the time, necessary skill sets or appropriate resources to truly process and digest the data. It looks much like the first days of Category Management to me where a few created reports they thought valid while the many clamored to get access to data they just knew held all of the answers. They even had an idea of what they wanted from the data. It seems to be the cost of software licensing and the ability to deliver the data to all facets of the company in a form that they can use for their daily job functions. The people that need it most, after all, are those in the stores. The HQ offices will just aggregate it to the point where it is meaningless or spend resources needed at store level trying to digest and disseminate it in a timely manner.
Those are just some issues I see. I don’t know the answers that solve them. I do see some promising ideas beginning to get close, but I have yet to see them truly executed effectively. I would love to hear who has succeeded and what got them there.
Sophisticated analytics are a red herring. Basic analytics are quite sufficient for most retailers. The key is to identify MEANINGFUL insight and be willing to act on it.
I think the premise that if sophisticated analytics were used, it would magically create loyalty.
I again follow the path I normally do when discussing loyalty. Its not a program! Loyalty is the consumers choice, not the retailers choice! Loyalty is earned by the retailer not forced on the consumer. Loyalty is the consistent choice by a consumer to return again and again when other alternatives exist. That’s it. It doesn’t equate to data, it doesn’t equate to a card, it doesn’t equate to sophisticated methodology of data analysis.
Futhermore, its not at all about price. Its even less about price when you are forced into using a card to get the price.
All of the factors in the equation that consumers relate to value and worthy of their loyalty don’t add up to a card. What they do add up to is execution. No matter how you add it up, it comes back to the same equation.
I think of one of the questions asked about what the consumer thinks when they see the card in their wallet. I think of my own thoughts about the cards I have. They are an annoyance and I wish that there was an alternative.
Retailers that focus on execution with their ears wide open always have loyalty. The majority that issue a card and forget about it, never will.
In addition to relevant offers, a very basic and simple way to improve business with high spending shoppers is to treat your top shoppers better than “regular” customers. Airlines do this with their platinum and gold level travelers, and department stores do it for their top shoppers. I don’t think too many supermarkets or mass merchants are doing this well, though. As a frequent Costco shopper who recently upgraded to an executive membership at an additional annual cost of $55, I now get 2% back at the end of the year, but the cashiers don’t give you a special greeting or anything when you show your top level card. At CVS, you can complain about something at check out, and the response you invariable get is, “Do you have a CVS card?” As if that would resolve the complaint.