Plastic population?

Loyalty schemes have suffered a dip in popularity in the past few years, though some, such as Tesco, seem to buck this trend. Can these schemes re-invent themselves to cater for changing demands, or is the UK card-weary? By Phil Dourado

When Michael Moore, the activist film director, turned his attention towards loyalty schemes recently, his rant was delivered with as much passion as a preacher urging his congregation to cast out the devil. On this occasion, though, the devil came disguised as a small, rectangular piece of plastic.

Moore had given fishing nets to the ushers for a show in north London. As he yelled encouragement from the stage, the ushers ran up and down the aisles catching loyalty cards that the audience pulled from their wallets and purses and dropped into the nets as Moore urged them: “Throw ’em away! Cut ’em up!”

Moore is atypical in reacting with such charged emotions to the card culture that has sprung up over the past couple of decades. Most of us, it seems, have been unmoved either way by the majority of retail loyalty cards, which defeats their purpose.

The problem is partly caused by the proliferation of card-based schemes. Consumers appear to be increasingly card-weary rather than card-loyal, or even, like Moore, card-furious. The very fickleness they were designed to combat now appears to apply to some loyalty schemes and for the same reason: over-supply.

Reward points and loyalty cards emerged from mature, price-led markets as a way of offering differentiation. The saturation of the retail market with “me-too” cards led to an inevitable weakening of their effect. At its most extreme, the over-abundance of cards leads to consumers simply playing the system, with pockets full of competing cards cancelling each other out.

According to research carried out at the end of last year by YouGov on behalf of KPMG, consumers see loyalty cards as a good thing, but having little influence on shopping behaviour. Forty-six per cent of respondents said that they still shop wherever is most convenient. Only two per cent said that loyalty cards meant they stay loyal to that brand.

Half of respondents said that loyalty cards did not really influence where they shop. Twenty-nine per cent said that they would rather have all-round lower prices than a loyalty card, while ten per cent described loyalty cards as a “gimmick”.

More recent research from Carlson Marketing Group, due to be published in May, is thought to be less negative. During the first quarter of this year, 16,000 people responded to Carlson’s online questionnaire on loyalty programmes.

Ninety-two per cent of people are in some kind of loyalty scheme, according to Carlson, and of these, 78 per cent carry more than one loyalty card. Thirty-six per cent of customers say that they are “much more likely” to continue to shop with a company because they were in a loyalty programme and 17 per cent say they are “more likely” to spend more because they are in a loyalty scheme.

The limited impact of most card-based schemes is partly because you can influence customer behaviour with points and rewards only so far, says Tony Clarke, managing director of International Customer Loyalty Programmes. “Reward, typically as a percentage of spend, is a valuable benefit to a frequent shopper. However, reward has its limitations. The benefit is typically low value. And schemes vary little, so there is no unique proposition,” he says.

It has always been questionable whether discounts deliver loyalty in the long term anyway, argues Huw Williams, planning director at WDPA Communications. He says: “The key problem with loyalty cards rests with those that use a dressed-up ‘discount’ scheme as a ‘reward’. Such schemes tend to have a significant effect on profits.”

When there’s an overcrowded supply side, the obvious thing to do is consolidate, according to the economists, and it took the founder of one of the pioneers of loyalty schemes, Air Miles, to spot the opportunity.

Nectar Card boasts about 11 million members, bringing together some of the UK’s biggest brands to combat the “wallet full of cards” syndrome. Debenhams, Sainsbury’s, BP, Barclaycard and Vodafone are among the household names that have ditched or morphed their own loyalty efforts to join Nectar, on the assumption that the next generation of retail loyalty will derive from strength in numbers.

When you ask those in the know who is getting loyalty right, they tend to point in one direction. Martha Rogers, the one-to-one marketing guru of Peppers & Rogers fame, says: “If I had to point to someone in the UK doing loyalty right it would have to be Tesco. It seems to be ahead of anybody else in linking its marketing to actual loyalty generation.”

So, why have so many companies failed where Tesco has succeeded? Could it be that loyalty is dead due to customer fickleness?

“Everyone’s heard about the death of loyalty. Yes, to a degree loyalty schemes are dead. But that’s not the same thing, as the vast majority are sales promotion programmes in disguise,” says Clive Humby, chairman of Dunnhumby, responsible for developing Tesco’s Clubcard.

“Sales promotion has always been tactical, never strategic. Tesco builds its business around its customer data,” adds Humby.

So, how does Tesco use its card data? Humby explains: “We build up our knowledge of a customer by watching what they buy and establishing patterns.

“Our image of customers is built from seven pieces, which the card gives us data on: lifestage, shopping habits (frequency, etc.), basket topology (what they buy), promotional promiscuity, primary channel (how they like to buy), brand advocacy and profitability, including the element of cost to serve.

“So, on ‘promotional promiscuity’ for example, we know the 250,000 people who take up 70 per cent or more of their baskets with our promotions, then nip off up the road to do the same at Asda and Somerfield. That doesn’t mean we will get rid of them. But we know who they are and the others don’t.”

Tesco sends out 11 million Clubcard statements with 4 million variances, so only a handful of people receive the same offers. Clubcard holders get cheaper prices in exchange for the data, but money alone doesn’t deliver loyalty.

Breeding loyalty

“We track trends and create offerings like Tesco’s Baby Club,” adds Humby. The Baby Club started in 1997 and has more than 540,000 members. “Eighty per cent of all births to Clubcard customers are registered with us before the baby is born. That’s loyalty,” says Humby.

Fred Reichheld, Fellow of the Bain Consultancy in Boston, Massachusetts, helped to kick-start the loyalty movement in the early Nineties with his book The Loyalty Effect. Reichheld’s work had a profound effect on shifting many marketers from a focus on customer acquisition to customer retention. So does Reichheld agree that loyalty is an increasingly lost cause?

“No, I’d refute that,” says Reichheld. “The idea that there has been a change in customer psychology leading to a chaotic world of churn that we have to learn to live with is, quite frankly, bunk. The state of constant customer defection in many industries is because companies abusing their customers’ trust.”

Incentive world 2003

The largest promotions, incentives and premiums exhibition in the UK, Incentive World 2003 will take place from April 29 to May 1 at Earls Court 1 in London. This event showcases new ideas and provides ready-made and tested solutions for marketers who are looking for tools to help motivate, sell or improve performance. Concepts and products on display include:

• on/in-pack promotions

• premium merchandise

• workforce motivation programmes

• achievement awards

• corporate hospitality

• incentive and group travel

The show will include more than 400 exhibitors – from incentive vouchers and business gifts to promotional merchandise – and more than 7,000 visitors are expected.

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