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The Loyalty Momentum Effect
Loyalty programmes exist to drive corporate profitability. However, there have been many instances of companies not being able to squeeze financial value from their loyalty initiatives. This research was conducted in order to quantify the proportion of companies, by industry sector, that is using insights gathered from customer loyalty programmes to deliver hard, measurable return on investment. This report will examine how value derived from loyalty programmes escalates, gathering more and more pace, the more effort that is devoted to making the scheme a success. The greater the conviction that underpins the programme, the greater the payback. We have termed this trend the Loyalty Momentum Effect.
Key findings:
• Industry sectors that view their loyalty scheme as an integral part of their business were more able to extract return-on-investment from their scheme. Supermarkets emerged as the stars of our research: nearly two-thirds of organisations were pressing insights gathered through loyalty schemes into hard commercial return. Credit card and department stores, long keen advocates of loyalty, followed close behind.
• Our research points to a ‘loyalty momentum effect’ – payback from loyalty programmes appears to snowball. The more you do it, the more you get out of it; as investment is made, the differential between capital investment and return-on-investment increases.
• On the other hand, industry sectors offering distress products and services (insurers, telecoms, utilities) were less able to generate hard cash return on investment from their loyalty programmes than their counterparts in more ‘desirable industries’.
• However, the hotel sector and the travel/airlines industry, traditionally strong exponents of loyalty schemes, bucked this trend, performing below par with only 35.6% and 40.7% of organisations deriving real financial value from their schemes respectively. These sectors may have been loyalty pioneers in their time, however they have lost their edge to several other sectors that have succeeded in extracting real value from their loyalty programmes.
• The utilities sector lagged behind all other industries, with just over a third (34%) of companies making intelligent use of loyalty data. However, a newly deregulated industry, this trend is less likely the result of inattention to customer value, and, instead, indicative of a cautious, wait-and-see approach to diversification in their product portfolios, and customer development plans.
Introduction:
More so than ever before in modern times, the customer is king. The penny has finally dropped: it is cheaper, easier and more productive to encourage your existing customers to do more with you than it is to win new friends. Consequently the last few years has seen the number of companies launching loyalty programmes proliferate. And customers are loving it. According to research by TNS, 85% of UK households have at least one active loyalty card, and take-up certainly shows no signs of slowing.
Needless to say, loyalty practitioners do not reward customers out of the goodness of their heart: there is a definite quid pro quo. The purpose of loyalty programmes is to exist to deliver incremental value back to the organisation. Companies seek to achieve this by rewarding customers for their loyalty, in the hope that in doing so they will cause members to alter their purchasing behaviour in some way, allowing the company to reap the rewards. But rewards are merely the shiny finish of a loyalty programme. The primary role of loyalty is to establish a ‘dialogue’ with the customer in order to determine their needs and wants, maintain and strengthen the relationship, and ultimately increase profits. Customers might choose to shop more frequently with a particular store if they are accumulating or redeeming rewards, they might spend a little extra, or they might widen the range of products that they buy. Cumulatively, the changes in purchasing patterns should have a significant impact upon the bottom-line. A well-executed programme should deliver ROI as a serious multiple.
Cynics argue that loyalty programmes are little more than a bribe; that do nothing to engender consumer allegiance. Loyalty aficionados, on the other hand, claim loyalty programmes form the core of their business strategy, enabling them to increase customer value, grow market share, and successfully populate new markets. There is clearly a gulf in the success with which UK plc is using loyalty programmes to increase profitability. So to what extent are organisations seeing payback from their loyalty schemes? Total DM decided to quantify the proportion of companies UK plc is seeing the fruits of its investments – not in terms of intangible customer loyalty, but rather in hard measurable return on cash investment. We asked senior marketers across key UK industry sectors about the proportion of companies that were deriving real value from their loyalty schemes.
Methodology
Fieldwork: MarketingUK
Research period: May/June 2004
Research method: Telephone and email questionnaire
Research base: Senior marketers in top 1000 companies in utilities, hotel, telecoms, travel/airlines, insurance, department stores, credit card and supermarket industries.
Interpretation of research findings:
Our research suggests that the more committed a company is to its loyalty scheme, the greater the value that it extracts from it. The longer a loyalty scheme is running, the richer and more rounded an understanding the company has of its customers, and the better equipped they are to push relevant offers and rewards out to their customers. The financial impact of opening up new product lines has reduced considerably over the last few years, as wholesalers cut costs in order to establish new routes to market. And as time spent running a (well executed) loyalty scheme elapses, so the cost of offering new products diminishes, as established routes of communication enable more cost-effective customer interactions. Over time, the value derived from cross-selling products increases at a rate that is disproportional to the cost of entry (the expense of conducting customer analysis and the cost of physically getting the campaign out of the door, and so on).
