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Loyalty laid bare: the naked facts

What are loyalty programmes and how does a strategic approach to consumer-retention marketing work?

As Harvard Professor Michael Porter observes: "Competitive strategy is about being different", not just doing what your competitors do but with better operational efficiency. It involves making hard choices: "deliberately choosing a different set of activities to deliver a unique mix of value" for your customers. Loyalty marketing has to apply the same principles.

Loyalty is actually not a good word for consumer-retention programmes. Few consumers ever define their relationship with suppliers as "loyalty". From the industry's point of view, the desired consumer behaviour characteristics are, in shorthand terms, "shift" (from a competitor), "lift" (increase spend) and "retain" (repeat business).

Very simple customer loyalty programmes that are designed to deliver a simple reward for repeat purchase, for example buy nine coffees and get the tenth free, can be run by a single managed business with nothing more complex than a printed card and a rubber stamp. Increase the complexity and everything starts to get much more difficult very fast.

There are effectively four types of loyalty currencies which most of the major loyalty programmess deploy in varying mixes:

• Points-led
• Discount-led
• Information-led (loyal customers may value help and advice as much as cash)
• Privilege-led (status is the key member benefit for most airline frequent flyer programmes)

We seem to have reached a tipping-point shift from product-orientated to customer-orientated marketing. A few brands, such as the iconic Apple make of computers, seem able to maintain their margins versus the rest of the market due to product leadership. But maintaining this lead is ever more challenging. A loyalty programme provides information which assists in making the right strategic choices.

A recent report by the UK-based Institute of Customer Service (ICS) listed eight commercial organisations in their top ten performers. Leading this ranking is Amazon which only offers a customer loyalty programme via its credit card programme. It does, however, understand who you are as a customer, how often you spend and on what items. Amazon also has an insight into what you may be interested to purchase in the future.

ICS chief executive Jo Causon defines customer loyalty as an outcome of high levels of customer service - and Amazon's success in this area proves her point. Best practice is certainly based around data capture and analysis to illuminate actionable insights that build customer trust and loyalty.

There are four essentials that a loyalty programme must generally provide if it is to be successful:

• Rapid market penetration (scale assists economic viability)
• Be the first to market (there are exceptions - Nectar launched in the UK 13 years after Air Miles, but its founding coalition partners brought huge existing member bases into the programme from their own established schemes)
• Deliver attractive rewards
• Build reliable communications (the consumer now wants access via all sorts of channels, all of which offer different strengths, weaknesses and costs)

Consumer loyalty programmes were developed from card-based tokens of identification. The digitisation of marketing offers linked to the growth of ownership of smartphones is starting to change this and mobile loyalty apps look set to be the consumer-linkage medium of the future. Social media is currently an evolving area. If you run a large consumer loyalty programme, you have to manage your brand in this space, but a clear strategy is still being determined and relinquishing control challenges most commercial organisations.

Loyalty model definitions are:

• Proprietary (such as Tesco Clubcard) rewards customers with your own value proposition
• Player (a low-cost way to reward others with another brand's value proposition)
• Partner (develop a value proposition or currency that others can use)
• Coalition (rewards customers with a value proposition shared via multiple partners)

Businesses need to choose the right model based on their long-term objectives, brand, customers and market strategy.

What operating a successful and sustainable customer loyalty programme requires managerially is a capability within an organisation to deal with change across a wide range of areas.

Only the largest and best-funded organisations can normally rise to this challenge. This trend has encouraged private equity funding in three of the large loyalty management specialist companies: Aimia which runs the Nectar programme in the UK; Amex-owned Loyalty Partner which runs the payback coalition programme in Germany; and LoyaltyOne which operates the established Canadian coalition programme.

But what do these observations suggest for loyalty marketing strategy in the UK? Stay very simple if small and consider joining a coalition if seeking more sophistication. The UK has many examples of solus loyalty programmes that do not offer sustainable returns for all stakeholders or any clear strategic differentiation. Less may actually offer more.