Loyalty Programs on Fast Evolutionary Track

Discussion
Sep 17, 2007

By Faye Brookman, special to GMDC

Loyalty programs can do more than just give shoppers rewards for spending a lot of money in a retailer’s stores.

Indeed, as loyalty programs roll on, they are being more carefully crafted and targeted, are providing a broader array of consumer perks, and are becoming much more sensitive to market demographics and customer needs than ever before.

The next trend in frequent shopping programs appears to be to better target the “best of breed” shoppers. Although at first blush loyalty programs might seem best aimed at getting new customers or under spending shoppers to spend more, experts actually advise a different tack.

For example, Larry Aronson, a former executive with Revlon who co-founded a loyalty marketing program called Cartwheel LLC actually thinks zeroing in on best shoppers is the best bet. It is easier to convert your existing shoppers to those who’ll come to your stores more often than to change other consumer habits, he believes.

His reasoning is that it can be more lucrative to go after 10 percent of shoppers who do 51 percent of your business and spend $750 a month versus a 60 percent base that only produces 12 percent of sales and spends $30 a month.

The best initial programs are instant coupons that are issued when a customer hits a certain spending level. But the next step is to offer coupons that are more specialized to life cycles or even disease states, such as diabetes.

However, chains do have to dig deeply into the data to make sure future frequent shopper deals are aimed at the perfect audience, and more and more suppliers are playing a role. In fact, manufacturers now see a benefit in using retail programs to also help target more of their “best” customers, too. That was the evolutionary point in loyalty programs brought out by Tim LaBeau, chief executive officer of regional drug chain Drug Fair, based in Somerset, NJ, who said his firm’s new loyalty program, called We Care, would give the chain the “opportunity to work closely with our suppliers in the development of new ways to communicate with our shared customers.” The hair care category has been especially responsive to loyalty programs since so few customers buy across hair care brand lines, especially color.

More evolution is likely on the way. Aronson pointed to the success of Tesco in building its frequent shopper program in the U.K, and their entry into the U.S. will probably reinforce the growth of loyalty programs. In the U.S., food chains have been way ahead of other channels, but drugstores are quickly catching up. Down the road, Aronson thinks loyalty programs can be one of the most important factors separating one chain from another.

Discussion Questions: Is focusing heavily on the top spending consumers the right strategy to pursue? Is it wise to ignore the great bulk of customers who could be a gold mine if innovatively approached? What role can suppliers play in either of these two tactics?

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19 Comments on "Loyalty Programs on Fast Evolutionary Track"


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Mark Lilien
Guest
14 years 7 months ago

Cost is always a big priority. Since it’s less costly to market with a few highly-committed customers, versus many low-volume ones, the payoff generally looks a lot better to management when the loyalty program is focused on the few, not the many. There are at least 2 major loyalty program types: those financed by the retailer and those financed by the suppliers. When the program is primarily financed by the suppliers, the retailer can be tempted to encourage wide use, not focus. When retailers spend their own money, it’s often a lot more restricted. It seems that some retailer-financed loyalty programs are primarily designed to reduce ad media spending, by getting shoppers’ contact info, and then cutting newspaper, radio, and TV budgets.

Doron Levy
Guest
Doron Levy
14 years 7 months ago

Any loyalty program should focus on the entire breadth of the database and not just the top spenders. Top spenders are a huge priority but there also has to be a plan for the customers that are not spending as much. If anything, marketing to the infrequent spenders should have more of a punch than the heavy spenders. This is where innovative and cutting edge marketing comes into play. Loyalty programs are the norm now and they are an invaluable tool to analyze the whys and hows of how your customers spend. Retailers will be short changing themselves if they only focus on the top tier spenders. Business needs to look at all facets of the customer base and create marketing plans to get the low tier spenders into the stores and filling up their carts. In terms of cost, I believe that in the long run, chains will see their bottom lines increase as they create goodwill between themselves and all levels of customers.

