An Analysis of Customer Loyalty, Loyalty Programs and the Impact

Transcription

Paul Coke
APRJ 699
An Analysis of Customer Loyalty, Loyalty Programs
and the Impact they have on Consumers
17,775 words
April 25, 2014
Tim Carroll
PAUL COKE – APRJ 699
Table of Contents
Abstract .............................................................................................................................. 4
Introduction ........................................................................................................................ 5
Research Purpose & Questions ...................................................................................... 6
Literature Review .............................................................................................................. 6
Websites ................................................................................................................................................ 7
White Papers.......................................................................................................................................... 8
Books ..................................................................................................................................................... 9
Research Design ............................................................................................................. 10
The Loyalty Landscape .................................................................................................. 11
Grocery ................................................................................................................................................ 11
Banking ................................................................................................................................................ 11
Petroleum............................................................................................................................................. 12
Credit Cards......................................................................................................................................... 12
Canada – Leaders in Loyalty............................................................................................................... 13
Outside of Canada ............................................................................................................................... 15
The Need For Loyalty ...................................................................................................... 16
The Privacy Issue ............................................................................................................ 18
PIPEDA ................................................................................................................................................. 18
Shopper Marketing .......................................................................................................... 20
RFM ................................................................................................................................... 21
Marketing’s Most Powerful Ally – Word Of Mouth ...................................................... 21
Reward, Recognition, and Relevance........................................................................... 23
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Reward ................................................................................................................................................. 23
Recognition.......................................................................................................................................... 24
Relevance ............................................................................................................................................ 25
Data Analytics and CRM ................................................................................................. 25
The Case for Coalition .................................................................................................... 28
Breakage ........................................................................................................................... 29
The Case Against Loyalty .............................................................................................. 30
No Loyalty ............................................................................................................................................ 31
Inertia Loyalty ...................................................................................................................................... 31
Latent Loyalty ...................................................................................................................................... 32
Premium Loyalty.................................................................................................................................. 32
New Technology – AKA What All the Cool Kids Are Using....................................... 33
Analysis ............................................................................................................................ 34
Demographic ....................................................................................................................................... 34
Environmental ..................................................................................................................................... 35
Political ................................................................................................................................................ 35
Economic ............................................................................................................................................. 36
Social ................................................................................................................................................... 36
Technological ...................................................................................................................................... 36
Conclusions ..................................................................................................................... 37
Appendices ...................................................................................................................... 39
Appendix A .......................................................................................................................................... 39
Appendix B .......................................................................................................................................... 40
References ....................................................................................................................... 41
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Abstract
Since the dawn of the internet in the 1980’s the business landscape has changed
dramatically. Included in this massive global shift has been the way we as consumers
do business, whether we are buying goods, selling them, or distributing them. Amazon
and Ebay have become as popular as Walmart and Costco for the everyday consumer.
The savvy shopper has become more discriminant about what they spend their money
on, especially in the wake of the economic recession in 2008; and the speed with which
we can obtain knowledge about a competitive product or a brand has shifted the power
of consumerism into our hands. With all of this new found knowledge and power the
importance of gaining the trust and loyalty of consumers has heightened the impact on
the success of a business. Customer loyalty is the new commodity for many retail based
bricks and mortar businesses as they now compete for online loyalty and getting
customers in the door.
The purpose of this paper is to critically review many of the aspects of customer loyalty
and how they are tied together to attract and retain customers. What will be evident
throughout this paper is that loyalty programs can have a significant impact on a
business when they are marketed and managed correctly. Too many programs today
do not fully engage consumers to the full extent that they create any type of loyalty, and
the criticism behind loyalty programs is that they simply become a cost centre of the
organization that does not provide any profitable value. There is little debate that loyalty
programs cost the organization time, money, and resources; however, the profound
impact of a properly executed program that can create program champions for a
business is immeasurable. This paper reviews many of the key areas of loyalty
including data analytics and CRM, new mobile technologies, customer privacy, and
word of mouth advertising. As competition for customer loyalty becomes global, these
key areas become more important to creating loyalty and building deep relationships
with consumers. Customer service, price, and product quality are still the cornerstones
of a profitable business strategy, but loyalty has become an integral part of this strategic
mix especially when the lines of differentiation become blurred.
The key findings in this paper show that successful loyalty programs must go beyond
the simplicity of gift cards and rewards points. Loyalty programs have become a much
larger and more sophisticated part of an organization’s strategy and the importance of
loyal dedicated customers have elevated the value of what loyalty brings to the
organization. The value added benefits of truly loyal customers prove that they spend
more, spend more often, and are generally more profitable because they buy all the
time rather than just those times when there are sales discounts. Companies who can
recognize and evaluate who these customers are the fastest are those that will benefit
most from higher profits, and ultimately win the battle for consumer spending. The
loyalty landscape in Canada is one of the most robust and highly engaged markets in
the world, and those businesses with loyalty programs in place are at a significant
advantage to those who continue to discount the value of loyal customers.
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Introduction
Loyalty is defined as, “the willing and practical thoroughgoing devotion of a person to a
cause. A man is loyal when, first, he has some cause to which he is loyal; when,
secondly, he willingly and thoroughly devotes himself to this cause; and when, thirdly,
he expresses his devotion in some sustained and practical way, by acting steadily in the
services of his cause.”
Josiah Royce. The Philosophy of Loyalty (1908).
Man inherits the capacity for loyalty, but not the use to which he shall put it. The
persons and causes (if any) to which he shall devote himself are suggested to him,
often, indeed, imposed upon him by education and environment.
Arthur James Balfour, Theism and Humanism (1914).
What is the value of loyal customers in today’s business environment? Do loyalty
programs really work and do they add value to a business? Why do some programs
succeed where others fail, and what makes a successful program? Loyalty is often
defined and argued many different ways. In some cultures and religious affiliations it is
believed to be one of several virtues of humanity. Christopher Peterson and Martin
Seligman, two leaders in the world of positive psychology identify loyalty as part of the
category of justice and strengths that build communities in their description of Character
Strengths and Virtues i. Loyalty is an important aspect of society and in everyday life.
Sports franchises like the Toronto Maple Leafs and the Boston Red Sox have benefitted
by the devout loyalty of their fans with sold out attendance records for the past several
decades, regardless of their team’s performance on the field of play, while other
franchises struggle with keeping fans engaged unless the team performs to
expectations. There is also the famous story of Hachiko, the Japanese Akita dog whose
loyalty to his master was unwavering and unquestionable as he sat at the train station to
wait for his owner every day for 9 years after the owner had died and not come home
from his place of work. ii
Many consumer brands have spent millions and millions of dollars on building loyalty to
their brand. Some of the most recognized symbols in the world are actually consumer
product brands like Coca-Cola, McDonald’s, and Apple. Loyalty is everywhere, and
consumer loyalty to brands and retail businesses trying to hold on to customers is no
exception. The retail landscape is changing every year. Over the past several years we
have seen the exit of major retail chains such as Simpsons, Eaton’s, and Zellers; and
the entrance of Walmart, Target, Dollar Tree, and soon to be department store giants
Sak’s Fifth Avenue and Nordstrom. Our strong loyalty to Tim Horton’s caused the brief
stay of US giant Krispy Kreme, and our dedication to Costco caused Walmart to rethink
their growth plans for warehouse club Sam’s Club and close the last of its 11
warehouses in 2009. Sam’s Club still thrives as the second largest warehouse club in
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the US with 612 locations, but our loyalty to select brands in Canada has challenged a
number of US expansion plans over the years. Retail consolidation, scan data and
CRM systems, and the rising prominence of private label have shifted the power of the
knowledge base of understanding the consumer squarely onto the shoulders of the
retailers. With this shift however, comes the ongoing struggle by retail businesses to
strengthen customer loyalties and drive consumer spending behaviours using an ever
changing mix of brand power, data analytics, and marketing savvy to convince the
elusive consumer to shop with them.
Research Purpose & Questions
The key focus of this paper is on the strategy behind loyalty programs and taking a
strategic direction on how loyalty programs and loyalty in general fits into to a corporate
business environment. There are a number of aspects of loyalty that go beyond a
simple gift card or the accumulation of points. The purpose of this paper is to look at the
loyalty business primarily in Canada, but with some analysis and comparisons to other
programs internationally such as Nectar, the largest loyalty program in the UK, as well
as Tesco, one of the largest retail chains in the world with a strong loyalty program.
Some of the questions that will be researched and expanded upon include, why is
loyalty important in the Canadian marketplace? What is the impact of loyal customers to
a consumer facing business? What makes a loyalty program successful? Why do some
businesses embrace loyalty while others avoid this ongoing trend? As part of the
analysis, it is interesting to note that while loyalty can be very much a part of the
company’s strategy, loyalty in general terms divides consumers into categories or levels
of identified importance, and therefore there must be another strategy that puts all
consumers on the same level regardless of loyalty.
Some of the areas that will be discussed throughout this paper include a brief review of
the business of CRM or customer relationship management, a discussion around
customer privacy and how much information and communication is too much, and a
look at some of the top programs by participation and what makes them successful. The
paper will also address a number of concepts that relate to the business of loyalty
including earn and burn, the importance of surprise and delight, the incredible power of
word of mouth advertising, coalition programs versus private label or closed loop
programs, and the three pillars of reward, recognition, and relevance.
Literature Review
The loyalty landscape in Canada is one of the most advanced and mature in the world.
Canada, unlike many other countries has a number of large national loyalty programs
that embrace the entire population across the country and not just a small pocket of
regional banners, making it easier for retailers to market the program as well as drive
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other factors such as word of mouth. This also allows the manufacturers scalability of
their marketing spends when providing offers to customers. The literature behind loyalty
encompasses a wide variety of websites, white papers, journals, and books. As with
many fast paced industries that continuously evolve and change, some of the literature
becomes obsolete very quickly and the most up to date research and industry data is
found through up to date and ongoing papers and websites.
Websites
There are a number of websites that will be reviewed throughout this paper including
loyaltymatters.com, colloquy.com, crmtrends.com, jdpower.com, thewisemarketer.com,
and loyalty.com. Many of these websites offer up to date insights into the business of
loyalty and what works and what doesn’t. Colloquy is one of the industry leading
research companies and is owned by Loyalty One who runs the Air Miles program.
Colloquy frequently provides analysis and data on the loyalty industry across the US
and Canada and has done studies comparing the US and Canada and their respective
more popular programs. Many of the insights in this paper will be referencing Colloquy
as an industry leader and key researcher in the business of loyalty.
