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The Future is Coming

Will customer loyalty schemes survive into the 21^st Century?

In some markets, customers are already showing signs of 'loyalty scheme fatigue' and programmes will need to be re-positioned to recapture their attention.

Will customer loyalty schemes survive into the 21^st century? Given that we are only eight months away from entering the new millennium it seems timely to ask the question.

The growth in this type of marketing has been very marked in the UK since the recession of the early 1990s and the number of separate retailer schemes operating is estimated to exceed 180 different offers. The UK has 35 million loyalty cards in use on a regular basis. By anyone's measure this is an impressive figure of utilisation in a country with a total workforce just exceeding 28 million.

Clearly a consumer who is an enthusiastic participant in these programmes would need a separate shopping trolley just to transport their different cards on shopping forays. The result of this extensive choice has been a rise in the concern of 'loyalty card overload' and the fight for 'real estate' in the wallet.

The plastic limit

Research has validated these concerns with evidence that the average consumer will only carry five plastic cards in their wallet. Since debit and credit cards will account on average for a least two of the available five 'slots', the battle amongst retailers has been to ensure that their reward programme is filling one of the remaining choices.

The shopping frequency and relatively high average basket on purchases has tended to favour the major grocery retailer schemes in the development of database-driven customer loyalty schemes. Hard on the grocery boys' heels come the oil companies (Shell Smart, BP/Mobil Premier Points, Texaco Global, Total TOPS and Fina For You) which have used this type of marketing as a form of extended premium promotion offers in their battle for market share with the supermarkets.

Only the market leader, Esso, seems to be holding the line with its 'Price Watch' price promise, but even they are running a premium item self-liquidating offer on coffee mugs which certainly creates feelings of 'deja-vu' for an old oil marketer! The highly successful launch by Boots of its Advantage loyalty card has put further pressure on the choice of which card to select for regular space in the wallet. The bandwagon towards customer loyalty schemes has gained further momentum in the first quarter of 1999 with Conran Restaurants, The Carphone Warehouse and even Marks & Spencer - which indicated it was considering the launch of a loyalty scheme in the near future.

However, even if some consumer segments still continue be attracted to this marketing initiative, it seems to be losing ground with the marketing managers who initially got the consumer locked into these schemes. A recent survey amongst 300 senior marketers from the UK, at the Marketing Forum held aboard the ship Oriana, supported this belief. It indicated a fall from 29 per cent to 13 per cent in the number of marketers who regarded loyalty schemes as 'very effective' for building customer loyalty.

The key learning from a mountain of analysis and opinion seems to be that loyalty schemes can only assist brand values and ultimately encourage repeat custom if they are part of an overall core proposition. The real value of the schemes to most companies is going to be the database of information that is facilitated by running a scheme.

Facing the future

With so many loyalty schemes on offer, why question their future? Examination of the 'rhetoric vs. reality' is almost inevitably a subjective view at present, but the following observations are offered:

• can loyalty schemes really build relationships when markets become crowded with carbon copy schemes? Loyalty is therefore cited as a zero sum game. We should however reflect that traditional mass advertising is also undertaken by most leading brands and that this form of marketing is less often criticised as being an ineffectual position to hold.
• how do you effectively differentiate your programme in a crowded and 'me-too' market? Traditional methods of market research are unable to predict future demands. It is not until a new player offers a 'taste of tomorrow' that most consumers can understand the options they can pursue.
• in some markets, customers are already showing signs of 'loyalty scheme fatigue' and programmes will need to be re-positioned to recapture customer attention. The recent speculation that Tesco is planning to re-launch its Clubcard scheme in the summer with tiered rewards is an early indication of this likely development.
• delivering results from these schemes is going to attract the attention of more board meetings, as pressure on margins will force companies to seek further cost savings.
• data protection legislation has not yet received a wide press, but in markets like the UK it will begin to feature more in loyalty scheme reviews.
• the issue of which technical platform to run a scheme will become more problematic, as the variety of options available is increased.

New millennium loyalty?