Kai Clarke
Guest
14 years 7 months ago

Better mining of the data of loyalty customers is certainly an opportunity that needs to be more explored. However, the big problem is getting retailers to do any type of data mining of their loyalty programs. The majority of retailers gather this data, yet still fail to do any data drilling with it. As the data fails to get used, its age makes its value even less usable and usually results in massive databases that are difficult to work with and even more daunting to manage. The large majority of retailers not only do not use their databases, but have no strategic plan for what to do with their data and what questions they need to have their data answer.

Mike Bann
Guest
Mike Bann
14 years 7 months ago
As someone who is on the street marketing loyalty programs, I agree with Doron Levy that it calls for innovation to reach those mid and low tier clients. Yes, many of those clients are cherry pickers and will continue to be but many are also someone else’s top tier clients that you need a means to convert. In our opinion, a loyalty program that fails to bring in new clients is fatally flawed. One of the more successful loyalty programs that engages every client on every transaction is Ashland’s Speedy Rewards. They are financed to a great degree by suppliers and we feel that is the direction for merchants to look. That funding comes in return for providing a direct channel of communication to consumers. As Bill Robinson stated, data–and how you use it –is the key. Further, we believe that the other CRM (Cause Related Marketing) should be used to help build merchant loyalty. The current coupon model only breeds loyalty to the offer, not to the merchant. Nobody likes the coupon model, yet… Read more »
Mike Romano
Guest
Mike Romano
14 years 7 months ago
It’s interesting how philosophies differ from one organization to another. What works for one may or may not work for another. For example, I see some retailers spending as much as 30% or more of their budget on their top 10% and rationalizing ROI, while I see some retailers spend 10% or less of their budget on the top 10% under the auspices that the top 10% are already brand loyalist and will come in anyway–no need to sell them on the value. Then they invest in high potential mid-level segments. One of the better retailers I’ve seen has a formula philosophy of 20-70-10. 20% on top 20, 70% on middle 60 and 10% on bottom 20. The top 20 is clear. They do invest 10% on the bottom 20% (most cherry pickers) as there are some gems in there and if they aren’t finding the gems then someone else is. The real key is that they relentlessly model the middle 60% and deliver key communications based on internal and external factors. Internal factors are… Read more »
Jim Dakis
Guest
Jim Dakis
14 years 7 months ago

“Any loyalty program should be designed so that the bottom 80% does not realize they are not the target (who knows, at some point in their lifestyle cycle they may very well be).”…Well spoken. Although at Macy’s, we emphasize the loyalty of the Macy’s card holder, and realize that this shopper does in fact spend more money per visit, and visits the store more often, this is no reason to let the cash customer or 3rd party card holder feel like a second rate consumer. By the same token, the loyal customer DOES shop more, generate more revenue, and therefore, is entitled to perks that are reserved for her. This is something that is reinforced when explaining the advantages of the Macy’s loyalty card to a shopper who does not already have one.

Bonny Baldwin
Guest
Bonny Baldwin
14 years 7 months ago
I was consumed with this topic when I had my stores, because it’s ALL true, everything said in the comments so far! As a small business, I found that my top tier was absolutely vital, though I had to constantly be grooming other customers to join that tier because I’d have attrition and dips from factors I couldn’t control, like death, taxes, and media-driven societal freakouts. I had to be VERY mindful of balancing the profitability of certain customers and programs with the human truths that personal relationships help to create and recognize. For instance, hard numbers can tell you that a woman shops with you consistently, but that her spending doesn’t put her into tier one. However, maybe an employee can tell you that this customer absolutely is a booster of your brand, refers people, and would shop with you more given the means to. She’s ultimately more precious to you than someone who’s been spending a lot recently, though is inclined to be fickle. You can waste a lot of money and effort… Read more »
Dennis Serbu
Guest
Dennis Serbu
14 years 7 months ago

Why did Willie Sutton rob banks? Because that is where the money is. Grooming and retaining loyalty customers does not come from 10 for 10 and bogo marketing. It comes from reasonable everyday pricing, attractive promotional price points, product differentiation, clean and comfortable stores with friendly capable service.

The funding that it takes to bring in the full bandwidth of customers bleeds off resources that maintain the loyalty of “profitable shoppers.” By definition, the lower tier customers will not be loyal. They will price shop and cherry pick. Trying to be all things to all customers is a failing proposition. There is opportunity in this customer group, but it requires a more specialized operation. Retailers seem to want it all and that is the big mistake.