The website loyalty.com is owned and operated by Loyalty One who is one of the
largest loyalty providers in the world. Loyalty One runs and operates the Air Miles
program in Canada which has the largest population penetration of any program in the
world (http://en.wikipedia.org/wiki/Air_Miles). Loyalty One also owns Colloquy as their
research division and Precima, a shopper analytics company that provides insights to
corporate retail businesses and manufacturers on the shopping habit of their customers.
As all big fish in the sea, there is always a bigger fish, and Loyalty One is owned by
Alliance Data Systems in the US. This paper will discuss the Air Miles program in more
detail, but currently this large coalition loyalty program is measured to be in two thirds of
Canadian households and has over 10 million members across Canada
(http://en.wikipedia.org/wiki/Air_Miles). There are only two major coalition programs in
Canada, Aeroplan is the second largest, and both of these juggernauts of the loyalty
industry have multiple large national partners that allow consumers to earn miles in a
variety of categories.
This paper will look at both programs in more detail, particularly as they compare with
retail based, or closed loop programs such as Shopper’s Drug Mart Optimum, Canadian
Tire’s Money Advantage, and HBC Rewards. Both types of program are different in their
loyalty exchange with the end consumer. Coalition rewards, or miles in the case of both
Air Miles and Aeroplan, are earned at various partners across a broad spectrum of
categories. Once those rewards have been accumulated to some level they are often
redeemed elsewhere, either for travel, merchandise, or donated to a special cause. In
the case of closed loop rewards, points or rewards are earned at a retail location and
the subsequent rewards can only be used back at the same retail banner, typically for
merchandise, cash back rewards, or gift cards.
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Another useful website thewisemarketer.com, dedicated to loyalty marketing, also
produces one of the most comprehensive journals in the market today entitled The
Loyalty Guide. The Loyalty Guide, now in its 6th edition, outlines the full scope of the
loyalty industry around the world with a core focus in the US where it was written. The
Loyalty Guide explains the many facets of loyalty including an overview of different
industries such as banking, supermarket and general retail, telecommunications,
automotive, and travel. The guide explains how a number of the programs associated
with these industries are able to either succeed or fail and what some of these programs
do to make them successful. An example of this is the Tesco ClubCard program,
launched in the UK in 1995 that was a leader in the supermarket industry and has
grown over the years to one of the world’s largest and most effective programs. Tesco
has grown the program to fully integrated status and regularly sends unique offers to
customers and produces a coupon book that is relevant to the number of rewards that
customer has earned over a 3 month or 13 week period
(http://www.tesco.com/clubcard/).
JD Power is well known across North America as one of the leading marketing
information companies that provides clients with research and data analytics in order to
make informed business decisions regarding how they market to their consumers. One
of the most popular aspects of JD Power’s work is their annual ratings of the top
vehicles produced each year which not only gives consumers information but also
provides the automotive brands a marketing platform with which to sell based on a wellrespected research company.
White Papers
This is one of the more common and popular methods of reporting updated data
analytics and research on the loyalty industry, especially by organizations like Colloquy.
This paper will reference a number of white papers that have been written over the past
several years regarding the loyalty business in Canada and assessing the benefits of
loyalty plus answering the question of whether loyalty programs work.
Aside from Colloquy, there are a number of white papers written by research companies
and independent researchers that will be referenced throughout this paper. One of
these papers produced by Aberdeen Group, a research company in the US, who
produced a paper entitled Cross Channel Customer Loyalty. This insightful paper looks
at the concept of using loyalty across channels within a retail business. With the
tremendous growth of online and mobile technology in today’s retail landscape,
businesses that are taking advantage of rewarding their customers across multiple
areas of their business will thrive and be better suited for future growth. Aberdeen’s
research also looks at companies who have fully integrated loyalty programs and uses
the term “best in class” to compare them with other programs with less integration and
also those who have only touched the surface of customer loyalty (Cunnane & Anand,
2010). As this paper looks at the loyalty industry and whether loyalty programs really
are effective, Aberdeen’s research on fully integrated programs is useful as a
benchmark against less integrated and further against having no program at all. The
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concept of cross-channel loyalty and having a fully integrated solution is a strong
argument to suggest whether loyalty programs are effective in today’s marketplace.
An additional white paper that has been updated in recent years and outlines the latest
figures for the Canadian marketplace in particular is Colloquy’s latest analysis of the
Canadian loyalty landscape. As this paper will look at the overall effectiveness and
impact of loyalty programs in Canada and whether loyalty has an impact on business,
this white paper actually discusses a slight decline in loyalty program memberships,
despite the statistic that over 90% of Canada’s population belongs to a program. As the
business of loyalty is strongest here in Canada (only 74% in the US), this white paper
discusses some of the challenges that today’s programs face and the overall impact of
population growth factors, the growing concern over personal data usage, and the
ability of programs to properly and effectively communicate with customers.
One of the key discussion points of this paper will be the use of customer data and the
balance between data and the relevancy of loyalty programs. A number of white papers
and books will say that loyalty programs work best when businesses know their
customers best and are able to communicate relevant offers to them. However, there is
a threshold by which consumers want to provide data to allow businesses to know
them, but only at an arm’s length. There are a number of publications that address the
issue of sharing personal data and other outside companies to access customer
information, and then not be bothered to personalize it. This simply creates noise, not
only from irrelevant offers but also from other programs and from various
communication channels.
Environics Analytics is a world renowned customer research and data analytics
company recently conducted a study called Reframing the Conversation on Loyalty
Programs in Canada (2013). This research paper offers a different view on loyalty
programs in general by looking at the variables surrounding time to reward as a
concept. In this paper Environics looks at the idea that the most successful programs
should be based on the amount of time that elapses between earning a reward and
redeeming the reward. The logic behind this is that the faster a loyalty reward is earned
and redeemed, the more the customer is engaged. A program that takes too long to
reward is more easily forgotten and simply frustrates the long term loyalty of customers,
according to the research.
Books
The Loyalty Effect is written by Frederick Reichheld and explains the impact of
customer loyalty to a business. It is a comprehensive look at how businesses today
need to focus not only on the loyalty of their customers, but also on the loyalty of
employees and investors. All of these are tied together and engaged employees can
often lead to engaged customers. Reichheld points out that the average business loses
half of its customers every five years. Although this may not be true in every business
there is a real argument for building relationships in every business sense that leads to
higher profits and lower marketing costs. Reichheld also talks about good profit and
bad profits and how good profits come from your valuable customers. This comes back
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to the earlier discussion around RFM analysis whereby your best customers are those
who come in most recently, more often, and spend more with you.
Research Design
The research design of this paper will be focussed as a conceptual paper that looks at
many of the keys areas of loyalty programs that can either make or break the success
of a program and a business. Colloquy’s recent research suggests there are 120 million
loyalty cardholders in Canada, and 2.65 billion in the US (Colloquy Talk, July 2013), so
there must be something to this industry that attracts consumers and businesses to it.
What works and what doesn’t work and what are the elements of an effective program
are some of the ideas that will be discussed in this paper.
From a conceptual framework perspective this paper will review some of the major
concepts associated with loyalty programs including CRM, data analytics and customer
information, RFM, communication channels, reward value and relevancy, and program
impact of business profitability. As a strategy document there are a number of tools that
can be used in assessing these concepts including a DEPEST analysis that will briefly
look at the overall loyalty industry in general to assess the political, economic, sociocultural, and technological effects of loyalty on an organization. As an example, the
technological impact of a data driven CRM system implementation can be significant for
an organization.
One of the key arguments in favour of an effective loyalty program implementation is the
ability of the organization to use customer data to distinguish their loyal customers from
those who are either infrequent customers or worse, customers who only make a
purchase during a money losing sell off period. The challenge of course for the IT
department is properly capturing that data, however, the challenges don’t end there. An
effective CRM system allows the data to be extracted in a usable format, but also allows
the organization to analyze the data and then create some type of a strategic plan to
use the data to enhance their loyalty initiatives and communicate with their best
customers.
In order to look at businesses that are running a loyalty program, this paper will also
look at some large corporate businesses that don’t have a loyalty program and why
loyalty is not part of their strategy. One example is the Four Seasons hotel chain which
is one of the few hotel chains without a loyalty rewards program. The key argument
against loyalty programs here is that all customers should be treated equally, and some
loyalty programs quite often by their nature actually segregate customers into different
classes of spending patterns. Communicating special offers to your best customers is a
common practice of many rewards platforms, especially those related to hotel, travel,
and banking programs. Other retail channel programs such as grocery or pharmacy are
more focussed on relevancy and providing offers to customers based on spending
patterns and the products they buy, not always on spending thresholds.
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The Loyalty Landscape
The S&H Green Stamps program is arguably one of the first loyalty programs created in
the late 1800’s in the US (http://en.wikipedia.org/wiki/S&H_Green_Stamps). In Canada,
most would agree that Canada’s oldest program is the Canadian Tire Money program
launched in 1958, although the program was created to combat some of the local
competitive gas companies that were already offering rewards to their customers for
filling up their tanks. Today the loyalty landscape in Canada is much more diverse. The
Canadian Tire program today struggles with its own identity, with a demographic base
that is still devoted to the idea of paper money, and a new customer who loves virtual
points, mobile technology, and tracking accumulation. As diverse as Canadian Tire’s
product portfolio is, so is its customer base and with locations both in major centres
across the country as well as many rural towns, Canadian Tire has been challenged in
recent years to maintain the loyalty of Canadian consumers and the overall relevancy of
its program. The essential element of Canadian Tire’s success is their ability to
continually market themselves as a purely Canadian company with many Canadian
products which has given them a significant advantage over their American rivals
entering the market such as Home Depot and Walmart.
Grocery
In the highly competitive grocery industry, the two largest chains in Canada compete for
customer loyalty. Loblaw’s has their Presidents Choice program, while Sobeys
competes with their own Club Sobeys and an additional ongoing partnership with
Aeroplan. Other regional players such as Safeway, Metro, and Overwaitea all have a
loyalty rewards scheme to bring customers in and keep them shopping with them. The
grocery industry is highly competitive as it is very much a staple of consumer shopping
and is not affected as much by new technology and innovation. However, the
introduction of self-serve checkouts and mobile coupons have given consumers more
reasons to have a choice between certain grocery stores to shop at. Milk, bread, and
cheese does not change that significantly in price from one store to another but the
technology behind how a customer pays and what promotional loyalty rewards are tied
to these staple products can have an effect on the entire shopping experience.