Essentially, value increases as the loyalty scheme gathers momentum. Redemption analysis allows the marketer to continually refine the rewards offered, so that each customer is presented with rewards that mirror their preferences. As the sophistication of loyalty schemes increases over time, customers come to expect to receive cross-selling offers. They are warmer, more responsive customers. Consequently they spend more. That’s the logic that drives companies to offer loyalty schemes in the first place. However, this aim is only realised if rigorous ROI measurement strategies are established, the loyalty programme is linked to business strategies, and rewards and offers are truly relevant to members. Our research found that the extent of the commitment to loyalty schemes varies widely by industry type and by company.
Supermarkets, the archetypal loyalty practitioner, topped the table in our analysis of how different industries were extracting hard cash return on investment (ROI) from their loyalty schemes. Tesco is recognised as the epitome of best practice loyalty, having put Clubcard at the heart of its corporate strategy. Over the last 15 years it has moved away from losing marketshare to the privileged position it now enjoys, with one pound in every eight retailing pounds being spent in Tesco (Reuters). A look at this loyalty success story demonstrates that a loyalty scheme can only have a sustained impact on the bottom line when, from its inception, it changes the dynamic, the whole culture of the organisation. When the board recognise that loyalty scheme data is the bedrock of their business, then the considerable investment in technology, manpower and other resources really starts to pay dividends.
Credit cards also excelled in their use of loyalty data: over half (52%) were able to extract real monetary value from their loyalty schemes. Credit card companies have had to market themselves on the basis of fulfilling a ‘need’ rather than a ‘desire’. As they do not offer a physical product as such, they have necessarily sought to differentiate through loyalty schemes, rewarding customers with third party offers. As the market becomes increasingly competitive and new entrants offer highly attractive rates, the traditional, generally more expensive, companies rely on a combination of consumer inertia when it comes to financial products and the pull of rewards.
The best use loyalty programmes to elicit information on customer tastes and preferences, enabling them to communicate with them in the most compelling and relevant manner, and to personalise rewards accordingly. Working with more desirable lifestyle brands, to offer holidays, wine and home furnishings etc, credit card companies have used loyalty programmes as a means of encouraging loyalty and increased credit card use by forming strategic alliances. In fact, the perceived value of these rewards is higher than the actual cost to the credit card company since the partner brand will discount significantly in return for the advertising exposure associated with the partnership.
There has been much discussion around the ambition of utility companies to engage in ‘brand stretch’ in the last few years. Faced with limited margin core products, and operating in a marketplace where it is difficult to differentiate on the basis of either price, product or service, utility companies have made public their ambitions to move into the bundled home services market. But with Centrica, the oft-quoted example of brand stretch, recently announcing that it is divesting its assets in the AA, the future for utilities as an extended market seems uncertain. However, the reality is that the utilities market has only been fully deregulated for about four years, and it therefore seems unreasonable to expect a comparable level of commitment to loyalty schemes from utility suppliers as one would from other more stable sectors. And with the industry watchdog actively encouraging consumers to switch supplier in order to obtain the most competitive deal and publicly urging greater clarity and uniformity in billing, utilities companies are possibly not yet at the point in the business cycle at which it would be prudent to over-diversify into new markets.
Historically, utilities companies have struggled to fully integrate legacy systems with new CRM applications, hampering the achievement of a single customer view. Of course, this has been compounded by the high switching rates and a relatively poor track record in customer data management, which has made tracking serial switchers and bad debtors problematic.
As they largely lack the robust data infrastructure necessary to make intelligent use of the influx of data generated by loyalty schemes, our research suggests that utilities companies are taking a softly-softly approach to customer development, biding their time until they are in a position to process, analyse and derive valuable insights from loyalty data.