Bill Robinson
Guest
Bill Robinson
14 years 7 months ago
Focusing on tier one customers is always a good idea. But it shouldn’t become a primary focus of a good marketing program. The best programs address 10 pockets of opportunity lurking in the data warehouse. 1. Reactivating customers who haven’t visited the store in a while. 2. Welcoming new customers. When they sign up for the loyalty program, roll out the red carpet. 3. Rewarding behavior. When established customers do something that you like for the first time (gift card, web store, etc). reward them. 4. Trading up bottom feeders. Find your bottom feeders, invite them in for a preview of the clearance markdowns, at a better markup than usual. 5. Promoting a brand. Find your customers that are brand loyal to Liz, L’Oreal, or Polo, and let your vendor pay for a promotion for them. 6. Following the sale. Follow up significant sales in a couple of weeks to offer a companion purchase. 7. Upgrading tiers. Take your Tier 3 customer and promote them to Tier 2. Tier 2 to Tier 1. 8. Recruiting… Read more »
Bill Bittner
Guest
Bill Bittner
14 years 7 months ago
You have only three things to accomplish with a loyalty program: keep your current customers, get your current customers to spend more in additional departments or current departments, or improve the “quality” of your current customers by moving them to higher direct product profit items. By definition, it is not meant to attract new customers, although there must be some effort to get new consumers to sign-up. So that means the loyalty effort must be coordinated with the category strategy to also attract visiting consumers. I always remember our first push to move “silver customers” to “gold.” When the existing gold customers realized that we were incenting the “less loyal” customers we had some angry gold customers. Loyalty programs can be good and targeting specific customer needs can help, but I am concerned that it doesn’t drive away current customers either because they feel they have been ignored or that too much information is being mined from their shopping data. The latter concern may be addressed through questionnaires in addition to raw data analysis. In… Read more »
Sue Nicholls
Guest
Sue Nicholls
14 years 7 months ago
Some great comments above! If you think of this from a category management perspective, your overall retailer strategy may include a focus on rewarding those highly loyal consumers, and making them feel important. And you can tie in some marketing elements with those consumers. One danger is that you may leave behind others who have the potential to be highly loyal consumers. But within different categories, dependent upon the role and strategy of the category, you can define category strategies that tie in to the loyalty data as well. Reward consumers at a category level and let them know that you understand the importance of this category to them. If you can tie it in to nutrition and healthy food choices, or the environment, or education, etc, consumers will feel good about the choices that they are making. Good loyalty data has some of the most amazing insights about consumer shopping behavior (it can sometimes be a lot of work to get to those key nuggets). If you can let your top spending consumers know… Read more »
Ben Ball
Guest
14 years 7 months ago

Every retailer has a “long tail” of customers, just as we have the long tail in inventory. The ROI of a dollar invested in better serving the core will always be higher when analyzed. But it may not always be more incremental (sort of like understanding how much of your promoted volume is “promoted base”). So a mix of efforts is still the best way to go for the long term health of the business. Maybe a 70/30 or even 80/20 skew to stimulating the core versus prospecting–how does that sound to the panel?

Ken Wyker
Guest
14 years 7 months ago
I think we need to avoid the paradigm of focusing on a particular set of shoppers and instead focus on achieving PROFITABLE sales gains. The reason that most experts suggest focusing on top shoppers is that experience shows that they are the most promising group from which to generate profitable behavior change. They do respond to offers and they don’t require huge incentives to do so. Conversely, infrequent shoppers typically have a low response rate and even if they do respond, the cost to achieve it wipes out any profitability. However, that doesn’t mean we need to give up on lighter shoppers. It just means we have to work harder to keep the costs down, so that the net impact on the bottom line is positive. You can’t simply send out coupons for dollars off a minimum purchase. To be successful with lighter shoppers requires more intense data analytics to understand each customer and identify what genuinely motivates them to visit your store. Only if you understand the customer can you effectively (and efficiently) target… Read more »
Dave Roberts
Guest
Dave Roberts
14 years 7 months ago

