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The future of customer loyalty in 2003

These comments are generic in scope, as they are based on my case history experience across a wide range of retail sectors, geographic regions and business-to-business applications.

This is a very interesting time to be asking the question about the future of customer loyalty schemes and I want to cover cover 5 points in considering this question in the context of Europe:

• What is the future for customer loyalty management?
• What are the social and market forces driving this future?
• What are the new rules of the market?
• How are loyalty models polarising?
• And, finally, is a coalition approach the way forward?

We are now several months on from the launch of the Nectar programme in the UK. The programme hopes to sign up half the UK population and create a renewed interest in what had become a mature and rather boring market for this type of marketing initiative. It has some very impressive partners, with the big guns of Sainsbury's, BP, Barclaycard and Debenhams making the initial sponsors' group for the launch. First Quench have now joined the party and a major telco player is rumoured to be poised in the wings to enter the scheme as well.

Nectar intends to change the UK market for loyalty and it has some big ambitions. Very much to its credit in my opinion, it has stirred some incumbent schemes to sharpen their customer offer and is forcing some well-established single brand schemes to re-evaluate whether a single brand offer is really what their customers want.

The initial reaction in the UK press was mixed: Evening Standard investigators claimed that some customers in the new programme will have to spend up to 50% more to accrue some of the same benefits under schemes being replaced by Nectar. This is a fact when you look at the offer in the basic format. The Consumers Association also waded in and stated that "shoppers may not always get as much as they expect". The Times ran an article that compared the major UK consumer loyalty programmes in terms of what could be obtained for an £8400 annual spend. The cross-scheme comparisons were not very flattering.

We have not seen this kind of press interest in loyalty schemes in the UK since the mid-1990s when the grocery groups and fuel retailers all piled in to them with a similar blaze of publicity.

The Nectar scheme, however, seemed to be creating an enormous amount of customer interest in sponsors' high street stores, and became a victim of its own demand creation as the Nectar web site crashed under the strains of 5% of the UK population trying to hit it at once!

All this is making both the market interesting and the customer offers more sharply defined. Nectar and this type of coalition/ multi-partner loyalty programme have been sold to their sponsors as the only sustainable approach to consumer loyalty schemes for the future.

Why the change? Well, all markets are facing declining growth and everything is now over-supplied. The time pressures on anyone in full time work are huge and gaining customer attention in this environment is set to become the definitive challenge for marketing. The paradox of the age of connectivity is that we are all seeking more individuality and mass marketing per se has declining influence.

As CRM programmes are rolled out in more companies and EPOS systems become ever more complex, more and more information is being collected about customer transactions. Companies are starting to drown in data and customers face a confusing choice over most things they buy. Combine that with increased consumer expectations as to individual solutions to their buying needs and we have a recipe for confusion.

To acquire and then keep customers in the 21^st century is going to require some new thinking. The mindset that starts by asking 'what will it take to keep me as a customer' is the only approach that seems likely to succeed in a market over-supplied with everything except time. Customised products are replacing mass produced off-the-rack offers for all items from cars to books.

Consumers shift with ever greater speed to a permission-marketing approach of being prepared to allow access only to suppliers of products and services in which they personally are interested. The 'if its news I can use, I'll pay attention' approach may be the only sustainable option. A 'must fit exactly' consumer mindset is now replacing 'reasonable value at a reasonable price' as suppliers go through ever higher hoops to create customer loyalty.

Customers are increasingly expecting:

• Convenience of customer choice of channel: the 'Martini' principle.
• Targeted communications to customers who are receptive.
• Recognition of high spending or high potential spend.
• Fast, efficient service levels with no excuses and rapid adaptation to fast-changing consumer trends being market threshold requirements.

In this environment, companies who manage customers well, using sensible, observable and well-implemented business practices are very likely to be the best- in-class performers. The problem is that it has proved to be mind-numbing in complexity: is customer loyalty management possible?