Banking
The major banks are no strangers to looking for ways to keep loyal customers as all of
the five largest banks in Canada offer their own version of credit card based loyalty
programs. RBC pushes their own Avion program, while Bank of Montreal counters with
their BMO Rewards and World Elite Mastercard. Scotiabank has a rewards program but
also partners with Scene, the Cineplex Rewards program that is one of the most
popular in Canada, to offer multiple loyalty opportunities. CIBC is now pushing hard on
their Adventura program after a lengthy ten year relationship with Aeroplan that was, in
many ways, swept away from them by TD Canada Trust just recently in 2013.
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Banking rewards are an integral part of the bank’s ability to retain customers. CIBC, the
smallest of the five banks had for many years the top credit card Visa program in
Canada on the strength of the Aeroplan membership base and the popularity of the
Aerogold program. Today, they are hoping to keep those loyal customers with a new
offer from Adventura as many of their Aeroplan customers who only had a bank account
with CIBC for the rewards program, flock over to TD. Travel rewards are a huge
incentive for many of the bank programs. The idea that just by using your credit card as
you normally would do, you have the potential to earn points, miles, or some type of
reward that will make that holiday vacation a little less expensive. For the consumer
earning rewards that will help ease the pain of some of the most costly vacation
expenses like flights, hotels, and car rentals, is often incentive enough to want to do
more business with the bank. For the banks who charge merchants for transaction fees
every time a customer uses their card, it’s a relatively inexpensive way to retain
customers and increase transaction volumes and revenue.
Petroleum
Another industry that has established rewards programs across all major entities is the
petroleum industry. Most major gas companies have some type of rewards program,
and in an industry where price is everything, it is an interesting business case for
loyalty. Esso has adopted a double rewards type program to try to capture more
customers by offering Aeroplan and Esso Extra. Although a customer cannot earn both
rewards when they fill up, those drivers who are not one of the 4.6 million Aeroplan
customers in Canada can easily earn Extra points instead which increases the overall
number of consumers who can earn a reward when they fill up at an Esso station. The
other big player, Shell, counters with the Air Miles program, while Canadian Tire centres
across Canada offer their own Money program. Husky, much like Esso has a 2-tier
structure in offering their customers My Husky Rewards as well as CAA dollars. In many
cases when prices are so closely matched between two stations across the street from
each other, consumers may often choose the one where they can earn points they can
use for future purchases.
Credit Cards
All of the major credit card companies have existing partnerships with major retail
partners that offer rewards for using the card. For the credit card companies the value is
in increased transactions and overall usage of the card. For the retailer the value is in
offering points to consumers who may choose to shop elsewhere, but choose them in
order to earn valuable rewards that can redeemed. Retailers like Hudson Bay,
Shoppers Drug Mart, and Canadian Tire have partnered with Master Card while Best
Buy, Esso, and Cineplex partnered with Visa. There is a valued benefit of customer
loyalty for both retailer and credit issuer that has long term advantages for both.
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Canada – Leaders in Loyalty
Many of the loyalty landscape studies that have been published in the past several
years often put Canada at or near the top of the loyalty rewards industry. A couple of
recent studies by industry expert Colloquy estimates the penetration of loyalty programs
in Canada to be in the range of 90%. Much of the reason for this is our strong loyalty to
brands and to businesses across Canada. There is no question that Walmart’s entrance
into the Canadian marketplace in the early 90’s can be directly related to demise of
many small businesses across the country as well as some very large ones such as
Zellers most recently, and K-Mart. Consumer loyalties to Walmart have often been built
on a different strategy than having a loyalty program. EDLP, or the everyday low price
strategy has given consumers a reason to shop at Walmart, knowing they will not see a
better price elsewhere and Walmart will match the price if they do. Walmart’s strategy in
this has much to do with the peace of mind consumers have that they are getting the
best price without having to shop around looking for it.
Without a loyalty program, Canadian’s in general have stuck with their beloved Tim
Horton’s, despite the onslaught of Starbucks stores, and the less that planned short visit
of doughnut giant Krispy Kreme in 2001. Krispy Kreme still operates a handful of stores
in Canada but Canadian loyalties to Tim Horton’s has squashed much of their
expansion plans. Tim Horton’s has expanded their menu and made changes to its
coffee cup sizing in recent years, but traditionally has used their Canadian roots and
strong community based programs like Timbits Hockey to build loyalty to their brand
much the same as Canadian Tire has done. Brand loyalties aside, Canadian’s have
also adopted a number of loyalty programs that have helped build relationships between
consumers and the places they shop. As not every retailer can implement an EDLP
strategy or a Canadian born and raised campaign to create loyalty, rewards programs
have become a staple in many businesses across the country to attract consumers by
offering more than simply a product at a price.
As the Canadian Tire program continues to be one of the most popular programs across
the country and Hudson’s Bay Company continues its Rewards program without Zellers
as one of the highest membership programs, many experts may consider the gold
standard of loyalty programs in Canada to be Shopper’s Drug Mart’s Optimum program.
Its diligence to building a connection with its customers and understanding the needs,
purchase behaviours, and dedication to personalizing offers and rewards accumulation
have made it one of the most highly penetrated and customer engaging programs in
Canada. The Optimum program has over 9 million members, many of whom are active
in the program, and has built a reputation in the industry for providing consumers with
relevant and timely offers and a deeper connection with consumers than many of its
competitors. The concept of relevancy will be discussed further in this report.
There is little debate, however, that a significant reason for the strong penetration of
loyalty in the Canadian marketplace is due to the adoption of coalition based programs
like Air Miles and Aeroplan. Air Miles has over 11 million members across Canada
which is over 30% of the entire adult population and it is estimated that over two-thirds
of the households in Canada has at least one Air Miles member. Aeroplan by
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comparison has just over 5 million members and markets itself as a more premium
member base than Air Miles. Both programs are based on the coalition model that
allows consumers to earn miles in multiple ways including flights, hotels, retail
purchases, and credit card transactions. Both Air Miles and Aeroplan have built strong
membership bases across Canada and despite having multiple members with both
cards, both programs do have many differences.
Air Miles has its roots in coalition based rewards and has over 100 partners including
Bank of Montreal, American Express, Rona, Shell, Canada Safeway, and Metro. The
program allows members to earn miles either with their associated credit card and/or
with their Air Miles rewards card at participating retailers, and then redeem the miles
they earn for flights, hotels, entertainment, and many more options. Air Miles promotes
flight redemption more often as it competes directly with many other rewards programs.
Recently Air Miles introduced Air Miles cash which allows consumers to choose whether
to redeem miles for rewards or simply get cash back at a participating retailer. This cash
back option is similar to the Shoppers Optimum program and offers consumers the
easiest and most instant redemption option.
Aeroplan in contrast was originally a frequent flyer program, started by Air Canada in
1984. Today, Aeroplan is owned by one of the leading loyalty companies in the world,
Aimia Inc. who also own the rights to Air Miles in Europe as well as Nectar, the leading
loyalty program in the UK. Although Air Canada is still a partner of Aeroplan, the
program has expanded beyond simply flight rewards and Aeroplan is partnered with a
number of key competitors to Air Miles including TD Bank, Visa, Home Hardware,
Sobeys, and Esso. The Aeroplan program promotes itself as having a higher
penetration of medium to high income earners as its core member base, and this is
evident in its current advertising campaigns and its new Distinction program launched in
2013. Both coalition based programs allow consumers to earn miles at multiple partner
locations and through their affiliated credit card bank programs, and then redeem those
miles for flights, hotels, gift cards, merchandise, or even donate to charity or
environmental groups.
The strategic advantage of coalition rewards programs is that they allow consumers to
earn multiple ways through multiple partners. With so many programs currently active in
the market, keeping the interest of consumers is key to the success of any program and
coalition programs have the advantage of earning multiple times at multiple locations.
This is especially helpful for merchants who have low frequency spending patterns such
as furniture stores or automotive service centres. For a business such as Shoppers
Drug Mart, frequency is an extremely important aspect of their business as earning a
greater “share of wallet” from their customers allows Shoppers to be more profitable and
develop a higher degree of loyalty with their customer base.
14
Outside of Canada
The loyalty landscape in the United States looks a little different than in Canada. Both
Air Miles and Aeroplan have made multiple attempts over the years to enter the
consumer rich US market but have failed in their efforts. Currently there are no real
strong coalition loyalty players in the US which is often attributed to a much more
fragmented regional market, and a less engaged consumer. Some of the largest
programs by memberships in the US include the many frequent flyer programs like
American Airlines Advantage, Delta’s SkyMiles, and United Airlines Mileage Plus. Most
of these large airline program memberships far exceed that of the Air Miles program in
Canada, however, many would challenge the program engagement and the ability for
the average consumer who is not a business traveller to earn rewards on a regular
basis, thereby discounting the notion of creating valued loyalty. Consumers who carry a
loyalty card for all of the major airline carriers would arguably not be more or less loyal
to one or the other.
Similar to the Canadian market, most of the major grocery chains in the US have loyalty
programs as do many of the hotel chains, banks, and gas station chains. Most of these
programs are tied directly back to the issuing partner and not built on a coalition based
platform. The challenge with developing any type of coalition based program in the US
is in combining partners with locations in the same states. As an example, a large
grocery chain like Winn-Dixie which operates 485 stores only has a presence on five
states; Florida, Alabama, Mississippi, Georgia, and Louisiana. For Winn-Dixie to partner
with a gas station or hotel chain to take advantage of consumer spending patterns and
increased frequency, they would need to find one with locations in those same states in
order to take full advantage of the coalition partnerships.
The largest supermarket chain in Britain, Tesco, launched their loyalty club card
program in the early 1990’s and now has a membership estimated to be 15 million
members (http://en.wikipedia.org/wiki/Tesco_Clubcard). The program has evolved over
the years and now includes fuel savings for Tesco’s gas stations, and its operations are
in the UK, Ireland, Hungary, and Poland. The Tesco program now also includes a
mobile app for consumers to check their balance and notifications for special offers and
bonuses.
In direct competition to Tesco’s program is the Nectar program which is the largest
loyalty program in the UK and is partnered with Sainsbury’s grocery chain and BP fuel,
and has over 19 million members. Nectar operates primarily in the UK and has recently
launched a separate program in Italy. The Nectar program allows consumers to earn
rewards in store at a number of merchant partners, as well as a number of online
partners. Interestingly the program was originally started by Sir Keith Mills, the founder
of Air Miles, but today is owned and operated by Aimia Inc., who also own the Aeroplan
program in Canada (http://en.wikipedia.org/wiki/Nectar_loyalty_card).
