The Future of Customer Loyalty (Part 2)

Guest Contributor: Peter Wray

Customers are increasingly expecting:

  • Convenience of customer choice of channel
  • Targeted communication and often in real time
  • Recognition of high spending or high potential spend
  • Fast efficient service levels with no excuses service levels and a rapid shift to adapt to fast changing consumer trends being market threshold requirements.

In this environment, companies who manage customers well, using sensible, observable and well-implemented business practices are very likely to be the best- in- class performers. The problem is that it has proved highly complex to deliver and often more expensive and longer term in focus than most senior managers are willing to support?

Recent surveys in the UK highlight billions of investment by companies in CRM solutions as they scramble to understand their customers better and deliver what they want. Some surveys also claim that much of this investment has been wasted! The future development of customer loyalty schemes is increasingly linked to making these massive investments deliver a return on that investment.

The big idea behind loyalty, as first expressed in the work of pioneers like Bain & Co’s Fred Reichheld, was that loyal customers are more profitable. Keeping customers was cheaper than finding new ones and they cost less money to service.

But understanding customer preference is not easy:

  • You need to understand what I buy
  • Identify who I am
  • Speak to me in a style of communication relevant to my lifestyle
  • Offer me relevant content and meaning
  • And do this at a time and channel of my selection!

The reality of CRM and the mythical 1-to-1 marketing is that it is costly and difficult.   Mass customisation remains untested outside a few models e.g. the Dell computers approach.   The organisational and cultural changes required in most companies to deliver 1-to-1 are going to be more difficult than the complex IT platforms that have promised to deliver this reality.

Loyalty schemes are expensive to launch. They face customer fatigue in mature markets but are difficult to stop when the scheme becomes part of the expected customer offer. In fact, the only route out is often to focus on price discounting as the replacement benefit being offered to customers.

Technical options are multiplying alarmingly for anyone not supplying this technology and data protection concerns are increasingly becoming a concern for consumers worldwide.

Plastic proliferation in Europe is now very high due to several decades of retailer use of this form of marketing. Share of voice is getting more and more expensive as channels to communicate expand and consumers ‘switch off’ to everything in which they are not emotionally interested. Payment cards, loyalty cards, shopping centre cards, retailer store cards, co-branded payment cards all proliferate.

Research has often shown no evidence to suggest that loyal customers, that is repeat purchase with frequency, were necessarily cheaper to serve, less price sensitive or particularly positive advocates for the brand. In fact, the research suggests that the longer and more loyal a customer was to the brands surveyed, then the more they come to expect.

These findings are very close to seminal research work undertaken by Professor Andrew Ehrenberg at South Bank University, who has shown that loyal customers are not the most profitable.  His work has clearly shown that the 80/20 principle rules apply: in most categories, the big spending customers are repertoire buyers and ‘loyalty’ per se is only relative.

In most of the big customer loyalty programme that I have personally been involved, the crucial importance of the high spending, or potential high spending customers has far more profit impact once the programmes start understanding their membership level of inter-action with the brand.  Vast numbers of loyalty currency collectors do not automatically translate into improved corporate profits: in fact it is sometimes the reverse.

Every research study I have seen has shown that loyalty schemes do not research well with shoppers.

How then do we explain the huge and seemingly positive response to the launch of schemes such as the ‘payback’ programme in Germany, the Nectar programme in the UK, the global leadership of the Air Miles Canada program and what does this confusing mix of academic and retailer driven research suggest for the future of consumer loyalty marketing?

Across the globe, most loyalty schemes in mature markets are seeking to rationalise to capture the better economics for the sponsor on a shared platform and better earning opportunities for the consumer. Witness the recent acquisition by Areoplan of LMG who operate schemes in the UK and Middle East.

(… to be continued)