I have defined the objective for certain clients as 'maximising the value of a business by strategically managing customers' behaviour using a permission marketing approach'. This sounds good but is very difficult to deliver in practise.

Recent surveys in the UK highlight a £17 billion investment by companies in CRM solutions as they scramble to understand their customers better and deliver what they want. Some surveys also claim that up to £12 billion of this investment has been wasted! The future development of customer loyalty schemes is increasingly linked to making these massive investments deliver a return. A recent article in the Harvard Business Review by Professors Reinartz and Kumar stated:

"No company should ever take for granted the idea that managing customers for loyalty is the same as managing them for profits." In other words, focusing solely on customer loyalty does not always lead to increased profits.

However, as Brian Woolf pointed out in his critique of this article, this is a truism. The implied qualifier is that increased sales will lead to increased profits provided that incremental gains are made in a cost-effective fashion. I do not think that any customer loyalty advocate is suggesting that all expenditure aimed at building customer loyalty will have a positive ROI.

The big idea behind loyalty, as first expressed in the work of pioneers like Bain & Co's Fred Reichheld, was that loyal customers are more profitable. Keeping customers was cheaper than finding new ones and they cost less money to service.

But understanding customer preference is not easy:

• you need to understand what I buy;
• identify who I am;
• speak to me in a style of communication relevant to my lifestyle;
• offer me relevant content and meaning;
• and do this at a time and channel of my selection!

The reality of CRM and the mythical 1-2-1 marketing is that it is costly and difficult. Mass customisation remains untested outside a few models e.g. the Dell computers approach. The organisational and cultural changes required in most companies to deliver 1-2-1 are going to be more difficult than the complex IT platforms that have promised to deliver this reality.

Loyalty schemes are expensive to launch; remember that Nectar has been cited as costing £20-30 million to launch. They face customer fatigue in mature markets but are difficult to stop when the scheme becomes part of the expected customer offer. In fact, the only route out is often to focus on price discounting as the replacement benefit being offered to customers.

Technical options are multiplying alarmingly for anyone not supplying this technology and data protection concerns are increasingly becoming a concern for consumers worldwide.

Plastic card proliferation in Europe is now very high due to several decades of retailer use of this form of marketing. Share of voice is getting more and more expensive as channels to communicate expand and consumers 'switch off' to everything in which they are not emotionally interested. Payment cards, loyalty cards, shopping centre cards, retailer store cards, co-branded payment cards all proliferate. We can all now pass numerous credit checking filters and fill our wallets with huge credit lines and vast amounts of plastic. New players are emerging from different sectors and will also offer you a cafeteria-style credit card to fit your lifestyle.

The Harvard professors' article was based on research they had undertaken to verify this principle and their findings covering 16,000 customers in 4 different companies were based on the French retail market. They found a very weak correlation between loyalty and profitability. Their research had shown no evidence to suggest that loyal customers ie those which frequently repeat purchase, were necessarily cheaper to serve, less price-sensitive or particularly positive advocates for the brand. In fact, they suggested that the longer and more loyal a customer was to the brands surveyed, the more they came to expect.

These findings are very close to the work undertaken by Professor Andrew Ehrenberg at South Bank University, who has shown that loyal customers are not the most profitable. His work has clearly shown that the 80/20 principle applies; in most categories, the big spending customers are repertoire buyers and 'loyalty' per se is only relative.

In most of the big customer loyalty programmes with which I have personally been involved, the crucial importance of the high-spending, or potential high-spending customers has far greater impact on profit once the programmes start understanding their members' level of interaction with the brand. Vast numbers of loyalty currency collectors do not automatically translate into improved corporate profits: in fact it is sometimes the reverse.