Any loyalty program should be designed so that the bottom 80% does not realize they are not the target (who knows, at some point in their lifestyle cycle they may very well be). But, it does make sense to “superserve” Pareto’s 20% who drive 80% of sales. While coupons and other savings mechanisms will always be the center of attention, there are other perks that can make those in this target feel a bit more appreciated, depending on the retail category. Hardware and home improvement types, for example, might appreciate special “early bird” hours, a web “portal” where they can store materials lists and even compute costs, special phone numbers for product availability, delivery, and more. Usually, these heavy spenders know what perks they want and they know why they are special. Researching this group beyond “database diving” would serve to better craft the message that “you are special.”

Gene Hoffman
Guest
Gene Hoffman
14 years 7 months ago

Loyalty programs certainly can be beneficial for retailers and they will probably grow in importance among similar-type chains. But the best way for one retail chain to differentiate itself in the most positive way from another chain, is by performing perceivable better day-in-and-day-out via the most innovative offerings, the highest level sense of theater, and the most outstanding service performance. That, thereby, trends to create the strongest loyalty.

Dick Seesel
Guest
14 years 7 months ago

Effective “customer relationship management” (CRM) focuses your effort on your best customers. “Best” might be defined as a combination of frequency, recency and amount of spending. The customers at the top of the CRM pyramid should be your most profitable, and should get more than their fair share of attention. However, it’s a good strategy to focus on the next tier of the pyramid: How to turn solid, loyal customers into “gold” customers. The more you can push to the top tier, the more profit you should enjoy from the expanded base of “best” customers.

Nikki Baird
Guest
Nikki Baird
14 years 7 months ago

I don’t think it matters which shopper type you go after. It’s not the shopper type that reaps the rewards, it’s whether you make a profitable offer that the target customer values. Retailers have a hard time getting that equation right for ANY customer, let alone their best customers.

According to our research, retailers hardly know if an offer they make is profitable or just giving away margin, and 81% of our survey respondents couldn’t tell which customers chose to redeem an offer. A loyalty program isn’t a rifle shot–you don’t have one chance to hit as many customers as you can. It’s a tennis match–a back and forth between you and the customer. If you’re not providing enough value from the customer’s perspective, they’re not going to keep playing.

It doesn’t matter which customers you target with an offer, as long as the offer you make them is valuable to you–and valuable to them.

Ed Dennis
Guest
Ed Dennis
14 years 7 months ago
I really think, based upon what I have experienced, that all but the most sophisticated retailers will never be able to take advantage of “loyalty programs.” My experience is that most are gimmicks and anti-consumer. I can recall entering a grocery store in a town I was visiting to pick up a few items. Every single item that was on sale REQUIRED a loyalty card to receive the sale price. I left every item with the cashier and walked out of the store. I got what I needed at a convenience store and actually saved money. The fact is that most retail management is too lazy to really utilize a loyalty program. The source of my rebellion took place in one of our nations very largest grocery chains. If they don’t think enough of their customers to actually go to the trouble to make the program work in a manner that makes customers feel good about shopping there then their business will suffer. Everyone should take a look at the Revco loyalty program. They always… Read more »
Stephan Kouzomis
Guest
Stephan Kouzomis
14 years 7 months ago
If I may, the worthy salary expense of a marketing type is far more beneficial in this discussion than just cutting prices, and hence GPM for a sale to move product. Secondly, and as suggested, superior consumer-oriented loyalty programs are always shopper segmented. If I may add, whether a supermarket, or specialty store, upscale luxury products outlet, or any type of department store, it is appropriate to utilize. With this shopper segmentation, the retailer can establish strategic tactical events and programs, as well as cater to the elite top tier loyal shoppers. GPMs call be made with each segmentation group. Importantly, this is evidenced more so with retailers with higher priced products, than say the price driven super centers. The likes of Marriot, Nordstrom, Target, American Express, Marsh and Publix supermarkets have dominated such a profitable marketing practice. And finally, you must build the loyalty of the targeted audience through to the converted consumer to shopper with superior sales associates’ service and their knowledge; differentiated products; noting valuable shoppers with emails and direct mailers; theatre-when… Read more »
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