Loyalty is pointless - or is it? | 
 |
By Robert Kenley (Director, CardsConsult Ltd)
Published by The Wise Marketer in March 2005.
Robert Kenley provides valuable insight into the key issues facing stakeholders in the loyalty card market, along with a vision for the future evolution of loyalty cards and programmes...
With 85% consumer penetration of loyalty cards in all their different guises in the UK, the market for loyalty cards is highly commoditised and saturated. Despite high penetration, consumers have become disinterested in most loyalty schemes and the market is heading for a significant shake out with only a few existing programs surviving. The loyalty market is also ripe for new entrants who champion the consumer, utilise new technology to deliver a better consumer experience, create interesting new value exchanges and communicate on a true 1-2- 1 basis. Organisations need to raise and exceed consumer expectations of loyalty schemes and re-engineer their loyalty programs for the 21st century.
A brief history of loyalty programs
Ever since programs such as AirMiles and Tesco Clubcard were created, loyalty schemes have become products in their own right. An entire new value exchange was created where consumers would give organisations their consumption time, personal information and discretionary spend in return for a reward of perceived value greater than the perceived cost of attaining and delivering it. The value exchange was mediated by points systems and given tangible form by plastic cards.
Consumers gravitated towards loyalty schemes because they were easy to attain and provided 'something for nothing', after all our time, personal information and discretionary spend is all 'free' isn't it?
Retailers built powerful databases to collect, analyse and interpret the data from loyalty schemes. Category management strategies evolved whereby retailers could use the customer data from loyalty programs to develop more efficient and effective promotional strategies using points to persuade shoppers to increase their share of spend.
Credit card issuers joined the party aiming to increase share of spend on their cards by giving points on all card spend and sometimes bonus points for specific, higher margin transactions. Increased share of spend would lead to additional transaction fees and interest income. Card issuers either created own-label schemes or partnered with established schemes to create co-branded cards aiming to increase customer loyalty to both the card and the partners' business. Both companies would share the costs of running the program leading to higher margins. Again consumers adopted these cards without too much hesitation because they provided 'something for nothing'.
Just when loyalty programs were starting to lose their appeal and relevance, along came a major new coalition program in the form of Nectar. More opportunities to earn points, so that consumers can attain the rewards they want faster whilst delivering reduced costs for scheme participants, is what differentiates the coalition model from the single brand and co-brand models. True to form Nectar is still based on the principle of 'something for nothing' and because of this reason has managed to get its plastic into half of the UK households' wallets.
So why is it that despite the fact that almost every adult in the UK is or has been a member of some type of loyalty scheme, many consumers say that compared to other more important factors such as price, loyalty schemes make no difference to they way they decide what to buy, who to buy from and how much to buy? Are consumers in denial? Surely loyalty schemes must make a difference to consumer behaviour otherwise companies would not invest their scarce resources in building them in the first place.
Why loyalty programs succeed or fail
Feedback from consumer research into the motivations and attitudes held by users and nonusers of loyalty cards will normally show that different consumers want different things from loyalty schemes. However they do in fact share a core set of beliefs about what makes a loyalty scheme good or bad. In no particular order the motivating attributes people look for in a loyalty scheme are:
A single, unique and relevant reward which can be easily attained as quickly as possible;
- A currency that is easily understood;
- Lots of ways to earn the currency – so long as the currency is worth something;
- No restrictions on rewards;
- Easy, fast redemption
In this context the following rewards and programs score very highly with most consumers:
- Cashback – for example Egg, A&L, Morgan Stanley;
- Money-off vouchers – for example, Tesco Clubcard, or M&S &More;
- Stored-value virtual currencies that are the same as or better than cash – for example, AirMiles, Boots Advantage, or Thomas Cook Travel Pounds.