15
The Need For Loyalty
The consumer landscape has changed significantly over the past several years as
brands, manufacturers, and retail businesses look to secure their place in a country that
is the second largest in the world by geography, but only has the population roughly the
size as the state of California. There is little debate that loyalty programs on their own
will save a business or sustain it through an ever changing marketplace. This is naïve
thinking for a struggling business to assume that a rewards program will somehow mask
other business inefficiencies and bring customers in. In the retail environment a number
of other factors are constantly at play including customer service, product quality,
location, and the variety of brands available. In a study conducted by Colloquy, a
leading loyalty research company owned and operated by Loyalty One (What Price
Loyalty: Colloquy), researchers identify that the factors associated with business growth
and profitability have changed over the years and the importance and relevance of each
have many retail businesses scrambling to keep up with the consumer demands. In the
years leading up to the recession in 2008, the Colloquy study showed that the more
important factor in 2 of 3 major retail categories was customer service and the in-store
experience.
Even in cases where another competitor’s products may be lower priced or even a
better quality, good customer service and attention to providing an engaging experience
was critical to the consumer’s loyalty and their desire to return. According to this study
one of the biggest beneficiaries of this was Costco the US and Canadian club chain.
The idea of walking into Costco and discovering a deal brought customers in by the
thousands. Even if you didn’t need the 5L bottle of ketchup, it looked like a great deal
and the price was better than buying 5, 1L bottles; never mind the subtle advantage of
not having to remember to buy ketchup for the next 12 months.
As the recession hit and money became tight those great customer experiences
appeared to be less of a factor and were traded in with getting the lowest price. Lower
prices quickly became the new face of loyalty but with chains like Walmart having their
everyday low price (EDLP) strategy, it became difficult to compete. The recent
popularity and influx of dollar stores is a strong indication of the importance of price to
consumers. Differentiation is key to building a loyalty following that goes beyond the
confines of EDLP. Everyone can’t have the lowest price, otherwise none of them would
be in business or worse, that all important factor that fits in right behind the battle
between low prices and customer service, product quality, quickly takes its toll on
consumer purchase behaviours. You can buy a frying pan at the dollar store, but how
long do you think it will last?
Loyalty rewards programs are only part of the puzzle that is building customer loyalty.
Other pieces of the puzzle include low prices, exceptional customer service, and
product quality as a way of enhancing and building on customer engagement and
understanding the behaviours of every shopper. In an article written in the Harvard
Business Review book Increasing Customer Loyalty, the author states that “we buy
from a company because it delivers quality products, great value, or a compelling brand.
16
We leave one, more often than not, because it fails to deliver on customer service.”
(Dixon, et.al. 2009. pg.5).
One of the key drivers for retail businesses taking over the reins of customer shopping
habits from manufacturing brands was the introduction of consumer scan data which
provided real time data on the shopping habits of consumers instead of the old method
of inventory management. W hat consumers bought, how many, how often, how much
they spent, and eventually what other products they bought with it has increased the
overall effectiveness and importance of building loyalty. If you were a manufacturer of
peanut butter, the retailer could tell you how much of your product consumers bought
and when, and even tell you how many bought jam at the same time. The grocery store
knew when they were running low on peanut butter they had better also order more jam,
and the manufacturer knew if they wanted to sell more peanut butter they should be
close to the jam.
The profitability side of loyalty programs are also an important factor to consider for
many organizations looking to implement one. Price Waterhouse Coopers published an
article in the US that exposes some of the costs and relevant revenues associated with
loyalty programs and what marketing managers can expect from implementing one. The
chart below shows some of the profitability revenues versus costs of program
implementation (PWC, pg.3)
Profitability of Loyalty Programs (Revenues - Costs)
Incremental Revenues
Incremental Costs
ption and accrued liability
point sales, partner payments)
recognition, member events)
advertising, mailings, email)
maintenance
centers)
payroll and benefits)
As will be discussed throughout this paper, loyalty programs can be very profitable for
an organization that is willing to invest in a program that will drive loyalty in consumer
behaviour and invest in technology and infrastructure that will fully understand who their
customers are. It can also cost an organization more to implement if the investments
17
are not made and the organization only wishes to execute the basics. The target of
loyalty rewards programs is to get all of the information the retailer needs in order to
match it with the consumer’s behaviour patterns, in exchange for points, rewards, miles
or whatever the retailer wanted to offer. By earning a reward and providing some basic
personal information the retailer can then understand who that customer really is and
then cater to their needs specifically, thereby on some level having to avoid taking on an
EDLP strategy. Loyalty rewards programs have become a powerful tool to help retailers
combat EDLP as well as provide a point of difference providing the program is used to
its fullest.
Consider a mother who comes to grocery store once a week to buy diapers for her
newborn twins. The store sends her an email with a triple point offer on diapers and a
discount offer on coffee for those late nights and early mornings. The store actually
saves money on the diapers as the points don’t cost them nearly as much as
discounting the diapers or trying to fight with the Walmart down the street. The coffee is
an easy sell to get her into the store and she believes the store understands her needs
better and may actually consider spending a little more than she normally would
because the experience is more personal. This personalization through the creation of
loyalty and rewards has proliferated the hold that price has on the retail industry and
created a new platform with which more businesses can compete.
The Privacy Issue
Customer privacy is a hot topic and always seems to appear at the forefront when yet
another business with millions of lines of personal data gets hacked and an individual’s
information is released into the universe. With the explosion of social media in the past
ten years since Facebook first launched in 2004, sharing personal information, stories,
pictures, opinions, and amateur reviews has become the new channels of
communication. Before Facebook, if someone made a poor business deal or issued a
personal attack on someone else, the options were limited as to how that information
was disseminated out to the public. Similarly, if a restaurant meal was extraordinary, the
restaurant would have to rely on the public to talk about it at the next PTA meeting or
their kids sporting event to help get customers to come in. Today, a good or bad
experience can be broadcast to millions of people in a matter of seconds over a
multitude of social sites and a business can be an instant attraction or a discredited
avoidance.
PIPEDA
In 2004, on the heels of Facebook’s arrival on the world stage, the Federal Government
enacted the Personal Information Protection and Electronic Documents Act (PIPEDA) to
protect individuals from the personal collecting and sharing of information electronically.
There are various parts of the act that deal with the use of electronic personal records in
court documents, personal health information, and specific to this report, the sharing of
personal information for commercial use (PIPEDA, A Constitutional Analysis.pg322).
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According to the Office of the Privacy Commissioner of Canada, “PIPEDA requires
private-sector organizations to collect, use or disclose your personal information by fair
and lawful means, with your consent, and only for purposes that are stated and
reasonable” (https://www.priv.gc.ca/information/02_05_d_08_e.asp). With the
introduction of transactional scan data, the ability for a retail business to collect and
analyze their customer’s shopping habits and buying behaviours was a monumental
shift in the retail landscape. Information privacy and the sharing of personal data is
increasingly relevant in today’s market just as individuals share more and more of their
personal lives with their friends and friends of friends.
Twitter and Facebook have opened a whole new world of instant updates and personal
information, yet consumers still want their transactional data to be protected and kept
close to them. A study conducted in the UK by Aimia, one of the leading global loyalty
companies that owns and operates the Aeroplan program in Canada, showed that
consumers are willing to provide their data to certain businesses such as banks or
companies like Amazon more than they are to share with others like energy companies.
Further to this study, consumers are more or less willing to have their data used in
different ways. Based on the study, 55% of consumers are willing to have their data
used to provide product recommendations, 37% are willing to have targeted
advertisements sent based on web browsing history, 70% are willing to have coupon
offers sent based on products they buy regularly, and 37% are willing to have product
recommendations sent based on shopping history (Appendix A).
In Canada we are also protected by the Consumer Protection Act (CPA), and
consumers are granted certain “cooling off periods” when buying certain products and
signing contracts with Canadian companies (consumerinformation.ca). The task for
loyalty programs and data analytics is to understand what information is key to knowing
enough about their customers to properly communicate to them in a way that doesn’t
become intrusive. There is a fine line between knowing you customer’s shopping
behaviours and knowing too much about their personal lives that they become
suspicious. What is worse however, is asking for basic personal information and then
never using it to make customers feel special or that the company actually understands
who they are and what their likes and dislikes are. This type of apathy works against the
company and actually makes customers disloyal and begin to further question issues of
privacy and what is being done with the personal data that has been collected.
The challenge with privacy and the data that companies collect is the expectation from
consumers that their needs will be met. Consumers in general are wary of providing
personal data to any company unless they know first, that information will not be shared
with anyone else, second, that information cannot be stolen from anywhere, and third, in
the case of rewards programs, that information will be used to personalize offers that
are relevant, rewarding, and will recognize their personal. Otherwise the company risks
losing that customer to a competitor that will make more effort to understand them or
worse, they will create a firestorm of negative social media backlash. Privacy laws like
PIPEDA protect consumers from having their information shared with other companies
or individuals, but they also give consumers the expectation that when that information
19
is provided it will be used in way that ultimately benefits them. The irony of social media
and the increase in speed to which information is shared is that it has increased the
focus on privacy and the protection of personal data in an era when personal data is so
much more accessible.
Shopper Marketing
For decades manufacturers and retailers alike struggled to understand consumer
buying habits. Much of what was known was based on running small focus groups and
handing out surveys; and for manufacturers, inventory analysis was based on what was
produced, shipped out, sold, and left over at the end. With the introduction of data
collecting Customer Relationship Management (CRM) systems in the late 1990’s, retail
businesses started to collect some basic personal information on their customers such
as age, gender, average household income, and shopping preferences. CRM was
something that every company needed to have and it seemed every month a new
organization with a new CRM system, better than the others, was launching. The
challenge businesses discovered in the early stages of CRM systems was that all of
these great data collection ideas could not explain how to use the data and ultimately
what was really needed which included who their customers were, where they came
from, how much they spent, and how often they returned. Many of these new systems
came crashing down to earth because they couldn’t do what the companies really
needed them to do to provide a solution to the their changing needs. Collecting the
data was only a small portion of what was actually required.
