The trouble with loyalty schemes...      By Belinda Neal (Client Services Director, Crazy Horse) Published by The Wise Marketer in April 2005. Most loyalty schemes don't really work, says Belinda Neal of brand marketing agency Crazy Horse. Bold but true. So what makes them fail - but more importantly, what makes them successful? So many big brands spend huge proportions of their budgets these days on ill-devised loyalty schemes, most of which I challenge to really deliver the goods in terms of contribution to the bottom line. High street loyalty schemes, particularly those devised by supermarkets, are not always smart. What do they actually do to build loyalty? Most of the big players have their loyalty schemes already and, in essence, the loyalty card has become a commodity. The playing field is once again level. I have a loyalty card for every major supermarket chain that offers one, yet none of them actually have my loyalty. These days, it's the customers hold all the cards – literally! So many of these programmes fail to radically change customer behaviour over time or deliver a bottom line contribution to profit. In fact, they reduce the amount of profit per customer by discounting existing behaviour rather than rewarding increased positive behaviour (e.g. spending more or returning more often). Everything to play for Not just in the supermarket sector, but in any other retail arena, the door is wide open for one retailer to change the nature of its loyalty scheme, to get smarter in its loyalty offering, and to deliver real relevance and perceived benefit to customers. Customer behaviour could be influenced positively, and ultimately deliver a far greater profit to the bottom line as well as enhanced brand and customer equity. So these are my six practical steps for establishing a successful loyalty scheme: Define your objectives Misunderstanding the principles of loyalty or setting vague objectives creates an opportunity for imprecise, ineffective marketing and leads to monolithic loyalty programmes. Define your objectives at the outset and judge the developing programme against them frequently. I would define these objectives as: Maximising retention of the most profitable customers; Maximising profit per customer. Segment your customer base The "one size fits all" approach doesn't work - it's been said hundreds of times by marketing experts around the world, yet many retailers still seem to try it, possibly for expedience. But it does not recognise the differences among customers. Many programmes assume that price is the key driver and common denominator. Consequently, those loyalty schemes become little more than discount programmes.   Understand customer motivations With a broad spread of customers, individual motivations will vary hugely. Loyalty schemes need to concentrate on relevance to the people they are trying to influence. For some customer segments, particularly the high-value ones, it's all about service, convenience and added value. Special deals, special treatment at point of sale, and recognition of customer value should all be considered when developing an effective loyalty programme. Take the busy working mother with a relatively high level of disposable income. Is she truly motivated by £3 off her weekly basket of £200 worth of groceries? Or would she prefer less queuing? That's more likely to appeal, really. Preferential car parking is a probable favourite, too. Does she really want to remember to take in time-bound money-off coupons every week? That's far less likely. Would the stay-at-home mother prefer £2 off her bill or a crèche in which to deposit her three children while she works her way around the store? And to the customer who 'does lunch', an invitation to take part in consumer panel will probably do more to drive loyalty than £5 off. The stereo-typed single adult male with his one basket may even prefer a "beer and spirits only" check-out to 50p off his shopping! Here's another idea: why not encourage pensioners to shop during quiet periods in exchange for a discount? That would not only reward them for their compliance but also free up space, trolleys, baskets, and check-outs during other busier periods. Better still, over-delivery is key: an out-of-the-blue "thank you" reward for a customer's business does far more to drive loyalty than a planned or expected reward. All that's needed is a bit of customer segmentation and a little imagination.   Use audience insights Most loyalty schemes have at their disposal huge amounts of transactional data that could, with relatively little effort and cost, provide invaluable insights into customers' buying patterns, lifestyles, and what could motivate and change their behaviour patterns in-store. Supplementing this wealth of data with some quantitative research insights could fuel a whole new type of loyalty scheme that actively changes behaviour, delivers more profit, and builds greater active loyalty to the brand. The act of encouraging dialogue and feedback from consumers (e.g. through the online channel for busy, high-value segments) is even likely to drive loyalty in its own right. Linking behaviour at household level could save fortunes on the programme's communication budget and provide marketers with a clearer view of household spend and potential. Many hotels are running very successful loyalty programmes by encouraging guests to tell the hotel about themselves. Arriving at your destination and having the pillows you like, your favourite newspaper delivered, and a bottle of your preferred wine or mineral water waiting for you appears to build genuine loyalty.   Establish share of basket Do you know who your most valuable customers are right now? A bank might think that it's those with the most money invested (and certainly this group is important) but what about the customers who go into debt at the end of the month, pay a few charges and then have their salary cheques paid in? This group is also highly lucrative. Always watch for the most profitable customers, even in unexpected places. Using data to establish behaviour patterns allows retail loyalty operators to identify which customers are promiscuous and which ones spend all (or most) of their sector spend with their store. Supermarkets can spot which customers shop weekly and establish how many weeks are missed each month. Then, with the scale of the opportunity established, effort and budget can be targeted toward the customers with potential to do more.   Build the bottom line Receiving a £6 discount voucher that works when £60 or more is spent is not a good way of driving profitability if the customer you give it to already spends in excess of £190 each week. But £6 off each £60 spent, given to someone who usually spends £40 every second week, is worth your while! Or perhaps give 20% off to anyone who will spend at least £100 a week for a month; a promiscuous shopper with an average basket of £70 is likely to be enticed. Run the promotion for three months and they're likely to start forming a new shopping habit that involves consolidating their sector spend with you. The allocation of your marketing budget based on potential customer value rather than a flat allocation across the entire customer base will contribute significantly to your bottom line. And finally... Encouraging customers to use you as their supplier of preference, even going out of their way to choose you over your competitors, is fundamental to protecting your business. Ensuring service excellence and relevance of offering not only encourages customers to remain loyal but gives your margins room for growth. Successful loyalty programmes should take the high ground, and offer a differentiated proposition. But the all too common 'me too' programmes do little or nothing to enhance consumer perceptions or differentiate the brand. 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. For more loyalty marketing feature articles: http://www.thewisemarketer.com/features   CUSTOMER LOYALTY & ENGAGEMENT: all you need to know in one 1,000+ page report...   Click here to tell a friend Copyright 2005 Crazy Horse / The Wise Marketer     About the author... Belinda Neal is a brand marketer with the UK-based brand response agency Crazy Horse, and believes that establishing brand without hearing the response is a waste of both time and money. The company is both brand-oriented and response-focused, and is driven by a need to deliver measurable ROI through a thorough understanding of the brand. The Crazy Horse team combines strategic brand expertise with direct marketing skills to produce brand marketing campaigns that can be monitored, measured and translated into bottom line financial value. 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