BENEFIT SYSTEM

How much would it take to ensure you always buy your petrol from Shell rather than Texaco? Or do your DIY shopping at Homebase rather than B&Q? The answer might not be easy to define purely in cash terms, but it is clear that consumers do become more loyal if given the right rewards.

Yet while customer loyalty has become the marketing paradigm of the Nineties, delivering the physical benefits remains as grittily difficult as it was in the Eighties (and probably every other decade).

Fulfilment is the unglamorous end of the process – sheds full of products and mailsacks bulging with orders. But get it wrong and the customers who should have been filled with warm feelings about your company can end up harbouring cold resentment.

That handsome carriage clock, sent as a thank you, looks less appealing after an hour’s journey to the local sorting office (because it was too large to fit through the letterbox) or when broken into pieces because the packaging was too flimsy.

Ensuring that the benefits of a loyalty scheme have the right impact should start with the selection of what is on offer. According to Barbara Barsa, vice president of Membership Rewards at American Express. “Cardholders say that what we offer is special as they perceive it as a reward. We try to keep the programme simple while offering choice – big brochures may be interest ing, but they are also confusing.”

Amex has steered clear of merchandise in favour of more aspirational premiums – restaurant meals, hotel stays, free flights. It has also taken the view that these should be completely free when cardholders redeem.

“The Amex brand stands for trustworthiness and reliability. As a result, we have had very strong principles in the scheme about being up-front with customers. We try not to have conditions on rewards at all. We are keeping their status free, whereas other programmes get launched as free, then realise the level of commitment that means and move to self-liquidating,” says Barsa.

How much work customers have to do to achieve rewards in a scheme is always a critical issue. Set the thresholds too low, and the client becomes over-committed while also eroding the value of the programme in influencing purchase. Set it too high and customers become disillusioned and disloyal.

Terry McCarthy, managing director of Product Plus International, notes: “Consumers always weigh up whether or not they will be able to make enough purchases – and earn enough points – to be able to obtain the reward.” He says that schemes need to recognise this in the level of redemption needed, because it also allows the different segments of the customer base to benefit.

“When it comes to selecting premium products, clients should always consider a two-tier gift structure. The first level of gifts should be set at a lower level in terms of product value and purchase requirement. Higher-value aspirational products can be aimed at higher-spending customers who recognise that they will be able to achieve these gifts by making a little extra effort,” he says.

However this issue is resolved, a scheme will rapidly fail if the technology supporting it does not recognise who has genuinely achieved a reward point and who has not. (Assuming that the link has been made between purchase and benefit, which is not always the case – see box.)

“People start with a marketing database, build in a couple of fields and call them ‘points collection’, and think that equals a loyalty system,” says Nicholas Turner, business unit executive responsible for loyalty schemes at Acxiom. “It isn’t. How do you respond, for example, to queries about points balances?”

He notes that in discussing how to build customer loyalty, many marketers overlook the fact that, to have real impact on this area of behaviour, a scheme has to become part of customer service. That means access to operators who can interrogate data and provide immediate answers.

It also means building an operational system, not a maintainance or analysis database, says Acxiom managing director Jerry Ellis. “When you are concerned with the individual – the customer – you need the characteristics in a system of reliability, 100 per cent data integrity and immediate response.”

None of these can be achieved by extending the marketing database, since this is usually built on aggregate data where accuracy is not paramount and processing does not have to be immediate, or by working on an existing operational system.

“Marketers say you don’t need two systems because the data is all there already. But when you push the button to respond to a customer query, it locks out your operational access for five minutes,” he warns.

One of the mistakes being made by companies entering the loyalty programme arena is to avoid duplicating systems and data. Ellis believes some marketers even view this as in some way wrong, preferring to keep one integral database. But the varying needs of each part of the business prevent such an approach being effective. And if the technology does not allow the company to answer customer queries about their status in a scheme, then it is certainly not helping to build loyalty.

The sheer volume of data which gets amassed in loyalty schemes can bring the best-laid plans to their knees if consideration has not been given to what to do with the information (see box). “The tendency is to ignore what needs to be done to run a scheme and the amount of information that is collected,” says John Merry, development director of The Database Group.

“If you have 10,000 customers a week, that seems like 10,000 records. But if they each buy 40 items at different prices every week, you get phenomenal amounts of data that you can’t deal with,” he says.

Decisions need to be made at the outset about the level of detail needed and whether information can be aggregated.

Does a retailer need to know if a customer bought a carrot or a potato, for example, or is the point of interest that a purchase was made in the grocery department? “You have to pre-screen rather than take everything and sort it out later, because you will come unstuck later,” says Merry.

If the right type of benefits have been chosen and the right technology put in place to run a scheme, then all that is left is to fulfil redemption orders. But it is here that some of the worst difficulties can arise. One of the perennial problems for promotional handling houses is stock levels.

“Because of cost, they are always kept to a minimum. Beforehand you have to guess at redemption levels per item, but consumers are very fickle. It often doesn’t run to expectations,” says Jan Morris, managing director of Mail Marketing (Scotland).

This fear of being left with overstock, with its attendant problems of storage and disposal costs, often leads to understocking.

What then happens is that items run out and delay letters have to be sent out. With delivery times on many premiums running into weeks, or even months, this turns a reward into a broken promise. Even if sufficient stock has been ordered in good time, problems await the unwary client.

“Packaging is difficult. Handling houses are often pressed into costing it out before they have seen an item, even buying packaging before the items arrive because orders are coming in,” says Morris.

Some problems can be easily avoided by asking obvious questions – if a product is to be fulfilled in units of four, the premium supplier can ship them to the handling house pre-packed in those numbers. But if it is not asked, it may deliver them in packs of six or 12, requiring costly repackaging.

There are few problems in running loyalty schemes that cannot be resolved and that have not been encountered before.

The difficulties tend to arise when advice is not sought from those who have already had experience, especially technology and handling suppliers. As long as loyalty remains at the top of the agenda, the risk will be high that well-laid plans will founder for lack of a small amount of consultancy. As one supplier warns, running loyalty programmes is like “walking on quicksand”.