On the other hand, the hotel industry ranked only marginally higher than utilities in their ability to squeeze hard cash return on investment from their loyalty schemes. Given that the hotel industry is a pioneer in the loyalty market, it seems astounding that so few are able to press significant value from their schemes. For an industry beleaguered by a string of recent crises, loyalty programmes represent an ideal vehicle to maintain and build upon existing relationships. With room occupancy down, hotels must now get to grips with the intelligent interrogation of loyalty data in order to identify repeat customers. Customers who have not visited for a certain amount of time can be incentivised with free night offers or, preferably, offers that are tailored to have individual appeal, for example free spa or luxury treatments, a complimentary concierge service, or discounts on local attractions etc. Offer take up must then be analysed so that targeting can be further refined. The travel/airline industry, blighted by similar problems as the hotel industry, did not fare much better. 40.7% of travel/airline companies were thought to be able to squeeze return on investment for their loyalty schemes. With so many airlines facing an uphill struggle in the face of cut-throat competition and rock bottom prices, the time has never been more ripe for change.
The insurance sector performed significantly better than one would have expected given that, as a highly intermediated industry, it is has no legacy of being customer-centric. Nevertheless, there is a major need to improve retention levels. The cost of establishing a loyalty scheme has tended to be prohibitive for many insurers, since they enjoy very few natural communications with their customer base, making it difficulty to contain costs by piggybacking loyalty communications on to existing communications.
However, the most visionary have embraced the opportunity to earn customer loyalty in a totally price-focused market, and have evidently succeeded in using their programmes to stem customer defection and identify prime cross-selling opportunities. The disastrous days of pricing for market have evidently prompted insurers to explore alternative means of retaining their profitable customers, by incentivising policy renewal and new product take-up through loyalty priviledges.
Loyalty programmes are very likely being pushed out through the intermediary, who is in a better position to make recommendations, bundle products and deliver rewards based on the insights gathered through the programme.
Conclusion
The success of a loyalty campaign is intimately connected with the conviction that lies behind the decision to launch, maintain and build upon the programme. A successful loyalty initiative depends upon a marriage of clear objectives from the outset, buy-in from board level to front-line staff, and significant investment in expert personnel. Loyalty schemes must be developed through a disciplined research process – both qualitative in order to pinpoint the desirable components, and quantitative in order to prioritise and cluster them. If sufficient research is not carried out, the result will be a one-size-fits-all approach to the customer base, and this will offer very little insight into individual customer wants and needs. This, in turn, will make it far harder to increase customer profitability.
Organisations that labour under the illusion that loyalty schemes offer a quick-fix to a customer retention problem soon founder. Customers do not take kindly to having a loyalty programme withdrawn. The decision to embark upon a loyalty programme must not be taken lightly, but, once that decision is made, full commitment and a shift in corporate culture is required to take the scheme from an added extra to long-term programme that will deliver return on investment in spades, as the loyalty momentum effect takes hold.
Key findings:
• Industry sectors that view their loyalty scheme as an integral part of their business were more able to extract return-on-investment from their scheme. Supermarkets emerged as the stars of our research: nearly two-thirds of organisations were pressing insights gathered through loyalty schemes into hard commercial return. Credit card and department stores, long keen advocates of loyalty, followed close behind.
• Our research points to a ‘loyalty momentum effect’ – payback from loyalty programmes appears to snowball. The more you do it, the more you get out of it; as investment is made, the differential between capital investment and return-on-investment increases.
• On the other hand, industry sectors offering distress products and services (insurers, telecoms, utilities) were less able to generate hard cash return on investment from their loyalty programmes than their counterparts in more ‘desirable industries’.
• However, the hotel sector and the travel/airlines industry, traditionally strong exponents of loyalty schemes, bucked this trend, performing below par with only 35.6% and 40.7% of organisations deriving real financial value from their schemes respectively. These sectors may have been loyalty pioneers in their time, however they have lost their edge to several other sectors that have succeeded in extracting real value from their loyalty programmes.
• The utilities sector lagged behind all other industries, with just over a third (34%) of companies making intelligent use of loyalty data. However, a newly deregulated industry, this trend is less likely the result of inattention to customer value, and, instead, indicative of a cautious, wait-and-see approach to diversification in their product portfolios, and customer development plans.
Introduction:
More so than ever before in modern times, the customer is king. The penny has finally dropped: it is cheaper, easier and more productive to encourage your existing customers to do more with you than it is to win new friends. Consequently the last few years has seen the number of companies launching loyalty programmes proliferate. And customers are loving it. According to research by TNS, 85% of UK households have at least one active loyalty card, and take-up certainly shows no signs of slowing.
