Preaching the loyalty message

American database marketing guru Brian Woolf was in Britain recently to preach the virtues of profitable customer loyalty schemes. Alan Mitchell assesses whether his message to British marketers of rewarding and sacking customers is the best w

If you ever want to hear a good evangelist preach, then try Brian Woolf. He turned US retailing onto database marketing through his Coca-Cola funded study of “measured marketing”. Recently Woolf was in London, courtesy of the Royal Mail and Group X.

His message to an audience of blue-chip British service and retail marketers, including six senior executives from Sainsbury’s, was that using the data generated by loyalty schemes “retailers have a wonderful three-year window of opportunity in which to generate extraordinary profits. If you’re not budgeting for a 30 per cent increase in profits within a year you’re not serious.”

The success so far of the Tesco scheme gives these claims some credibility. But, if Woolf is right, Tesco is barely scratching the surface. Its blanket one per cent loyalty offer goes against the grain of true loyalty marketing, which generates those super-profits by “de-averaging” customers and rewarding the best ones by using the funds generated by “disrewarding” the worst.

Marketers who adopt customer specific marketing strategies, match their investment in customers to the revenues they generate, says Woolf. They deliberately allow some to die on the vine, while nourishing others. Firms should treat customers just like employees. He argues: “If they don’t perform well, ultimately there must be a parting of the ways.” But, he adds, first they must be properly trained.

Woolf’s round-up of US experience (see his eleven Ps of marketing sophistication opposite) shows just how powerful the new schemes can be in influencing shoppers’ behaviour. But on reflection it’s all too easy to see how, far from generating that extra 30 per cent of profits, many protagonists will find themselves losing that amount, or more.

Firstly, there is growing evidence that the proliferation of so-called loyalty schemes is having precisely the effect Woolf warns against – teaching consumers promiscuity. Only last week, a MORI poll found 25 per cent of loyalty card holders are ready to switch to a rival scheme if it has better benefits.

Secondly, nobody has yet managed to explain why marketers need to reward loyal customers. If they’re loyal, presumably you’re already doing something right. How about doing more of that, instead of suddenly beginning to bribe them? Sure, discounts might get high spenders spending even more, but at what point do the increased revenues really offset the extra costs?

That’s the third point – costs. These can be terribly easy to underestimate. There’s all that investment in technology, software, staff training, administration and communications. Then there’s the cost of the rewards. As Sainsbury’s director of marketing Anthony Rees remarked in an interview with me two years ago: “One of the keys of this is whether you believe what you can afford is attractive to the customer.”

John Groman of Epsilon USA told the DMA’s seminar earlier this month that advertising-led marketing departments are used to spending 15 per cent of their budgets on labour and 85 per cent on media.

Database marketing may offer huge opportunities to cut that excruciating media bill. But the downside is the need to invest heavily in people who can use that technology to create real, cost-effective marketing opportunities.

Fourth, it’s all very fine rewarding your best customers and sacking the worst. But people’s circumstances and habits change. If you “dismarket” and “disreward” once, will they ever forgive you? And who says customers will fall in love with marketers who “de-average” them? Many may prefer the honesty and simplicity of the good old-fashioned one-price-for-all.

The crucial point is this. Even in this era of loyalty mania, few companies can afford to turn their backs on customer acquisition. All our buckets leak to some extent.

In the good old days of mass marketing, this wasn’t a problem. The things marketers did to attract new customers tended to be the same as the things they did to keep existing customers coming back – competitive prices, high quality and good service.

But the way the loyalty bandwagon is careering – for example the holding back of special privileges for those with a history of high-value transactions at the expense of others, – means the fences marketers are erecting to keep their best customers in are fast becoming barriers to the attraction of new ones.

Setting the horse of acquisition marketing running against his Siamese twin of retention marketing is thereby going to create deep philosophical and organisational tensions.

Get ready now for some sickening sounds as over-enthusiastic loyalty marketers try riding these two horses in opposite directions, and end up tearing their marketing strategies – and their companies’ profits – to shreds.

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