When the credit crisis hit during the back end of 2007, it generated much talk on its likely impact on retail sales. One of our clients, a high-street fashion retailer, expected an impact on sales volumes and wanted to be in pole position to be able to combat the anticipated drop. Now we have passed the one-year anniversary of the financial markets crisis, and parts of the retail sector are, indeed, seeing a negative impact. However, our client, with the intelligent use of database marketing and loyalty activity, has been able to address it in an effective way.
Many have questioned the effectiveness of loyalty schemes. And if we were to pay heed to many of the commentators on the issue, the lasting impression would be of a technique in decline. If loyalty cards are never taken out at the till to gain rewards of some description—or the card owner never receives targeted and personalized offers from the card issuer—then the process is, indeed, a waste of time. On the other hand, how many brands or retailers does each person use? Add up a credit card, a utility provider, a favorite supermarket, a department store, a toy shop, a book store, a coffee shop, a pub, a cinema. It does not take long for each customer to accrue a dozen favored suppliers. If they are all applying their loyalty activity, initiatives and schemes correctly, then all those cards could be providing a very important benefit for customer and supplier, alike.
‘More than half of the group recovered spending levels by the end of the two-month campaign.’
There are now more loyalty schemes in operation in all sectors (but especially retail), and the number continues to grow. Research we commissioned earlier this year found that the number of loyalty schemes in operation has more than doubled in a decade. So despite a crisis of confidence in the late ’90s, loyalty schemes are back on the block. Nevertheless, doubts still remain. What is it that loyalty schemes deliver? Is the outcome actually loyalty or something that uses the word, “loyalty,” simply as a convenient label? Do loyalty schemes actually incentivize additional purchasing?
It is now accepted that loyalty schemes are more about: identifying who the customer is; understanding customers’ tastes and preferences; understanding who is valuable and how that value is changing (positively and negatively); and providing customers with obvious value and relevance that incentivizes them to stay with—and spend more with—you. I should point out, however, that snapshots of customer value are useless in building effective and appropriate customer development strategies. It is essential to look at how value changes over time.
We conduct transactional analysis for the high-street retail client and run its loyalty scheme. The two go hand in hand, as monthly views of transactions help identify when a particular customer segment is in decline.
Decline in spend
In one recent instance, the retailer found that one high-spending, high-loyal customer segment had been gradually spending less over the previous six consecutive months. With this observation, the retailer worked to get the customers back to spending at their previous level. Our client put in place a targeted and time-limited double-point earning offer, focusing on products customers in the segment had previously purchased. But to get additional value from the loyalty strategy, the retailer also created a special discount package, which incentivized these customers over and above their previous normal spending point.
The principle we pursued was straightforward. The high-spending, high-loyal customer segment was spending £900 per annum. What executives cared about was defending this and increasing it if they could. They laid down an additional, and challenging, objective: to try to persuade a third of those whose spending levels had recovered to exceed their previous levels by 20 percent.
The retailer presented a limited time (two-month) offer of double loyalty points to the customer group. This was not just a blanket offer across the segment. Our analysis had shown that different subsegments of the customer group regularly purchased a number of lower-value, consumable products. For each subsegment, therefore, the retailer offered triple points on purchases of a couple of the lower-value products. In this way, executives hoped to further incentivize the take up of the offer.
In a third tactical strand, toward the end of the first month, the retailer offered customers who were approaching their former monthly spend a further incentive of actual discount on a range of higher-value products, selected on the basis of their previous purchases in the last two years. In other words, they tailored incentives not to their common group characteristics but to their individual purchasing history.
The result was dramatic. More than half of the group recovered spending levels by the end of the two-month campaign. Of that half, one third exceeded previous spending, to the extent that the retailer met its revenue recovery targets without denting profit margins. Our client also set longer-term campaigns in place with the aim keeping the high spenders at their new levels, while bringing the remainder of the group back to former monthly purchase value within 12 months.
The task was incentivizing and managing customer revenue and profitability, no more or less. The strategy covered the whole customer base, with the idea of—in some valuable customer groups—preventing decline before it happened.
Doing so meant obtaining basic transactional and campaign data, such as acquisition cost per customer segment, marketing communications cost per customer segment, customer service/marketing administration/overhead costs per customer segment, credit scoring, the time since the customer’s initial purchase.
With such information—and more—in hand, we calculated profitability over two-, three- and four-year periods and identified which customers were important to defend, which the retailer should try to grow and which were not as important.
Loyalty activity is growing because it is such a fundamental tool in database marketing. However, the temptation to overcomplicate the issue has led to the disillusion of bewilderment. This should not put retailers off the idea that they can use their loyalty infrastructures to defend, and even grow, customer revenue, as the credit crunch bites deeper.
Successful loyalty methods must be simple. They must be applicable in the real world. They must help deliver productive incentive strategies. And they must obviously help the whole database marketing process deliver a better return on investment.