Andy Wood, MD, GI Insight You Asked How can targeted loyalty programs help you ride out a slowing economy?

When the credit crisis hit during the back end of 2007, it generated much talk on its likely impact on retail sales. Now we have passed the one-year anniversary of the financial markets crisis, and parts of the retail sector are, indeed, seeing a negative impact.

Many have questioned the effectiveness of loyalty schemes. And if we were to pay heed to many of the commentators on the issue, the lasting impression would be of a technique in decline. If loyalty cards are never taken out at the till to gain rewards of some description–or the card owner never receives targeted and personalised offers from the card issuer–then the process is, indeed, a waste of time. On the other hand, how many brands or retailers does each person use? It does not take long for each customer to accrue a dozen favored suppliers. If they are all applying their loyalty activity, initiatives and schemes correctly, then all those cards could be providing a very important benefit for customer and supplier, alike.

It is now accepted that loyalty schemes are more about: identifying who the customer is; understanding customers’ tastes and preferences; understanding who is valuable and how that value is changing (positively and negatively); and providing customers with obvious value and relevance that incentivises them to stay with, and spend more with, you. I should point out, however, that snapshots of customer value are useless in building effective and appropriate customer development strategies. It is essential to look at how value changes over time.

Decline in spend

In one recent instance, a client of ours, a retailer, found that one high-spending, high-loyal customer segment had been gradually spending less over the previous six consecutive months. The retailer wanted to get the customers back to spending at their previous level. Our client put in place a targeted and time-limited double-point earning offer, focusing on products customers in the segment had previously purchased. This was not just a blanket offer across the segment. Our analysis had shown that different subsegments of the customer group regularly purchased a number of lower-value, consumable products. For each subsegment, therefore, the retailer offered triple points on purchases of a couple of the lower-value products. In this way, executives hoped to further incentivise the take up of the offer.

To get additional value from the loyalty strategy, the retailer also created a special discount package, which incentivised these customers over and above their previous normal spending point. Actual discount was offered on a range of higher-value products, selected on the basis of their previous purchases in the last two years. In other words, they tailored incentives not to their common group characteristics but to their individual purchasing history.

The result was dramatic. More than half of the group recovered spending levels by the end of the two-month campaign. Of that half, one third exceeded previous spending, to the extent that the retailer met its revenue recovery targets without denting profit margins. Our client also set longer-term campaigns in place with the aim keeping the high spenders at their new levels, while bringing the remainder of the group back to former monthly purchase value within 12 months.

The strategy covered the whole customer base, with the idea of preventing decline before it happened. Doing so meant obtaining basic transactional and campaign data, such as acquisition cost per customer segment, marketing communications cost per customer segment, customer service/marketing administration/overhead costs per customer segment, credit scoring, the time since the customer’s initial purchase.

With such information we identified which customers were important to defend, which the retailer should try to grow and which were not as important.

Loyalty activity is growing because it is such a fundamental tool in database marketing. However, the temptation to overcomplicate the issue has led to the disillusion of bewilderment. This should not put retailers off the idea that they can use their loyalty infrastructures to defend, and even grow, customer revenue, as the credit crunch bites deeper.

Successful loyalty methods must be simple. They must be applicable in the real world. They must help deliver productive incentive strategies. And they must obviously help the whole database marketing process deliver a better return on investment.

GI Insight