Needless to say, loyalty practitioners do not reward customers out of the goodness of their heart: there is a definite quid pro quo. The purpose of loyalty programmes is to exist to deliver incremental value back to the organisation. Companies seek to achieve this by rewarding customers for their loyalty, in the hope that in doing so they will cause members to alter their purchasing behaviour in some way, allowing the company to reap the rewards. But rewards are merely the shiny finish of a loyalty programme. The primary role of loyalty is to establish a ‘dialogue’ with the customer in order to determine their needs and wants, maintain and strengthen the relationship, and ultimately increase profits. Customers might choose to shop more frequently with a particular store if they are accumulating or redeeming rewards, they might spend a little extra, or they might widen the range of products that they buy. Cumulatively, the changes in purchasing patterns should have a significant impact upon the bottom-line. A well-executed programme should deliver ROI as a serious multiple.
Cynics argue that loyalty programmes are little more than a bribe; that do nothing to engender consumer allegiance. Loyalty aficionados, on the other hand, claim loyalty programmes form the core of their business strategy, enabling them to increase customer value, grow market share, and successfully populate new markets. There is clearly a gulf in the success with which UK plc is using loyalty programmes to increase profitability. So to what extent are organisations seeing payback from their loyalty schemes? Total DM decided to quantify the proportion of companies UK plc is seeing the fruits of its investments – not in terms of intangible customer loyalty, but rather in hard measurable return on cash investment. We asked senior marketers across key UK industry sectors about the proportion of companies that were deriving real value from their loyalty schemes.
Methodology
Fieldwork: MarketingUK
Research period: May/June 2004
Research method: Telephone and email questionnaire
Research base: Senior marketers in top 1000 companies in utilities, hotel, telecoms, travel/airlines, insurance, department stores, credit card and supermarket industries.
Interpretation of research findings:
Our research suggests that the more committed a company is to its loyalty scheme, the greater the value that it extracts from it. The longer a loyalty scheme is running, the richer and more rounded an understanding the company has of its customers, and the better equipped they are to push relevant offers and rewards out to their customers. The financial impact of opening up new product lines has reduced considerably over the last few years, as wholesalers cut costs in order to establish new routes to market. And as time spent running a (well executed) loyalty scheme elapses, so the cost of offering new products diminishes, as established routes of communication enable more cost-effective customer interactions. Over time, the value derived from cross-selling products increases at a rate that is disproportional to the cost of entry (the expense of conducting customer analysis and the cost of physically getting the campaign out of the door, and so on).
Essentially, value increases as the loyalty scheme gathers momentum. Redemption analysis allows the marketer to continually refine the rewards offered, so that each customer is presented with rewards that mirror their preferences. As the sophistication of loyalty schemes increases over time, customers come to expect to receive cross-selling offers. They are warmer, more responsive customers. Consequently they spend more. That’s the logic that drives companies to offer loyalty schemes in the first place. However, this aim is only realised if rigorous ROI measurement strategies are established, the loyalty programme is linked to business strategies, and rewards and offers are truly relevant to members. Our research found that the extent of the commitment to loyalty schemes varies widely by industry type and by company.
Supermarkets, the archetypal loyalty practitioner, topped the table in our analysis of how different industries were extracting hard cash return on investment (ROI) from their loyalty schemes. Tesco is recognised as the epitome of best practice loyalty, having put Clubcard at the heart of its corporate strategy. Over the last 15 years it has moved away from losing marketshare to the privileged position it now enjoys, with one pound in every eight retailing pounds being spent in Tesco (Reuters). A look at this loyalty success story demonstrates that a loyalty scheme can only have a sustained impact on the bottom line when, from its inception, it changes the dynamic, the whole culture of the organisation. When the board recognise that loyalty scheme data is the bedrock of their business, then the considerable investment in technology, manpower and other resources really starts to pay dividends.
Credit cards also excelled in their use of loyalty data: over half (52%) were able to extract real monetary value from their loyalty schemes. Credit card companies have had to market themselves on the basis of fulfilling a ‘need’ rather than a ‘desire’. As they do not offer a physical product as such, they have necessarily sought to differentiate through loyalty schemes, rewarding customers with third party offers. As the market becomes increasingly competitive and new entrants offer highly attractive rates, the traditional, generally more expensive, companies rely on a combination of consumer inertia when it comes to financial products and the pull of rewards.
The best use loyalty programmes to elicit information on customer tastes and preferences, enabling them to communicate with them in the most compelling and relevant manner, and to personalise rewards accordingly. Working with more desirable lifestyle brands, to offer holidays, wine and home furnishings etc, credit card companies have used loyalty programmes as a means of encouraging loyalty and increased credit card use by forming strategic alliances. In fact, the perceived value of these rewards is higher than the actual cost to the credit card company since the partner brand will discount significantly in return for the advertising exposure associated with the partnership.