As the turnaround started to happen and CRM was entering back into the market with
stronger analytic capabilities and more robust reporting metrics, the need for shopper
marketing was introduced. In an article published by Colloquy entitled True Romance, a
reference to Deloitte Consulting’s 2008 Shopper Marketing Report, defines shopper
marketing as “the employment of any marketing stimuli, developed based on a deep
understanding of shopper behavior, designed to build brand equity, engage the shopper
and lead him/her to make a purchase” (Colloquy.pg12). This deep understanding of
shopper behaviour is often what is in question when businesses are offering loyalty
rewards points in exchange for not only making purchases, but also sharing some
personal data.
Most of the top programs such as Shoppers Optimum, Air Miles, and Aeroplan will not
allow consumers to redeem any rewards earned without knowing something about you.
Part of the attraction of loyalty programs for the retailer is being able to collect all of this
data on their consumers in exchange for a few points. The value of information on
inventory management, supply chain, margin and profit analysis, and overall strategic
direction is invaluable to a company and loyalty programs are an effective means to an
end for many businesses. Overall, a business can be more profitable and more
strategic when it knows more about the customers who buy from it and peruse its aisles,
websites, and online catalogues (Appendix B).
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RFM
Another topic of discussion and white paper research is the concept of RFM. RFM
refers to recency, frequency, and monetary value. James Stafford, an independent
consultant and researcher with a Master of Economics degree, outlines the concept of
RFM as one of the core foundations of data mining. The paper primarily outlines the
basics of RFM analysis and talks about why companies would want to use this type of
analysis to categorize their customers and better market to those customers who have a
higher perceived value as part of the RFM analysis. Many large packaged goods
companies like Procter & Gamble, Nestle, and Unilever as well as many of the large
retail chains have taken data mining and analytics to an entirely new level, however,
RFM serves as the basic premise behind customer analytics.
The idea behind RFM is that customers who have made a purchase most recently are
more valuable, those who have made purchases more often are more valuable, and
those who spend the most are more valuable. By looking at customer purchase data
and sorting customers into some number of recency, frequency, and monetary buckets
and assigning a score or number, those customers at the highest level can be targeted
a different way than those at the lowest level. Stafford’s example uses quintiles or 20%
buckets and uses a concept that starts with recency. The top 20% of customers who
have made the most recent purchases are put into the first quintile. From that top tier,
those 20% of customers who have made the most purchases, or frequent, are put into
another top quintile, and those top 20% who have the highest transaction values, or
monetary value are sorted once again. By the end, the customers with a ranking in the
top tier of each category are considered the most valuable customers. By doing this, the
retail business is able to focus and target their marketing efforts to those customers
rather the “spray and pray” approach which is considerably more costly and less
effective. As Stafford outlines, some companies may decide that recency, frequency,
and monetary value may not necessarily be the order in which their business operates
the most effectively (Stafford, 2009). A furniture chain may decide that customer
frequency is not as important to their business as monetary value and how much
customers have spent, so rearranging the three variables differently may be more suited
to their business needs.
Marketing’s Most Powerful Ally – Word Of Mouth
As discussed earlier, the tidal wave of social media that has engulfed us in the last
decade has created the entirely new line of business of shopper marketing and the
science behind understanding customer needs and shopping habits. Businesses have
figured out that the closer they are to their customers the harder it will be for them to
leave, and hence be more loyal to their business. On the heels of this is the incredible
power that consumers now have in recommending a business or pointing out its flaws to
the world, and a renewed focus for businesses on word of mouth advertising. Some
may recall the famous 1980’s Faberge Organics commercial where a very young
Heather Locklear launched her career by saying she would tell two friends about the
21
Faberge shampoo she used, and they would tell two friends, and so on and so on. The
essence of this commercial is what word-of-mouth is all about. Many consumers would
likely agree they would trust the product advice or recommendation of a friend or
colleague before they trusted an advertisement. If that same commercial was played
today, a great shampoo could easily be “Tweeted” out to millions of consumers in
seconds.
In 1995, Robert Metcalfe, an electrical engineer and the founder of 3COM, developed
Metcalfe’s Law which states that “the value of a telecommunications network is
proportional to the square of the number of connected users of the system”
(http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Metcalfe_s_law.html). The
theory behind this concept is that if you buy a cell phone, the value of your phone
increases as the number of others buying a cell phone increases. From a loyalty
perspective, the more customers you have that are part of your loyalty program the
better your program has the potential to be.
Metcalfe’s Law is also referenced in a report by Colloquy entitled “The New Champion
Customers” which conducted a study of word of mouth advertising and found that the
general population is 59.3% more likely to recommend a retailer if they are part of the
retailer’s loyalty program (Ferguson & Hlavinka. 2009). The study further looked only at
members of loyalty programs and their overall propensity to tell their friends, splitting
them into 3 categories based on a questionnaire; advocates, champions, and
connectors. Advocates by definition, are promoters of a brand who are willing to tell
others where they earned rewards or recommend a business. Connectors are described
as influencers who have the ability to recommend but may not always do so, while
champions are a combination of advocate and connector and actively recommend often
and actually go out of their way to champion the brand. The study found that 55% of
loyalty program users are considered champions meaning that a strong loyalty program
and strong membership base can have a significant impact on a company’s business.
The study goes on to explain and identify various demographic segments as well as
compare word of mouth champions of loyalty programs to non-members. The findings
show that non-members are only 32% likely to be word of mouth champions, which is
70% less than those who are members. The chart below shows the effects of loyalty
rewards on word of mouth champions. Members of a loyalty program who redeem for
rewards are three times more likely to be word of mouth champions.
22
The argument for word of mouth advocacy, especially when tied to a loyalty program is
unquestionable. A strong program that engages with its consumers can reap the
benefits through various forms of social media outlets when those members talk about
the program and become advocates of the business; where they earned, how much
they saved, and what they bought with their rewards. The issues facing many programs
today is in building that advocacy with relevant offers and rewards that push those
members to be champions. There is much at stake here, especially with the new age of
word of mouth that is now global in scale, and a misstep in service or unengaged
customer can similarly create an army of haters for a business to deal with.
For as much as word of mouth champions and reward members can be a company’s
own promotional army, there are also naysayers and groups that are just as ready to
pull their support and recommendations. In Colloquy’s white paper on Urban Myths
(2011) the authors use the term “Madvocates” to describe that group who advocate for
everything that is wrong with a brand. This bad press is usually caused by a product or
poor service and is typically less about the rewards, although bad rewards can certainly
contribute. What is interesting about this Colloquy study is that there is overlap and the
study claims that 39% of Madvocates are also word of mouth champions (Colloquy
pg.4). There is still a percentage of the population that goes out of their way to find
things wrong with a business, and we can assume that if a customer has taken the time
to join a rewards program and actively participate over a period of time, sometimes
those little slips in customer service can be overlooked providing they are not
reoccurring. Where loyalty programs become the focus of madvocates is when the
program gets stale or offers no value for the work the customer puts into it, or as stated
earlier, when the personalization and sharing of information is one-sided.
Reward, Recognition, and Relevance
In grade school there are the three “R’s”; reading, writing, and arithmetic as the key
components of a good education. Besides the obvious fact that only one of them
actually starts with the letter “R” and this is coming from an education based doctrine,
there are arguably also three “R’s” in the loyalty business that all actually start with “R”.
Bryan Pearson, the current CEO of Loyalty One and parent company of the Air Miles
program, uses reward, recognition, and relevance as the building blocks of a strong
loyalty program (http://pearson4loyalty.com/2012/01/the-three-rs-of-loyalty-a-life-lessonfrom-the-classroom-to-the-boardroom/). These three R’s can be looked at in many of
the top programs in Canada to get strong view of what each of them mean and how
they are part of making a loyalty program successful.
Reward
The reward side of the three “R’s” is often referred to as the tangible benefit. The actual
reward itself is as important to consumers as anything else the program offers. It is
often the trade for providing your valuable personal data and spending the time you do
collecting and tracking your reward progress. It is what the program gives you for
23
changing your behaviour from shopping with one retailer to another. It is what the
consumer looks at to compare the value of what they buy to the value of what they get.
Many businesses have taken to offering a variety of reward types in order to meet the
demands of their consumers and loyalty program members. Whether the reward is
instant cash back on purchases, gift cards, merchandise, or the opportunity to buy
flights or hotels, the reward offering is one of the most important aspects of the loyalty
component. Both Air Miles and Aeroplan have taken these tangible benefits to a new
level, not only offering flights and hotels, but now reward members can redeem for
merchandise, gift cards and donations to charitable organizations. Many of the bank
programs have followed suit with their own variety of rewards options.
Recognition
Recognition in combination with the reward are part of those small intangibles that are
almost equally as important as the reward itself. When various programs offer similar
rewards like instant cash back or gift cards, the recognition aspect is what can set a
program apart from other programs. Recognition is what it says it is; recognizing
customers by saying “we know you bought with us and made a choice to buy with us, so
here’s a small thank you”. It can often be in the form of special upgrades on flights,
preferred or “front of the line” status on new product launches or what is often referred
to in the industry as “surprise and delight” offers that recognize and personalize a
customer purchase behaviour. The best loyalty programs create loyalty not only by
recognizing customers for what they buy, but also for who they are and why they buy,
and recognition is an important aspect that unfortunately often gets overlooked because
it’s an added cost to the reward component.
Recognition is also overlooked because it is personal and requires that additional step
in the data analytics component to pull those customers that should be recognized
possibly more than others. Similar to the RFM example discussed earlier, a customer
who shops once a month may not get a special recognition bonus but a customer who
visits once a week may get a special “surprise and delight” benefit as a best customer.
Recognition often comes with an expectation on behalf of the customer as well as those
customers may go out of their way or make sacrifices to participate in the loyalty
program. Sacrifices may include actually spending a little more on products they know
they could find cheaper if they went elsewhere. There is something of value for
customers to reduce the amount of retail locations they have to visit to get everything
they need. Canadian retail giants like Loblaws and Shoppers Drug Mart have gone out
of their comfort zone and area of expertise over the past several years to become a one
stop shop for consumers. Loblaws has moved into selling health and beauty aids
(HABA) as well as clothing, furniture, and small kitchen appliances in some of their
larger stores. Shoppers Drug Mart has crossed over into selling a limited amount of
grocery products and electronics to keep consumers in the store and buying more from
them.
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Relevance
Relevance is often referred to as the sustainability side of a loyalty program. As social
media takes a grip on the world and mobile communication becomes the everyday
means of talking to consumers the relevance of a loyalty program is equally as
important as any other factor. Program relevance is important as loyalty program
membership increases. Today, the average Canadian participates in over six programs
at once so a program must engage customers and have meaningful rewards tied to
spending patterns and be weighted in the customers favour. Relevance also becomes a
key component of customer engagement and data analytics. Simply providing a card to
a customer and asking them to join your program is the easy part. When that same
customer has to sort through their wallet to decide which program cards to purge
because they have too many, the cards they value the most and the programs that
speak to them and engage them in their participation will be the ones they stay with.
