finders keepers

Recent research shows loyalty schemes are on the increase but, as Sophie MacKenzie reports, they need careful planning to fulfil a company’s requirements

Loyalty schemes are not appropriate for every company. Ten per cent of firms that operate them have no means of identifying participants and the number and variety of schemes is increasing daily, according to research released this week.

The study has been produced by marketing consultancy Abram Hawkes and integrated marketing agency Antenna. It aims to analyse and evaluate UK customer loyalty schemes, and covers the activities of nearly 350 companies across 20 industry sectors.

The report says definitions of customer loyalty programmes vary considerably, and therefore uses the following definition throughout: “A marketing tool designed to give loyal customers collectable incentives, which when converted into rewards make a compelling proposition to continue purchasing a company’s products or services”.

The study does not cover companies which run short-term tactical sales promotions or publish consumer “loyalty” magazines.

The findings show which industries are most likely to use loyalty schemes. These include mature markets where customer retention often takes priority over strategies to increase share and sectors where a small number of companies account for the majority of the market and it is hard to differentiate between their products or services.

Schemes that re-ward repeat purchase appear to be used as a surrogate for brand loyalty – the danger being that customers may become loyal to the scheme rather than the product.

The study suggests that industries where there are low switching costs, such as petrol retailing and airlines, are more likely to use loyalty schemes because there is little to stop customers moving to competitors. Where there are high switching costs for the consumer, such as mortgages, there is little rationale behind offering a loyalty programme as people are largely “locked” into repeat purchase or use.

Companies with a large market share (above ten per cent) make greater use of loyalty schemes because intense competitive pressures make it important to retain customers.

Industries with “medium” frequency of purchase (one to four times a year) are more likely than others to offer loyalty schemes, especially when average purchase values are high and competition intense. Where frequency of purchase is either low (less than once a year), or very high, companies are less likely to use such programmes.

The majority of companies using schemes collect customer data though, surprisingly, as much as ten per cent of the survey’s sample have no means of identifying participants.

Magnetic swipecards predominate as the method of data collection because of their low cost and ease of use in companies equipped with EPOS technology.

Almost half of the companies identified as having a loyalty programme differentiate rewards according to the usage, behaviour or value of the customer to their business.

The most favoured reward is reduced price or discounts, probably because it is a simple proposition for the customer and easy to administer. There is also a significant reliance on external product offerings to enhance schemes’ attractiveness.

However, the study shows that loyalty schemes are not appropriate for every company. They are not a panacea, rather one possible retention tactic, the success of which is determined by the company’s industry and strategic position.

And customer loyalty programmes do not compensate for marketing weakness. A good product, with a strong brand image, sold at a competitive price will generally promote greater loyalty than any scheme can manage.

The number and variety of loyalty schemes is increasing daily. But, as proliferation occurs, any short-term gain in share may be negated by a competitor’s reaction to it.

The findings also question whether such schemes promote lasting customer loyalty. There is a distinct danger that, in the longer term, they contribute towards greater consumer sophistication and encourage the very promiscuity they seek to negate.

The majority of the schemes identified offer rewards either directly related to the product or combined with third-party benefits. This makes sense since they must focus on developing incremental product sales and upgrading customer purchases. It is also logical to tie-in relevant third-party offers – where appropriate – to broaden the scheme’s appeal and to

offer other tangible benefits when purchase frequency is low. Airlines, for example, offer car rental facilities to enhance their service proposition. Only eight per cent of schemes use external rewards alone, such as petrol retailers, where loyalty is fickle and product values low, and schemes driven by a single proposition, such as Air Miles.

The research found that the vast majority of loyalty schemes are driven by database marketing – particularly those run by airlines, fashion and furniture retailers.

Point-of-sale material is widely used as a recruitment device and, in some cases, an ongoing communication method. Leaflets are frequently used, although multiple communication methods are more prevalent.

The high proportion of communications graded as “ongoing” reflects the support given to schemes at point-of-purchase in the retail environment, the importance to many companies of regular customer contact and the ability to communicate with customers using sophisticated database technologies.

Companies tend to keep their customers up to date with any developments or tactical offers that they intend to run through their schemes. Frequently, such as in the case of credit card companies, loyalty communications form part of pre-existing programmes.

While the majority of programmes reflect brand image, as many as 11 per cent of companies use schemes that do not appear to be supportive, and among the rest the quality ranges widely.

The air travel industry (which represents eight per cent of the total sample) accounts for about a quarter of the loyalty schemes identified, probably because airlines were among the first to use such schemes. Airline programmes are generally sophisticated and tend to offer a wide range of additional benefits – they are rarely just related to the core product or service.

But grocery retailers stand out as the most significant promoters of emerging customer loyalty programmes. The industry is mature and, as a consequence, has to be more innovative in a very competitive environment. The recent launch of the Tesco Clubcard reflects the growing focus on customer retention and lifetime value.

Fashion retailers have also started to develop schemes on a more widespread basis, the most prominent example being The Burton Group.

Other account card-based schemes run by, for example, Austin Reed and Harvey Nichols tend to be characterised by high-quality creative literature.

Industries that make little or no use of loyalty schemes include retail banks, building societies and general insurers. Here, marketing activities tend to concentrate on short-term tactical sales promotions such as school-leaver or student account opening promotions.

Newspaper publishing would appear to be an industry ripe for the introduction of loyalty programmes, although companies here tend to run tactical promotions rather than long-term loyalty schemes. The research suggests this may reflect the perceived need for publishers to inject new life into their promotions on a regular basis. It also reflects low margins and rising costs in the industry.

The real lesson to be learnt from the research, both for companies who already operate a loyalty scheme and those interested in developing one, is that every programme must be carefully tailored to suit the needs of customers in each particular industry. The research suggests that firms should not rush into loyalty schemes to keep up with their rivals. Loyalty programmes are no guarantee of customer loyalty, even when they are well thought out and fully integrated into the marketing strategy. Like any other marketing tool, they must be researched, tested and then, if appropriate, carefully and thoroughly implemented.

More information and copies of the report are available from Madge Smith at Abram Hawkes. Tel: (01444) 441176.

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