The most important success factor for a loyalty program is the reward must connect the consumer to the brand and motivate the consumer to earn the reward in the first place. Too often loyalty program providers fail to create a unique and compelling reward for the target audience or set the threshold to achieve rewards too high or create unnecessary barriers to redemption. Not surprisingly this results in consumer apathy towards the program and hence no positive change in their attitudes and behaviour for the business – a lose/lose situation.
The whole issue of points breakage is a typical example of where some loyalty program providers consistently get it wrong. If you make points hard to redeem or expire them after two years you shouldn't be surprised to see very little positive bottom-line impact from your loyalty program because for the consumer you've destroyed the very reason to participate in the program in the first place i.e. the value of the reward.
Some might argue that breakage models are critical to managing the profitability of a loyalty program however breakage models only serve to create a vicious circle of ever decreasing value for both the consumer and business because consumers will not change their behaviour if the value of the reward is being undermined.
The most successful programs influence customer profitability by flexing the rate at which different consumers earn currency for different activities. Rather than creating breakage models, enlightened loyalty program operators use knowledge about their customer's behaviour, their products and their margins in order to develop segment of one strategies that encourage consumers to behave more profitably using points as the incentive. They know that if the value of their points are in anyway devalued they are unlikely to get the positive changes in consumer behaviour they desire.
Successful loyalty program operators create predictive customer NPV and ROI models to decide which Customers, for what activities, how much and when points should be awarded. Points campaigns are integrated into their overall campaign management systems and are funded from marketing budgets.
Operators of programs such as Boots Advantage in the UK and to an even greater extent Garanti Bonus in Turkey treat their points currencies as virtual cash allowing consumers to spend points as real money in their stores. Enabled by chip technology and integrated point of sale systems, these models deliver the ultimate virtuous circle since consumers are able to easily earn and burn the currency keeping them happy, motivated and loyal. Consumers know that 1 point will always equal 1p and that 1p will always give them something off their shopping bill every time they visit the store. The smart card system just makes the whole earn and burn process easier and quicker for the consumer and the till assistant. The Starbucks Duetto Card whilst not a smart card also utilises this model.
By sticking to this "1 point = 1 penny" principle, loyalty program operators can go along way towards creating simple, straightforward programs that consumers value and understand. Rather than spending time changing the value of points when redeemed or expiring them in a vain effort to manage profitability, program operators should stick to the 1 for 1 principle and manage customer profitability through the earn side of the model. In addition program operators should increase the purchasing power of their virtual currency by opening it up to new partners and new channels – especially the physical point of sale.
Loyalty programs: the next generation?
There are three key market drivers that are set to change the UK loyalty market in the next few years:
- Chip & PIN;
- Stored value/loyalty card convergence;
- Digital channels.
These drivers will challenge traditional earn and burn loyalty models and create opportunities for existing and new loyalty operators. One can easily envisage programs that deliver instant rewards at the point of sale by leveraging the Chip & PIN infrastructure (credit and debit cards and point of sale terminals). For minimal incremental investment, card issuers and merchants can upgrade their cards and terminals to deliver instant rewards at the point of sale. Chip & PIN will provide both large and small organisations the ability to offer exciting rewards to their best customers. New types of loyalty operators will emerge to set-up and process smart loyalty transactions on behalf of card issuers and merchant communities.
As loyalty program operators realise that they must treat their point programs as real currency and allow easy redemption at the point of sale, hybrid stored value loyalty cards will start to emerge as a dominant mechanism for managing loyalty programs. These cards may be 'chipped' or could be delivered in different form factors (RFID chips, etc). Consumers will be able to top-up their cards via multiple channels with real currency and use them to pay for goods, services and content in existing and new channels (mobile, internet, digital TV, games consoles). Additional features such as contactless payments – similar to those used on the Oyster card - will further enhance the appeal of the hybrid stored value loyalty card and open up new loyalty markets where speed of transaction is critical (pubs, clubs, bars, quick service restaurants, etc). Because of its functionality, convenience and control, the hybrid stored value loyalty card could become the most important card in the consumer's wallet.