Many loyalty programs fail because they fail to engage with consumers.
The challenge for many programs that are created today is that the concept of customer
engagement and what customers are looking for is changing at a rapid pace.
Additionally there is an increase is what is important beyond the typical ideas of price,
product selection, and promotional opportunities. The ability of a program to be mobile
and recognize mobile technologies is important especially with so many cards in a
customer’s wallet competing for space.
Environmental sustainability and a focus on protecting the planet is also important. As
more and more plastic cards are produced and companies offer rewards that may have
an impact on the environment, this becomes a key area of customer engagement
strategies for an organization. Social consciousness becomes a very relevant part of the
loyalty landscape and companies that are considering launching a program, or
reinventing the program they have must consider what is on the minds of their
consumers, not simply what they purchase. Unfortunately the challenge of course is
that you can’t analyze what customers are thinking, but you can look at where you can
gain an advantage and make customers think more about where and what they spend
their money on. Restaurant burger chain A&W recently created the website
awbetterbeef.ca that is entirely focused on providing customers information on why their
burgers are better, how the cattle are raised without antibiotics, and what innovations
are being accomplished by the farmers who raise their cattle. As there is not data yet on
whether this new focus has impacted overall sales, it is a very relevant part of this
competitive industry and can only make a positive impact on the minds and thoughts of
consumers (awbetterbeef.ca).
Data Analytics and CRM
Loyalty programs in general come with the expectation that the more a customer
spends and the more often they visit the more they will be rewarded for choosing one
retail business over another. In order to accomplish this, the retailer needs to
understand who their customers are, what their purchase behaviours are, how much
25
they spend, and why they choose one business over another. Much of this
understanding comes from analyzing the shopper transactional data that flows through
the point of sale systems every day in mass quantities. For the small independent home
town business, sometimes simply seeing the same faces every week or the same
people at church, at the gas station, at school, or at the grocery store is method enough
for understanding who customers are and what their behaviours are. When you are the
only one around for miles, loyalty is almost a given. However, for mid-size and larger
businesses in most urban markets who compete every day for consumer’s “share of
wallet”, the one who understands and speaks to the consumer the best is usually the
one who wins.
The early adopters of extensive Customer Relationship Management (CRM) systems
will tell you that their first run didn’t go the way as planned. CRM website CRM Trends
(crmtrends.com) estimates the early years of CRM data analytics systems failed in 7075% of their initiatives. One of the key reasons for this is that businesses paid huge
dollars for sophisticated systems that tracked and compiled data but did nothing to
provide the “so what factor”. Additionally, many organizations did not plan for who was
going to comb through thousands of lines of transactional data to produce something of
value that a category manager or brand manager could use to reduce costs, speak
directly to the consumers who were buying their products, or improve overall supply
chain efficiencies and save the company money.
According to CRM Trends, loyalty programs are integral to a company’s business and
understanding who those customers are equally as important. As the authors state, “in
general, loyalty programs are often developed with good intentions but unclear
objectives. While retail loyalty programs have many purposes, the greatest value that is
created for retailers is the ability to identify individual customers and to measure and
understand their individual behaviors. This consumer behavior data far outweighs the
"currency" value of providing consumers the opportunity to build a reward opportunity by
shopping at one particular retail banner. This opportunity is often misunderstood by
retailers and consumers alike” (crmtrends.com). The bottom line is that CRM is about
building relationships and understanding customers, which also happens to be the
premise for a strong loyalty program.
In many consumer facing businesses there are 3-4 key areas that every owner wants to
achieve on a regular basis. One is often referred to as Shift or acquiring new customers
by shifting them over to your business. New customer acquisition is one of the important
aspects of retail that exists primarily due to the competitive nature of how consumers
shop. Consider the automobile industry and how many thousands of dollars are spent
every week on newspaper advertising, radio and television commercials from individual
dealerships to get customers in the door. And then the real pressure starts for the sales
team to engage and get those customers to buy a car from them versus going to a
competitor. The grocery industry is equally as competitive, especially in larger cities
where the choice of places to go is high. Today, the automotive industry is further
challenged to make a profit as consumers shop and research online before they step
foot in a dealership.
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The second key area is often referred to as Lift or getting existing customers to spend
more money than they normally would. In retail this is referred to as share of wallet.
Consider again the auto industry where a consumer may choose to have their tires
rotated at the local garage, their oil change done at a quick lube service, and their
brakes done at a brake specialist or at the dealership. If one of those service providers
had a loyalty program in place that offered special rewards for customers who would
have all this work done in one location, they would benefit from increased spends,
higher margins, and an opportunity to build a stronger relationship with the customer.
The third area is retention, which can often be the most difficult to achieve as many
businesses are competing for the same customers. Customer retention can be elusive
when so many businesses spend so much of their efforts on the first key area, obtaining
new customers. Retaining existing customers means that as a business you have done
your homework and figured out who you customers are and have provided the best
experience you can possibly provide so there is little margin for error as to whether they
will return for their next visit. If you are lucky, your word of mouth champions will also
sing you praises and not only will you be able to retain your existing customers but you
may gain new ones in the process. In select cases, retention is easily achieved, but in
most cases it needs to be worked on and nurtured. If you own the only gas station
within 100kms, your need for loyalty retention is less than if you are surrounded by your
competitors.
The fourth component for many businesses is often overlooked as it involves more
rigorous data analysis. Increasing the overall profit mix of existing customers is an
important area especially for loyalty program providers to help offset the costs of the
program itself. For many retail businesses certain product categories or even individual
products provide better profit margins to the organization. For marketers, enticing
customers to buy one product in the same category as a product they may already buy
that has a lower profit margin for the company is a difficult task. The easiest way to
accomplish this from a loyalty rewards perspective is to make the reward more enticing
for those higher margin products. Think of the auto business again in the purchase of a
new vehicle. Dealerships and brands make more money on the fully loaded model than
they do on a base model. By offering more of a reward on more options, dealership can
move that customer into a higher profit bracket and make more money on vehicles with
more options. Of course the more vehicles on the road with more options means the
more that can go wrong with them, so it’s also good news for the service and parts
department.
Data analytics is an integral part of understanding customers shopping habits and
needs. With the new vision of CRM being one of integrating the loyalty rewards program
into the overall strategy of the company to ensure customers who spend more, spend
more often, and spend on higher margin products are taken the best care of, CRM and
data analytics are as important to an organization’s survival as the traditional ideas such
as product mix, pricing, customer service, and promotional spending on advertising and
marketing. For many organizations today with a loyalty rewards program the data
analytics and CRM is often the most complicated and difficult to manage and utilize to
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its full potential and many businesses simply try to get by with simply providing
consumers with rewards and gift cards they think will be enough to win their affection
and their business.
The stark reality for many programs and for the companies that implement them is that
strong rewards do not always equal strong loyalty. Loyalty and rewards can be very
different and mean many different things to different companies. A company that hands
out gift cards to all of their customers who spend a certain threshold amount may not
necessarily be creating any loyalty. In fact, what they are accomplishing is a gift card
mentality that their customers will come to expect that uses those gift cards only when
products are on sale and at their money losing worst levels. Many retail businesses,
including McDonald’s use one of the most simplistic of loyalty rewards programs called
the frequent buyer program. Once a customer buys a certain number of items, usually a
high frequency item like coffee, they get their next one for free. This basic program
doesn’t collect data and doesn’t personalize offers to consumers, but on every tenth
visit when that customer has the option to get a free or coffee or pay for one somewhere
else, McDonald’s is counting on the customer to choose free which will increase their
overall visit frequency. Consider a company like Southwest Airlines who, with or without
a loyalty rewards program, has created a mindset in their employees and their
customers that customer service is the key ingredient to a successful business. The
customer reward in this case is often the incredible means by which Southwest goes out
of their way to satisfy a customer, and even with a loyalty program in place Southwest
has built a reputation of quality service that has a loyal following
(http://en.wikipedia.org/wiki/Southwest_Airlines).
Measuring loyalty by implementing data analytics and CRM best practices is an integral
part of an organization’s success and overall profitability. As discussed earlier this is
especially important in Canada where retail consolidation is abundant and more
Canadian companies are becoming national in scale. Using data analytics to
understand consumer behaviours and buying habits is a key to this consolidation, and
as Michael Porter, a leading competitive strategist, explains, "It's incredibly arrogant for
a company to believe it can deliver the same sort of product that its rivals do and
actually do better for very long. That's especially true today, when the flow of
information and capital is incredibly fast" (crmtrends.com). A loyalty program today that
does not use data analytics to assess and understand who their customers are is at a
significant strategic disadvantage to programs that are fully integrated with a system
that measures and rewards their most profitable customers.
The Case for Coalition
With the consolidation of many businesses that have allowed so many organizations to
be fully national in scale, the 2 largest coalition programs in Canada have become
giants in the loyalty industry. Both the Air Miles and Aeroplan programs combined have
members in over half the Canadian population, and the Air Miles program itself is
estimated to have at least one members in two thirds of Canadian households. The idea
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behind coalition programs is that consumers can earn rewards, or miles as they are
termed in both programs, that can then be used or burned in a variety of ways. Both
programs rely on a variety of reward partners, both on the earn and the burn sides, to
entice their members to participate in the program. On the earn side, coalition partners
use their strong membership base and brand recognition to encourage their partners to
market and sell the program to their customers.
The advantages of coalition programs becomes the partnerships themselves and the
cross marketing opportunities and ability to strengthen the loyalty of consumers across
the partnership portfolio. If one partner is stronger than another in keeping their
customers loyal, they will actually help the less loyalty focused partners by being part of
the coalition and encouraging members to remain loyal as part of the coalition. Coalition
programs also work well with businesses where purchase frequency may not be as high
as with grocery and gas chains. A furniture store has a much lower frequency of
customers than a grocery store does so the advantage to the furniture store is that if a
customer who may be an Air Miles collector who shops regularly at Metro stores, is that
if they are also an Air Miles partner those 11 million estimated members may look to
buy their next sofa at a participating partner first before looking elsewhere.