It is increasingly difficult for any business to look 100 days ahead and projections 1000 days ahead are potentially a source of recurring embarrassment to those bold enough to make them. However, having issued a suitable health warning, I offer these projections for loyalty scheme evolution in the next few years. I believe they will revolve around application of all or some of the following:

• the word 'loyalty' is actually misplaced in the context of consumer/retailer relationships and should be left for social and political applications. The adoption of an attitude that aims to 'make it harder to leave' as a customer is more likely to be successful in the cynical and pragmatic world of tomorrow.
• loyalty schemes are going to become much more technically clever and offer consumers real convenience in their use. Expect active use of telephone and Internet technology in more schemes.
• the re-engineering and down-sizing trend in all large companies is actually de-stabilising to any loyalty schemes being operated, since external customer loyalty is closely allied to internal employee loyalty. Expect to see the realisation amongst more retailers that any audit of their scheme should look inside the company as well as outside at competitive schemes.
• merged loyalty schemes will become more frequent as existing retailers increasingly face the issue of how to handle separate 'legacy' programmes launched in a more independent era.
• classic 'points means prizes' rewards have a declining pull in a world that seems to be oversupplied with most things except time and status. Expect to see more loyalty schemes switch their focus to privileges and benefits that are service and status-orientated.
• the decline in the attractiveness of products as rewards and the application of customer lifetime value considerations may also encourage scheme operators to focus on more tangible benefits. The pay back for a lifetime (lifetime in this context may constitute 10-15 years) of loyalty to your telephone network supplier may be free connection and local calls when the customer reaches pensionable age. This kind of initiative may find favour with Government agencies as they seek to supplant State benefits with corporate and self-help benefits.
• since the information base of many personalised loyalty schemes is attractive to other retailers we should expect to see programmes established as separate entities from the originating retailer business. This will facilitate equity partnerships and greater cross-sector application for loyalty schemes.
• customers are increasingly ware of the value of the information they provide in return for rewards. Expect to see this awareness reflected in the 'exchange rate' between rewards and information.
• customer lifestyles and market niches will offer scope for loyalty schemes that are more targeted and less 'one size fits all' in their design. Expect to see more specialist loyalty schemes.
• the lifecycle for everything is getting shorter and faster. Customers are much quicker to understand developments and maximise their benefits. Loyalty schemes will need to adapt to this 'fast forward' mindset and update/refresh their schemes with more frequency.
• loyalty schemes will become both multi-sector and multi-currency in their application to offer better customer value and lower operational costs to retailers.
• information has a value, depending on the speed with which it is processed and interpreted. It has more relative value to those persons who can access it first. Expect to see loyalty schemes reflect this 'time value' in their cost benefit justifications.
• customer 'deselection' is likely to gain momentum in some sectors. More benefit to bottom line can accrue from clearing out unprofitable customers than concentrating upon more business from profitable customers.
• environmental and ethical considerations are equally applicable in this scenario since database analysis will raise some delicate issues for retailers to resolve the area of genetic disposition and predictability.
• tribal links to team, language, culture etc are set to become more significant in consumer decision processes and loyalty schemes must reflect this trend. The growth in the commercialisation of sporting events is evidence of this trend.
• Expect to see the realisation amongst retailers that any audit of their scheme should look inside the company as well as outside at competitive Schemes.

As we focus on the challenge of meeting customer expectations in the 21^st century, a trend is emerging in mature retail markets for greater 'openness' and transparency with customers. Many well-known brands have already established a higher level of trust with consumers than more traditional institutions such as Government, the Police and the church. The true value of customer loyalty programmes to suppliers in the future may be their ability to offer marketers the conduit to better and more frequent customer communication. Customers dictating the terms and conditions under which they will elect to do business with suppliers is the likely scenario for retailing in the next decade. Well thought-out and implemented loyalty programmes can be an important strategic marketing technique to assist retailers in this new environment.

The thought put forward by Brian Woolf and developed in his book Customer Specific Marketing is worth further reflection in the evaluation of where customer loyalty schemes are heading: 'How long before the database that a company holds on its customers is going to represent a more valuable asset than the products that the company actually markets?'

Making the difference

Information management and the speed to understand and then exploit new retailing opportunities will be what will divide the profitable and sustainable enterprises from those heading down the road to dusty death. The world economy is replacing markets focused on industrial goods as the key economic drivers, with information goods - basically anything that can be digitised. Some information has entertainment value, some has business value, but regardless of the source people are willing to pay for information.

The interesting issue for the retailers of the future is that consumers differ greatly in how they value different particular information. Success is going to depend on how the particular value is identified and marketed. To quote the Nobel Prize-winning economist Herbert Simon: "A wealth of information creates a poverty of attention."

Loyalty schemes have a role to play in developing that idea which is why I believe they will be around for some time yet.