Loyalty schemes are back in vogue, with retailers keen to capture more customer data to boost sales.
The humble loyalty card is experiencing something of a renaissance. With retailers competing for a reduced consumer spend, they are eager to drive sales by gaining further insight into the shopping preferences and lifestyles of their customers.
2011 saw a raft of retailers launch loyalty cards, including value chain M&Co and high street department store House of Fraser, which joined forces with UK and European prepaid services company PrePay Solutions to launch its Recognition Reward Card. Meanwhile, premium etailer My-Wardrobe.com unveiled a loyalty scheme in January.
While it’s true that loyalty cards are hardly a new phenomenon on the high street, the concept is being revitalised by multichannel retailers which recognise their potential for capturing more data, which they can then leverage for marketing purposes.
Consumer research by consultancy PricewaterhouseCoopers (PwC) shows that consumers are reducing the number of retailers they shop with, encouraging many businesses to launch loyalty initiatives to compete for wallet share. However, PwC retail partner David Oliver says that understanding multichannel behaviour, and measuring the impact of promotions across channels, is the main driver behind renewed interest in loyalty cards.
Consumers often browse online before making their eventual purchase in-store, but Oliver warns that without a loyalty card, whose details customers use to log in, it can be hard to identify the specific reasons behind that conversion. “Imagine you change the design on your home page to highlight certain products. Without a loyalty card you’ve got no idea what business that is driving in-store,” he says.
However, retailers need to ensure they have the right back-office systems in place to be able to analyse data effectively. M&Co drafted in retail software specialist K3 to provide its customer relationship management (CRM) solution to help it do just that, ahead of its loyalty card launch in February of last year. The initiative is aimed at getting M&Co’s customers, who transact an average of five times a year, to spend six times a year. Some 500,000 customers have now signed up, representing 20% to 25% of M&Co’s customer base, and the retailer is aiming to double this figure next year.
One of the secrets behind M&Co’s loyalty card success is the rigorous testing that goes on behind the scenes. Over the last year the retailer has identified that its customers prefer its points-based reward card, which offers five points for every pound spent, versus the non-points option [see case study overleaf].
The retailer has also been using the information it captures via the loyalty card, including email addresses and mobile numbers, to control group card holders and test the effectiveness of its cross-channel promotional activity in driving sales, allowing it to hone in on return on investment (ROI).
“Each channel gives different redemption rates and ROI is vital. Due to the significant difference in costs for direct mail, SMS and email, we need to ensure we target customers in the most relevant way to get the best from that investment,” he says.
M&Co is just one of the retailers now capitalising on the information it captures via loyalty cards to refine its marketing strategies and run targeted promotions, based on an understanding of which rewards their customers actually want.
Maurits Dewina, consultant at business consultancy Kurt Salmon, says traditional blanket incentives are no longer enough to foster loyalty. “Today retailers need to aim to deliver more effective, highly targeted marketing campaigns by using analytics. Consumers are continually making quality-versus-price considerations, particularly in this tough economic climate, and this is even more prevalent as there is so much information easily accessible online and even through in-store mobile research,” he says.
“Retailers have realised that the data collected through loyalty programmes has a far-reaching strategic value that can influence their activities around targeting specific groups.”
This was the impetus behind the relaunch of My-Wardrobe’s loyalty scheme. As well as giving customers one point for every pound they spend, the My-loyalty programme splits customers into bronze, silver, gold and black tiers based on their spend, offering exclusive benefits to each. “Reward programmes have been around for a long time, but now it’s about giving the customer something that is relevant to them,” says My-Wardrobe customer marketing manager Becky Wakeling.
She adds that switching from blanket incentives to a more personalised approach will help identify which rewards hold the most appeal with My-Wardrobe’s customers. “We’re competing for share of wallet, and hope that this scheme will put us at the top of our customer’s preference list and encourage them to shop with us more frequently,” she says.
Balancing the books
The merits of running a loyalty scheme are clear, but managing larger-scale initiatives can be costly and time-consuming. Tony Bryant, head of business development at K3, says interpreting data is a challenge, and that retailers need to decide who is the best person within the organisation to interpret the data coming out of its CRM solution. “The problem is how you manage that down to an individual level. Segmenting customers into tiers and offering different incentives, in the way that My-Wardrobe has done, is probably the most efficient way to personalise the rewards,” he says.
MacMillan says that M&Co’s loyalty card scheme required considerable planning and investment in CRM technology to aide analysis. “It’s absolutely been a worthwhile investment,” he says. “We now know so much more about our customers, and that insight is helping us to buy the right product for them in every location,” he says.
While larger-scale loyalty schemes can be time-consuming and costly to run, a raft of independents are capitalising on simplified smaller-scale versions. Rochdale young fashion indie 25 Ten Boutique launched a VIP loyalty card for its top spenders three years ago and a paper-based card for the rest of its customers, on which they collect stamps to receive rewards, last year. Owner Paul Turner-Mitchell says: “The last couple of years have also taught us that mass discounting no longer works. Rewarding customers throughout the year with incentives such as advanced viewings of new collections and exclusive discounts really helps to generate that feel-good factor.”
St Albans womenswear indie The Dressing Room is also running both a Privilege card for its top spenders and a stamp-based scheme. Owner Deryane Tadd says the increased add-on sales outweigh the cost of running the scheme. “You have to do what is right for your business, but we’ve definitely found that our loyalty scheme encourages people to spend more. Customers want to feel like they are being rewarded for being loyal by getting that little bit extra, especially in today’s market,” she says.
Case study: M&Co
Since launching in February last year, M&Co’s loyalty card has amassed 500,000 members, and the value retailer plans to double this over the next year. Here are some of the statistics behind the initiative:
- M&Co’s loyalty card users represent 25% of its customer base. With 10,000 new card openings per week, the retailer has budgeted for another 400,000 cards over the next year.
- Control grouping has shown customers prefer its points-based option, which offers five points to every pound spent, to its non-points alternative.
- Loyalty cards are used in 30% of transactions in the points area, compared with 19% in the non-points area.
- Card openings are 40% higher in the points scheme, and M&Co will switch over to points-only at the end of this month.
Lessons in loyalty
Mark O’Hanlon, manager at consultancy Kurt Salmon
In mature markets the prospect for future growth is limited. So retailers are in the business of acquiring and retaining customers. Market share is everything. In this context, customer loyalty is key and will only be achieved by delivering exceptional customer experience.
Building loyalty isn’t easy though. It is important to decide what you want from a loyalty programme. A really clear operating model and rigorous implementation planning are essential.
Even with a loyalty card customers are promiscuous and retailers may be playing a zero-sum game with their competitors. Rewards don’t drive loyalty. It is the customer and transactional data which together inform who is the most profitable customer, what they want and which changes will drive genuine loyalty.
It is important to then embark on a project with real clarity of objectives, measures and the tactics which will be required to acquire the most profitable customers. Success rates can be improved when you know the demographics of your existing ‘best’ customers, and by then targeting prospects with similar demographics. Then make sure you retain profitable customers and improve defection rates, while actively deselecting unprofitable customers.