Previously seen as a numbers game or as a quick-fix solution to various problems, loyalty schemes have come of age in the UK. The new card-based schemes have emphasised segmenting the all-important database to get an accurate picture of the cu

SBHD: Previously seen as a numbers game or as a quick-fix solution to various problems, loyalty schemes have come of age in the UK. The new card-based schemes have emphasised segmenting the all-important database to get an accurate picture of the customers in attempt to change their spending behaviour and keep them as long as possible.

Arguments about loyalty schemes have been raging in the marketing community during the past year, with the big guns lined up for and against.

But Tesco’s decision to launch its Clubcard on a national basis must mark a significant milestone in the widespread acceptance of loyalty schemes by marketers. The size of the numbers involved in the Tesco Clubcard and the other big card-based loyalty schemes currently operating, Shell Smart and the GM Card, means a significant proportion of the UK population will soon be enrolled in a loyalty scheme of some type and will be using it on a regular basis.

Tesco’s marketing controller for Clubcard, Grant Harrison, expects that the scheme will have issued 4 million cards within a year or so, while forecourt marketing manager for Shell UK, Ian Sutcliffe says that 2.5 million people have already enrolled in the Shell Smart loyalty scheme. The GM Card is believed to have around 2 million users.

But of far greater importance than the numbers involved in these three schemes will be the sophisticated manipulation of the vast amount of information Tesco, Shell and Vauxhall will be collecting about their customers, and how that information will be used to segment their consumer databases.

The Tesco Clubcard scheme gives customers who join the promotion a plastic swipe card with which they can collect points when they do their shopping – two points for the first £10 of every bill, and another point for every additional £5 spent. At the end of every quarter, as long as members have collected at least 50 points, they will be sent vouchers to get money off their shopping.

If that was all the Clubcard did, then its detractors would be justified in dismissing it as a form of electronic discounting. Harrison is blaséabout what the retailer’s rivals think of the move. “Sainsbury’s has now said it is not going to launch a loyalty scheme – it calls it electronic Green Shield Stamps. I don’t agree with that at all.”

Clubcard is, in fact, far more sophisticated than trading stamps, or points-mean-prizes schemes, such as the Argos Premier Points programme. Clubcard will provide Tesco with an enormous amount of information about the buying patterns of its customers. This information will then be used to identify the retailer’s most valued consumers, so that they can be nurtured and encouraged to spend more with Tesco.

Harrison says: “Initially we’ll look at the customer’s overall spend by department. Then we’ll find out what sort of shopper they are – monthly large basket or weekly shopper. Finally, we will be able to identify those customers who are likely to shop in other stores, we’ll know how much we’re giving away to those stores, and how we might be able to make them think twice before going somewhere else.”

The Clubcard loyalty scheme had been under test in 14 Tesco stores since last autumn. The pilot scheme has already enrolled 250,000 members, accounting for between 70 per cent and 80 per cent of those stores’ sales. “The top customers with each store spend huge amounts of money with us,” Harrison says.

These customers have been targeted for special attention – invitations to wine and cheese and “meet the staff” evenings at their local stores. Harrison claims: “We could see clearly what the customers thought of the card – and they loved it.”

Shell’s Ian Sutcliffe sees the benefits the company is getting from its Shell Smart card as very similar. “We need a shift in our understanding of customer behaviour. We didn’t understand who our customers were, and how they made their purchases.” With the information from the Shell Smart scheme the company now understands its customers better.

But Sutcliffe does not expect absolute loyalty. “Petrol has very little brand or outlet loyalty. Research shows that 85 per cent of people don’t stick to one single brand – they have a repertoire of brands from which they choose. We want customers to move from two in five fills at a Shell garage to three in five fills,” he says.

Loyalty scheme experts agree that to focus single-mindedly on trying to get large numbers of customers signed up for a scheme misses the point. Instead, marketers should aim to build up accurate pictures of their customers, and what their spending patterns are. Using this information, it should be possible to identify both the most valuable customers and those who could, with a little encouragement, become most valuable customers.

Jon Ingall, managing director of Evans Hunt Scott, which helped Tesco develop the Clubcard idea, observes: “The database makes the loyalty programme. Gathering information about your customers’ shopping habits allows you to segment and understand who are the big shoppers and who are the small ones.”