On the burn side of the business, both Air Miles and Aeroplan give their members plenty
of options for using their miles once they have accumulated and saved up enough to
buy something. Whether it is flights, hotel stays, car rentals, merchandise, or gift cards,
both programs have given their members and their coalition partners a number of
options, which in turn creates a stronger breadth of members who remain loyal to the
programs. The other key advantage, as discussed earlier, is with so many programs
that are competing for space in consumer wallets having one card that can allow a
consumer to earn rewards at a number of top retail chains is a significant advantage.
Breakage
Breakage as part of a loyalty program is more of a financial task and has more financial
implications on the organization than on the marketing department. This is a key
component of most loyalty program schemes as is the amount of points, miles, or
rewards and the relative value of what has been distributed versus what has yet to be
redeemed. In relatively simple terms breakage is the number of points issued minus the
number of points redeemed. This equation will tell a company what is still left to be
redeemed and then it is the company’s responsibility to determine what to do with all of
those unredeemed rewards. Breakage, if not monitored properly, can become a huge
liability for an organization as there is a cost to those rewards before they are even
given out.
One of the challenges with breakage if often the unknown. Why customers are not
redeeming their hard-earned rewards can be attributed to any number of reasons. The
customer may have lost their loyalty card and forgotten they even had it, they may have
decided a better program works for their needs, they may be saving up for something
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significant and simply don’t use the card that often, or in the case of a retail program
they may have had a poor in-store experience and decided the program was no longer
worth the poor service they received. As mentioned, a loyalty program cannot fix all of a
company’s problems.
Expired rewards has become one of the most contentious issues around breakage, and
has sparked a number of heated debates and customer dissention over the past several
years. Both Air Miles and Aeroplan with so many members and partner earning and
redeeming opportunities have tested the waters with expiration dates on their rewards
earned. For the rewarding partner, the advantage is being able to predict when and
approximately how many rewards will expire in any given fiscal year. The disadvantage
of course is having to explain to customers that the rewards they have earned by
spending more and giving their business have suddenly gone away. Breakage actually
becomes a tremendous source of revenue for the company since all of the rewards that
have been previously paid for and not redeemed become an immediate source of profit.
The interesting idea behind breakage as a revenue generator is that by definition,
breakage is very much anti-loyalty. When a loyalty issuer makes money on breakage, it
mean the company has lost the loyalty of its customers, they have forgotten about the
program, or their purchases are so infrequent that the program is no longer relevant.
The website crmtrends.com, describes several ways in which breakage can be affected
by changes in a loyalty program’s overall structure. Changes to loyalty components
such as levels of accumulating points, pricing strategies, redemption thresholds and the
number of reward points required to redeem, changes in the way the program is
marketed, additional added fees, and marketing costs all contribute to breakage levels
and the value of unused rewards.
The Case Against Loyalty
A recent study by leading loyalty research company Colloquy in 2013, estimated the
number of loyalty program memberships in Canada to be 120 million (Canadian
Consensus 2013). This is also in line with the estimated 90% of Canadians who belong
to at least one loyalty program, which is surprisingly a decline from its 94% peak in
2009. In the US, Colloquy also estimates the US loyalty memberships at 2.65 billion
(Colloquy. 2013). With the obvious popularity and proliferation of programs across North
America, some rather large companies still don’t want to play in the loyalty sandbox. In
the hotel category, most major hotel chains either have their own program such as
Marriott Rewards or are part of a larger loyalty coalition such as those partnering with
Air Miles or Aeroplan. Despite this, hotel chain Four Seasons which owns 92 hotels in
38 countries has no loyalty program that brings customers back or rewards them for
staying with them. Ikea, a large furniture and home furnishings chain with over 300
stores in 26 countries doesn’t believe in loyalty programs for their customers as they
believe all customers should be treated equally, regardless of how often they shop or
how much they spend.
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There are a number of other businesses that do not have a loyalty program component
which may challenge the idea of why so many of them do. Loyalty programs by
definition are intended to build the loyalty of customers beyond their everyday
purchases, and as in well-known marketing terms, gain a better “share of wallet.”
However, for many companies the advantages of identifying loyal customers doesn’t
stop there. If there is an opportunity to give more for more loyal customers or those who
spend more, there is a definite advantage and an expected greater impact on
profitability. As discussed throughout this paper the benefits of true loyalty programs on
gaining better knowledge into customer behaviours and shopping habits is enormous.
So if there are so many benefits why would any company resist participating? To
understand this we need to understand the different levels of loyalty and what true
loyalty is.
In her book Customer Loyalty: How to Earn It, How to Keep It, Jill Griffin crosscompares 4 different categories based on the level of repeat purchase and the relative
attachment to the loyalty program. The image below shows how these categories fit
together.
No Loyalty
The No Loyalty customer is one who shows no loyalty to any product or service and on
some levels may not even care how they are treated. A business traveller with a
particular budget for meal expenses may choose a restaurant close to his/her hotel that
is within the travel budget and meets some basic requirements. This is not a customer
the restaurant likely wants to pursue or will offer any future extended value.
Inertia Loyalty
Griffin explains Inertia Loyalty as loyalty that requires a high degree of repeat
purchases, but no real attachment to the company. The loyalty is more for convenience
and to save time than it is for loyalty to the business. Consider filling up for gas when
one gas station is one kilometer away and the other is 5kms. It is possible for the station
farther away to attract those customers but it requires a strong commitment and in the
case of gas it is often determined by price.
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Latent Loyalty
Latent Loyalty customers are those who have a strong attachment to a brand or
company product, however their repeat purchase behaviour is extremely low. A furniture
store may fall into this category, and unless the customer is an interior designer the
frequency of purchase may be very low, even if the customer swears by the products
and the company. An expensive restaurant is another example of latent loyalty where
customers can only afford to treat themselves every so often but there is only place they
will go to do so.
Premium Loyalty
Finally, Premium Loyalty customers are what every business would love to have and
strive for. High repeat purchase frequency and a highly engaged customer base.
Premium loyalty followers fit into the category of brand champions discussed earlier,
where they are not only the biggest brand buyers but also serve as champions and
sellers of a company’s products and services.
With these various types of loyal or non-loyal customers, businesses that do not
participate in a loyalty program have made a conscious choice not to implement one. It
is unlikely that most organizations who sell products and have customers have not at
least considered or discussed loyalty at some point in their strategy discussions. From a
financial perspective one of the key arguments against loyalty is the cost to implement a
truly effective program. If a company decides to simply give out rewards or points to
their customers without any ability to measure the impact of those additional rewards,
then the program simply becomes a cost centre. Of course, in order to measure you
need the right tools and many organizations, especially those that may be franchise
based may not have a sophisticated enough transaction point-of-sale system to track
customer data and transaction history.
The other financial consideration is the added costs to market the program, the costs to
purchase and distribute loyalty cards, the relative costs of the redemption itself and
what is to be redeemed. Whether it is a cash-back based program, a merchandise or
reward based program where customers can use points to make other purchases, there
is a direct cost to issuing those rewards. Other marketing costs include management of
the program and its rewards, data analytics and business intelligence capabilities, and
the overall implantation of the loyalty program into the company’s sales strategy.
Aside from a number of financial implications, there is also the challenge with classifying
customers. As mentioned earlier, RFM analysis is a simplistic method of measuring the
overall importance of customers by dividing them into various categories based on
spending patterns such as how often they spend and how much they spend. By
focusing on those in the top tier brackets of spending volume and frequency, successful
loyalty companies may prove to save on marketing to customers who fit into the no
loyalty or latent loyalty categories and spend their marketing funds directing their
promotions to loyalty champions. So why is this bad? For organizations like Ikea who
want all of their customers to be treated as equals regardless of spending patterns, this
goes against their corporate strategy. For a hotel like the Four Seasons, their loyalty is
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built on exceptional customer service and the cost those goes with that service. The
affordability of a room at a Four Seasons hotel is limited to a select group of customers
who are loyal to what Four Seasons offers. Ikea wants their customer who buys the $10
bag of tea lights to feel the same customer service experience as the customer who
buys a $20,000 kitchen.
If both of these company’s positions are true and not speculation, then why does a
company like Southwest Airlines, whose customer service is world renowned, have a
loyalty program as well? Why does Fairmont Hotels and Resorts, one of the leading
high end hotels in the world and a direct competitor to Four Seasons, have their
President’s Club loyalty program? Further to this, why would all of the major petroleum
companies in Canada have a loyalty program when their customers are inertia loyalty
customers and primarily shop on price more than any other factor? The assumption and
conclusion in this is that companies without a loyalty program either don’t see the true
value of loyalty and its benefits or they don’t believe they can manage and market a
program to the degree that it requires to offer the full value to the organization. Loyalty
takes effort to build on over time and as a loyalty program is only a part of building
loyalty within the organization, many organizations are engaged and satisfied with
providing exceptional customer service, a premium product, and/or a brand that is so
exceptional that customers cannot help but be loyal to.
New Technology – AKA What All the Cool Kids Are Using
With the ongoing proliferation of plastic cards and the increase in loyalty programs
every year, something has to give at some point. According to a Colloquy article entitled
“Transformers”, (Colloquy 2009), the smartphone industry began roughly around 2007
when Apple launched the iPhone. Since then the smartphone industry has increased
consumer consumption, likely more than any other part of the electronics industry and
with it has launched the world of apps. There is no question that smartphones and
social networking have become the new communication platform for the world and for
an entire generation of consumers, and apps have creating a new era of gaming, helpful
tools, social media, and educational assistance. For the loyalty industry this is good
news as the digital wallet is almost limitless by comparison to the real thing. The other
good news for the loyalty industry is that a mobile card is open to a new group of users
and collectors who, in the past, may have been resistant to join a program for the sole
reason of having to carry a card around with them.
In 2011 Starbucks launched their mobile payment application for iPhone and Android
users that allowed consumers to download an app that contained a two-dimensional bar
code they could use to pay for their coffee or treat using their phone. According to
Market Watch online magazine (www.marketwatch.com), mobile payments have
increased to 14% of Starbuck’s total transactions in the US, and the coffee giant sees
over 5 million mobile transactions per week in its US stores alone. The mobile payment
app is of course also linked to the customer loyalty program so users can earn rewards
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each time they pay. The only limitation to this growth is the limitation on the number of
mobile smartphone users which is increasing rapidly each year.
The real challenge for businesses is implementing these new technologies and
integrating them into their current point of sale systems, and then deciding if the new
technology will add more profits to the bottom line and how quickly. New technology is
constantly changing and if the cost to implement outweighs the time to recuperate those
costs then the company needs to consider the alternatives. The reality is that while the
Starbuck’s mobile payment is a cool alternative to carrying a card, there also has to be
a significant profit upside to implementing this technology into thousands of locations.