There has been much discussion around the ambition of utility companies to engage in ‘brand stretch’ in the last few years. Faced with limited margin core products, and operating in a marketplace where it is difficult to differentiate on the basis of either price, product or service, utility companies have made public their ambitions to move into the bundled home services market. But with Centrica, the oft-quoted example of brand stretch, recently announcing that it is divesting its assets in the AA, the future for utilities as an extended market seems uncertain. However, the reality is that the utilities market has only been fully deregulated for about four years, and it therefore seems unreasonable to expect a comparable level of commitment to loyalty schemes from utility suppliers as one would from other more stable sectors. And with the industry watchdog actively encouraging consumers to switch supplier in order to obtain the most competitive deal and publicly urging greater clarity and uniformity in billing, utilities companies are possibly not yet at the point in the business cycle at which it would be prudent to over-diversify into new markets.
Historically, utilities companies have struggled to fully integrate legacy systems with new CRM applications, hampering the achievement of a single customer view. Of course, this has been compounded by the high switching rates and a relatively poor track record in customer data management, which has made tracking serial switchers and bad debtors problematic.
As they largely lack the robust data infrastructure necessary to make intelligent use of the influx of data generated by loyalty schemes, our research suggests that utilities companies are taking a softly-softly approach to customer development, biding their time until they are in a position to process, analyse and derive valuable insights from loyalty data.
On the other hand, the hotel industry ranked only marginally higher than utilities in their ability to squeeze hard cash return on investment from their loyalty schemes. Given that the hotel industry is a pioneer in the loyalty market, it seems astounding that so few are able to press significant value from their schemes. For an industry beleaguered by a string of recent crises, loyalty programmes represent an ideal vehicle to maintain and build upon existing relationships. With room occupancy down, hotels must now get to grips with the intelligent interrogation of loyalty data in order to identify repeat customers. Customers who have not visited for a certain amount of time can be incentivised with free night offers or, preferably, offers that are tailored to have individual appeal, for example free spa or luxury treatments, a complimentary concierge service, or discounts on local attractions etc. Offer take up must then be analysed so that targeting can be further refined. The travel/airline industry, blighted by similar problems as the hotel industry, did not fare much better. 40.7% of travel/airline companies were thought to be able to squeeze return on investment for their loyalty schemes. With so many airlines facing an uphill struggle in the face of cut-throat competition and rock bottom prices, the time has never been more ripe for change.
The insurance sector performed significantly better than one would have expected given that, as a highly intermediated industry, it is has no legacy of being customer-centric. Nevertheless, there is a major need to improve retention levels. The cost of establishing a loyalty scheme has tended to be prohibitive for many insurers, since they enjoy very few natural communications with their customer base, making it difficulty to contain costs by piggybacking loyalty communications on to existing communications.
However, the most visionary have embraced the opportunity to earn customer loyalty in a totally price-focused market, and have evidently succeeded in using their programmes to stem customer defection and identify prime cross-selling opportunities. The disastrous days of pricing for market have evidently prompted insurers to explore alternative means of retaining their profitable customers, by incentivising policy renewal and new product take-up through loyalty priviledges.
Loyalty programmes are very likely being pushed out through the intermediary, who is in a better position to make recommendations, bundle products and deliver rewards based on the insights gathered through the programme.
Conclusion
The success of a loyalty campaign is intimately connected with the conviction that lies behind the decision to launch, maintain and build upon the programme. A successful loyalty initiative depends upon a marriage of clear objectives from the outset, buy-in from board level to front-line staff, and significant investment in expert personnel. Loyalty schemes must be developed through a disciplined research process – both qualitative in order to pinpoint the desirable components, and quantitative in order to prioritise and cluster them. If sufficient research is not carried out, the result will be a one-size-fits-all approach to the customer base, and this will offer very little insight into individual customer wants and needs. This, in turn, will make it far harder to increase customer profitability.
Organisations that labour under the illusion that loyalty schemes offer a quick-fix to a customer retention problem soon founder. Customers do not take kindly to having a loyalty programme withdrawn. The decision to embark upon a loyalty programme must not be taken lightly, but, once that decision is made, full commitment and a shift in corporate culture is required to take the scheme from an added extra to long-term programme that will deliver return on investment in spades, as the loyalty momentum effect takes hold.
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