As Tesco shows, loyalty points no longer mean financial prizes
To say Tesco is in a spot of bother at the moment is something of an understatement.
Last week, it announced a 6 per cent fall in annual profits. This news came amid rumours of further management changes in the wake of the departure of chief financial officer Laurie McIlwee.
One feels for chief executive Philip Clarke. Shopping habits have changed. People increasingly favour the internet for their bulk items, plus smaller local stores for mid-week top-up shops. Fewer of us are making the weekly schlep to those big out-of-town formats in which Tesco invested so heavily. That journalist cliché about turning around a supertanker has never been more appropriate.
Frankly, I’m not qualified to make judgements about the wisdom or otherwise of short-term promotions versus everyday low prices. However, having grown up in the world of customer relationship management (CRM) I have a view about a marketing institution which has been synonymous with Tesco since the brand’s transformation in the early 1990s. I refer, of course, to Tesco Clubcard.
On its launch, Clubcard redefined loyalty marketing in one fell swoop. Careers were built on it, and justifiably so. But times have changed. And Clubcard has failed to change with them.
As an agency strategist, it’s part of my job description to disagree with management consultants. However I was impressed by a recent presentation from McKinsey’s US Loyalty Practice entitled ‘Making Loyalty Pay’.
At the start of the presentation, there is an impressive chart which correlates loyalty orientation with stock performance. It shows how those companies which have placed loyalty at the heart of their strategy have been rewarded with a higher market capitalisation than those which have not espoused the concept so wholeheartedly.
However, in the next few charts, a less rosy picture emerges. Across the 50 companies surveyed, companies with a high focus on loyalty have driven less revenue growth than those which give the issue a lower priority. The same applies to the companies’ operating margins.
A cynic might conclude that launching a loyalty programme is nothing more than another piece of crafty analyst-fodder for a canny CEO.
Luckily for loyalty marketers, such a jaundiced view is not entirely accurate. There are brands which have derived significant value from loyalty programmes. They have evolved their approach not just to satisfy changing customer expectations but to profit from them too.
Among McKinsey’s darlings are, predictably, Starbucks and Amazon.
Both these brands have listened and responded to consumers’ needs for benefits that go beyond the points-mean-prizes approach. Starbucks has introduced a mobile payment mechanic, meeting customers’ need for convenience as well as rewards. Amazon Prime grows customer value by removing the irritant of delivery charges through its ‘season ticket’ pricing approach.
There’s good financial sense to customer benefits that go beyond points. According to McKinsey, a traditional points-based grocery loyalty scheme needs to deliver a 5 per cent revenue increase in order to break even. Delivering low-cost soft benefits with high perceived value can reduce the cost of the scheme, bringing forward its break-even point.
However, when you go to the Clubcard chapter of Tesco.com, you find that everything is about the mechanics of the points deal. There’s little acknowledgement that customers may have other needs beyond earning and burning points.
It is true that there is a soft benefits ‘Perks’ section (‘Our way of saying thank-you, just for being a member’). But there is a catch.
For example, Clubcard TV lets you catch up with timeless episodes of Not the Nine O’Clock News and The Smurfs for free. But if you want to enjoy this televisual gold dust on the big screen, you’ll have to buy a PC/TV connector from Tesco.com, typically for around £10. Though you will earn points on it, which I suppose is something.
Tesco has announced its intention to review its approach to loyalty and CRM, using big data to target its rewards more intelligently. But unless it is willing to offer benefits beyond the promotional as well, these efforts may well be pointless. If you pardon the pun.