The other challenge is that the ultimate loyalty solution may not even be invented yet,
and really what matters from a loyalty program perspective is that whatever device
becomes the leader it still needs to provide the basics of a strong loyalty program and
develop customer engagement and personalization.
Analysis
In looking at the loyalty industry, specifically in Canada, and how a loyalty program can
be successful in a market that is continuously evolving with new products, new attitudes
towards rewards and value, and a changing retail landscape, certain analytical tools can
help to understand how a program is to be successful. This changing business
environment requires a careful analysis of how a loyalty program can affect a business
and to what extend the program needs to be executed in order to prove value to the
organization. A DEPEST analysis will assist in answering some of these questions.
Demographic
Demographic factors that can affect loyalty rewards programs and their success include
program values, the perceived monetary value of rewards, reward member status, and
the gender gap between male and female reward members. As fuel prices continue to
rise in Canada the value of using earned points to purchase gift cards for gas or simply
receiving a gift card for gas as a thank you has increased significantly. Member status in
rewards programs, particularly with frequent flyer programs and some coalition
programs like Aeroplan continually change as the gap between those with a few
rewards and those with many increases. Additionally, Colloquy studies indicate that
female rewards members are more engaged with programs than male rewards
members. If you consider some of the most engaged programs such as Shoppers
Optimum, HBC Rewards, and select grocery programs such as President’ Choice,
these tend to have a higher level of female shoppers than males and those businesses
in turn tend to market to a higher female demographic.
Businesses that are seeking to launch a loyalty program should definitely consider the
power of the female shopper and the value of the rewards they are using. Many
automotive service centres are starting to implement programs such as Ask Patty
(askpatty.com) which focuses on educating employees and engaging female customers
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on automotive advice. Integrating a loyalty program into this program and providing
rewards to female customers would be a significant benefit to the company.
Environmental
From an environmental perspective, the challenge for loyalty programs is primarily
focused on card production and the plastic used to produce them. As discussed earlier,
the future of loyalty programs may be moving away from the common plastic card to
mobile devises and the environmental impact of lost cards and continually producing
new plastic may start to slow in the coming years. However, as loyalty programs start to
go more mobile the significant increase in the gift card business, a lesser version of
loyalty, is increasing significantly. As loyalty programs start to introduce a more
environmentally friendly mobile program, the gift card industry will need to follow suit in
order to remain relevant.
The positive side of the environmental factors affecting loyalty programs is that some
programs such as Aeroplan and Air Miles have started allowing members to use or burn
their miles to donate to environmental causes. This provides the issuing program with a
positive offset to the thousands of plastic cards they are producing each year but also
helps attract new members to the program who are concerned with the environment, as
well as wanting a more mobile technology friendly program to belong to.
Political
The privacy laws in Canada are put in place obviously to protect the rights and privacy
of consumers. Government regulations in Canada and changing political powers will
likely not change the privacy laws without a lengthy debate and it seems more likely that
laws will become increasingly stringent rather than slack. One of the most impactful
changes in recent years was the Conservative government’s decision in 2011 to abolish
the mandatory long form census survey. The long form survey which provides a much
more detailed account of demographic information for use by many statistical
organizations such as Environics Analytics and even by Statistics Canada, was
changed to a voluntary form. The short form survey is still mandatory, but many critics
believe it does not have the relevant information required, and the long form is less
likely to be filled in by certain demographic groups that could be assisted more by
providing this information.
For the loyalty industry, detailed demographic information is less important in most
cases, however, a company that is looking to implement a program should consider the
capabilities and advantages of collecting some insights into their consumers shopping
habits, how far they come to shop, how large their family is, how many cars they drive,
household spending patterns, and other factors that could potentially help to engage
with their consumers, providing this information is always kept confidential within the
business.
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Economic
Loyalty Rewards programs have increased significantly both in Canada and the US in
the past several years, especially on the heels of the economic crash that happened in
2008. What emerged from this period was the price savvy consumer who was always
looking for deals, and the opportunity to earn points when making a purchase or a
potential cash back reward, was often reason enough to change consumer behaviours
and spending patterns. As retail business scrambled to attract consumers with low
prices, many could not compete with chains like Walmart so rewards programs became
the alternative and offering higher rewards for increased spends was a significant factor
in attracting new customers.
The overall costs of running programs including marketing and breakage management,
as well as the perceived valuation or devaluation of rewards is always an economic
concern for businesses with loyalty programs. However, most programs that implement
strong rewards platforms and data analytics capabilities will admit that the cost of loyalty
is far outweighed by the benefits of loyal champions and dedicated customers. The
economic factors behind loyalty programs are based on finding ways to encourage
consumers to spend their hard-earned money with one business more than another and
just like selling a product, the value and revenue generated always has to outweigh the
costs.
Social
Many loyalty programs are heavily tied to the businesses they serve beyond that of
loyalty including demand for the company’s product that may slow the value of the
loyalty engagement as well as age factors, social consciousness, and changing
behaviours towards shopping to earn rewards. It is unlikely we will see a retail business
ever offer extra rewards to consumers who buy cigarettes. Businesses who cater to
certain demographics may have a more difficult time attracting consumers simply
because of who their key consumer is. Much of the success of the Shopper’s Drug
Optimum program can be attributed to its complete dedication to rewards offers,
promotions, and data analytics capabilities that speak to consumers regularly.
Additionally, Shoppers Drug Mart’s primary market focus is on selling to women which
also happens to be the highest loyalty engagement category so both are a great fit.
Technological
The technology factors associated with loyalty programs can arguably have the greatest
impact on the success or failure of a program. Data analytics and the technology that
goes into to tracking shopping behaviours is an integral part of what makes a program
successful. As the retail landscape changes at a rapid pace technology is imperative to
making a program work, especially as consumers become more tech savvy and want
their rewards program to be simply and easy to use. The less consumers have to think
about what they earn and how they use the program the more successful the program
will be and likely the more loyal consumers will be to the brand. Technology can be the
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most costly part of a loyalty program implementation but can also have the greatest
impact on the success of a program. Whether it is the use of mobile cards versus plastic
cards, or the technology of integrating the program into the point of sale transaction
system in order to track customer transaction behaviours, the investment in technology
is a requirement that is directly tied to success or failure of any loyalty business.
Conclusions
There is little debate that the loyalty industry is alive and well in Canada and around the
world. Many of the top tier membership programs like Air Miles, Tesco, Nectar, and
many of the US frequent flyer carriers continue to evolve their programs to meet the
needs of changing economic times as well as changing consumer behaviours. As
discussed throughout this document, loyalty in general has many different layers, and
programs meant to attract and retain customers have many similarities but also can
vary in their overall effectiveness.
The unfortunate reality for many businesses looking to start a loyalty program or
wanting to jumpstart an existing program that is not working, is that loyalty comes with a
cost. That cost can be significant especially if it outweighs the overall value. No retail
business would ever sell a product in its stores for less than the cost to buy the product
and get it into the store. The true value of loyalty is immeasurable, however, it’s the
journey to get there that companies often don’t want to invest in. Any business would
love to have customers who are dedicated shoppers and would never even consider
going anywhere else. Those loyalty champions are hard to find and cost money to keep.
So why do so many businesses simply try to get by with the basics and then wonder
why the program is not driving up their profits and increasing customer advocacy? The
answer is that building loyalty has become a complicated business and for many large
scale organizations like HBC and Shoppers Drug Mart, entire departments dedicated to
the loyalty program spend their time combing through data and managing the program.
Smaller businesses cannot afford this luxury so the program is often “passed off” to
another area of the company where individuals are already have other responsibilities.
Building loyalty is similar in ways to planting seeds in a garden. You will not see the
value in paying for the package of seeds but when the flowers grow the true value
becomes obvious. In order to make the flowers grow, however, you need good soil,
water, fertilizer, sunshine, and most of all patience. Strong loyalty champions need to be
grown carefully and rewards programs are one of the key ingredients. As discussed,
customer service, price, and quality products can be equally important as part of that
growth in fertilizing brand champions.
Where loyalty programs can distinguish one company from another is when those other
intangibles like price and customer service are relatively equal. Most grocery stores will
compete equally on price, especially for the everyday high volume products such as
milk and bread, but if one is offering rewards or special offers on buying some of those
items, it may just convince a customer to shop there and possible pick up a few more
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items. Strong rewards programs spend the time and effort to figure out who their top
customers are and who buys with them the most.
The marketing costs associated with advertising and marketing to a mass audience is
significantly higher than targeting customers who shop with you regularly regardless of
sales discounts. Many loyalty program schemes cost the company less than 5% on
every dollar and is only for customers who have made the effort to sign up for the
program, whereby many discounts and sales typically start at 10% and is available to
everyone. Customers who only come to the store when there are discounts actually cost
the company money because they never pay full price and will leave to go somewhere
else where there is another deal. Customers who are rewarded each time they shop
cost less because the rewards cost less and the customer is more loyal because of the
opportunity to earn points.
Loyalty is not free, but loyalty can be much more cost effective than continuously trying
to acquire new customers and marketing to audiences that may never need your
service. Loyalty programs can make a business more profitable when the company
invests in the technology, infrastructure, and marketing to attract and build relationships
with its most profitable customers. Customers in general want the company to
understand their needs and build relationships that recognize their unique shopping
habits and willingness to commit. Most customers don’t want to shop at multiple places
for the same products but they do because the price is better or the customer service is
better, or there is a discount. And if the customer doesn’t feel the need to reward the
company for their business there is no relationship and therefore, no loyalty.
In order for a loyalty program to be effective, the company needs to fully embrace the
value proposition and recognize that loyalty is cultivated over time. Many large
organizations have started to think of the consumer over a much longer period of time
than just a couple of visits. Customer Lifetime Value (CLV) takes the loyalty and
relationship of consumers through the entire present and future value they are worth
and then looks at how to keep those customers and build on that relationship. For a
loyalty program to be fully effective from a CLV standpoint, it needs to become more
than simple gift cards or points exchanges. It needs to show consumers they are
needed, valued, and important to the success of the business they spend their time and
hard earned money with.
38
Appendices
Appendix A
39
Appendix B
40
References
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http://www.consumerinformation.ca/eic/site/032.nsf/eng/01173.html
i
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ii
http://en.wikipedia.org/wiki/Hachik%C5%8D
42

An Analysis of Customer Loyalty, Loyalty Programs and the Impact

Transcription

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