New digital channels will also open up new loyalty markets where cards can be used to identify consumers and reward them for their loyalty. The Sky Card is an example of this new genre of loyalty card where brand advertisers may now able to influence consumer behaviour from the point of advertising contact on digital TV via the chip on the card and connect to the point of sale. The data from Sky Card may start to provide advertisers with customer-level evidence showing whether their advertising is generating sales.
The rise of Chip & PIN loyalty programs, hybrid stored value loyalty cards and new digital channels is the beginning of the end for bespoke points breakage business models and the infrastructure required to support them. Existing loyalty operators will begin to phase out the bespoke call centres, web-sites, pricing systems, points accounting systems and inventory management systems required to manage a points redemption business. In the new loyalty environment these systems will become redundant and seen as costly by both consumers and operators alike.
Loyalty operators will start to invest in hybrid stored value loyalty platforms with Chip & PIN capabilities and integrate them into merchant pricing and payment systems thereby allowing consumers to spend points as real cash. In theory every merchant in the country could become a single point within a nationwide redemption network. Loyalty operators will also work with card issuers – banks or merchants - to mine data from these new types of loyalty programs and create permission-based, 1-2-1 campaigns delivered via SMS and other low cost, real-time, personal communication channels.
A new breed of loyalty acquirer will also emerge and will focus on building the redemption network with merchants. In return for building acceptance, loyalty acquirers will receive loyalty transaction fees from loyalty operators every time a loyalty transaction is processed.
Ideas for the future
Finally here are some new loyalty programs that could potentially develop in the future:
- New points currencies: for example, 1 point = 1 mobile voice minute, 1 text message, 1 ring tone, 1 packet of 3G data, 1 online casino chip, 1 Microsoft x-box bazooka;
- MasterCard or Visa Points: earn them with every MasterCard or Visa card, then burn them like real money at any MasterCard or Visa merchant. This really would be the ultimate global coalition program;
- Points exchanges: buy, sell and exchange points on eBay, or anywhere else.;
- Universal prepaid/loyalty hybrids: one prepaid account that stores multiple points currencies, universally accepted by participating merchants.
And all we have to do is create them.
Loyalty marketing... for real facts, figures, research, case studies, best practices, practical how-to's,
technologies & examples, The Loyalty Guide 4 is the world's most complete report (1,000+ pages) that
covers it all. Costing less than a conference pass, details of this electronic report's contents, chapter samples,
pricing, and ordering details are online now at
www.TheLoyaltyGuide.com.
About the author...
Robert Kenley is a Director of the UK cards and payments business consultancy CardsConsult Ltd. He has over ten years of consulting and management experience within the cards and payments market, focusing mainly on insight and strategy development, value proposition creation, and business modelling. He previously worked in strategic development roles for MBNA Europe and Egg, and was a senior consultant for P.Four Consultancy.
CardsConsult helps organisations develop and implement card and payment strategies that drive profitable commerce. The company's main focus is on consumer-facing businesses in the retail, banking & finance, telecommunications, media and entertainment sectors, in both domestic and international markets. It specialises in business consulting, R&D, training, and education in the areas of smart cards, e-payments, m-payments, prepaid cards, loyalty cards and trust services. The company's key goals are to challenge conventions, find new ways to create value from cards and payments, and to develop unique business models, strategies and solutions specific to each client.
To contact Robert Kenley at CardsConsult, email robert.kenley@cardsconsult.com
Looking for permission to reproduce this article?
We are usually pleased to permit the reproduction of our
Feature Articles in other trade journals (but not 'blogs').
If you would like to reproduce this article, you will need to
obtain written (i.e. e-mailed or faxed) permission from our
publisher (Wise Research Ltd) as well as the original author.
Contact the publisher by clicking here
and contact the author by clicking here
Please explain your intended usage in your requests.
| 