Granby Marketing’s business development manager, Howard Ormesher, also sees the database as being at the heart of loyalty marketing. “Like a heart, the loyalty database is a massive pump,” he says, “taking in the crucial elements of marketing – customer carelines, collector schemes, sponsorship, coupons, consumer magazines – and pumping out the lifeblood of customer service and relationship marketing – door-to-door distribution, prospect profiling, market research, analysis, geodemographics, targeted competitive sampling and targeted mailings.”

But Ingall and other supporters of loyalty schemes believe that many marketers have failed to grasp the most significant piece of information that a properly-organised loyalty scheme should allow them to find out – what a consumer’s lifetime value is to them. Once companies understand how much they might expect certain types of customer to spend with them over the entire period of their relationship, then they will have a better idea of how much they should spend to keep them happy, and therefore coming back.

Wedgwood, the china company, has just launched a loyalty scheme aimed at creating a lifetime relationship with customers. Although it is likely to end up with rather less than the 4 million members Tesco expects to get, the scheme, The Wedgwood Promise, will be just as important to the company’s long-term prospects.

Kevin Stott, managing partner of promotional consultancy The Yellow Submarine, which developed the scheme for Wedgwood, explains that the company’s problem is that it costs people a lot of money to invest in its products. “Buying a fine bone china dinner service is a considerable outlay – a reasonably decent one costs £600 or more. People are concerned that they might break a plate or that the pattern might be discontinued.”

The Wedgwood Promise offers guarantees to its members. Items broken within 12 months of purchase will be replaced free of charge, and if the pattern becomes unavailable within five years, then Wedgwood will take back the products and issue vouchers for their value, redeemable against other patterns.

Consumers also become “Friends of Wedgwood” and receive advance information about special events and special offers. Stott says: “There are real merits in having a dialogue with consumers as you have a better chance of keeping the relationship going longer.”

Marcus Evans, head of the Ogilvy European Loyalty Centre, which Ogilvy & Mather Direct set up last December, says: “Loyalty means achieving and maintaining certain customer behaviour patterns. You have to segment your database, and concentrate on those people who are most valuable to you. The more information you can feed into the database, the better.”

Evans warns that too many marketers see loyalty schemes as “quick fix” short-term solutions, and that they try to solve a variety of unrelated problems – such as poor service, inferior products or a lack of investment in the brand – with a “one size fits all” solution. Too often, he says, the loyalty schemes have been “glorified member gets member programmes”, or “thinly disguised excuses to cross-sell or sell more to the existing base”.

“A lot of people confuse customer satisfaction with customer loyalty,” Evans says. “One is a symptom of the other. But there is a difference between passive loyalty – where people stay because nobody has offered them a better deal – and active loyalty, where they stay because the company has impressed them.”

Paul Hawkes, director of consultancy Abram Hawkes, says: “The real aim of customer loyalty is to change customer behaviour. The amount of money you want to spend on the customer will be totally different depending on the life-stage of their relationship with you. There’s a vast amount of rubbish being talked about customer loyalty at the moment. People are using `customer loyalty’ as a catch-all term for mass customer communications tools, instead of a system for segmenting properly their customer database. As most so-called loyalty schemes offer no `differential reward’ to consumers, they won’t necessarily change their behaviour.”

David Perkins, managing director of Carlson Loyalty Marketing, who has been arguing for years that most loyalty schemes running in the UK are not true loyalty schemes, says: “True loyalty schemes include a feedback loop to allow the people who spend the most with you to talk back to you.”

The new card-based loyalty schemes – whether magstripe-based, such as the Tesco one, smartcard-based, such as Shell’s scheme, or even credit card-based, as with the GM Card – allow for such feedback, he says. If Perkins, Hawkes and Evans are to be believed, then these three cards are evidence that the loyalty scheme has finally come of age in the UK. Perkins observes: “There has been a shift among marketers from concentrating on customer acquisition to customer acquisition and retention.”

Even so, Evans Hunt Scott’s Ingall still believes that those in favour of loyalty schemes have their work cut out for them, to persuade marketers to take the area seriously. “A lot of people are still nervous about getting into loyalty schemes,” he says. But if anything is going to dispel that nervousness, it will be the success of the Tesco, Vauxhall and Shell schemes. Perhaps the most obvious sign of their success will be how quickly their rivals are compelled to launch their own schemes.

Tesco’s Grant Harrison already believes his scheme is destined to be successful, but his attitude to loyalty schemes is slightly different to that of many marketers and consultants. He thinks people have been looking for loyalty on the wrong side of the relationship.

“Loyalty schemes should be about us showing loyalty to our consumers, and should be a symbol of our appreciation for them shopping with us,” says Harrison.

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