In the UK, Asda (Wal-Mart) released in September 2002 details of research to suggest that plastic loyalty cards are failing to keep customers loyal and, surprise, surprise from the world's largest retailer with the greatest buying leverage, UK shoppers prefer lower prices to loyalty points. The survey was undertaken by NOP, and it indicated that 93% of shoppers suspect that loyalty cards are pushing up prices to cover their costs. Having abandoned their own loyalty card pilot in 1999 and with the launch of Nectar this was not a surprising revelation. I have no doubt that the survey was an accurate reflection of the questions asked and the audience approached. Every research study I have seen has shown that loyalty schemes do not research well with shoppers.

How then do we explain the huge and seemingly positive response to the Nectar launch and what does this confusing mix of academic and retailer driven research suggest for the future of loyalty marketing?

Across Europe, most loyalty schemes in mature markets are seeking to rationalise to capture the better economics for the sponsor on a shared platform and better earning opportunities for the consumer.

Why does loyalty still matter?

I think the answer to this question and the key to the future is that we are dealing with increasing customer expectations at a time of intense competition in retailing globally. Not all customers will have the same value to retailers and shoppers have two distinct drivers that influence their reactions to these programmes. On the rational level they will compare offers and seek the greatest value. But they are also driven by emotional factors influencing their prior experience of the brands and how they wish to reflect their own lifestyle in what they buy.

All these programmes are seeking to increase customer spend per visit, to attract new customers and to improve customer retention. Sometimes, and rather less frequently in the mature European market, they are also a weak 'me too' response from other retailers following the herd or a deliberate 'raise the stakes' tactic.

The reality of loyalty programmes is that they are perceived by retailers as a channel of communication and an incentive to customers to allow the capture of more information about them. The intention is to then use this information for better targeting of marketing offers and more effective management of their business. The better programme will deliver on these objectives. I think they are also a legacy of marketing that still seeks to retain 'control' over customers and regain the initiative. This may be a forlorn hope given the speed with which many customers are starting to feel that they are the ones in control and what they really seek are suppliers and brands who deliver against their priorities.

Recent research by the Henley Centre has indicated that consumers are demanding value as a right, even when they can afford to pay more. In the first decade of the 21^st century, we have had to adapt to less job security (and this impacts on external loyalty schemes since disloyal employees do not suddenly transform themselves into 'loyal' consumers) and more responsibility for our own pensions and education. It is hardly surprising that we are, therefore, much more demanding as consumers.

Contrasting with greater consumer power is greater centralisation of information which is leading to pressures for greater 'transparency' in consumer relationships and easier access to suppliers. Everything apart from status and time is now over-supplied and prices are trending lower. Technically we have greater ability to do more, do it better and do it faster. More for less has become the mantra of technology, and knowledge management is the new buzz word.

The consumer can no longer be treated as the passive target of a one-way street of marketing stimulus-response initiatives. Good loyalty programmes should be able to create a win-win scenario in the mind of the customer, with mutual benefit between the programme operator and the loyalty scheme member. This is why I think that we will continue to see them feature in some form and that a pure 'price only' focus will still need to be balanced.

If this is a correct conclusion, then the question is what form of loyalty programme will we see evolve from the current crop of offers? This is where I think the trend to coalition loyalty will be important.

The evolution of loyalty models is likely polarisation into both mass market coalitions and highly focused niche coalitions, built around customer lifestyles and emotional drivers. Trade-offs in terms of scheme ownership, control, costs, scale and value will continue to be made by sponsor retailers. Globally, the trend is towards coalition loyalty models. The greater power of the coalition loyalty model in terms of depth and breadth of the consumer spending will give them a massive advantage as information on customers becomes the real name of the game.

The key to delivering this for the retailers involved will be a technical platform that blends data; dialogue with customers to build trust; listening posts to facilitate the dialogue; and a rules engines that builds creative and imaginative offers to seduce members into greater engagement with the programme.

The implications for retail loyalty strategy are that dialogue with members will create a difficult to copy and permission based platform for growth. Listening to customers instead of trying to second guess their needs will be a novel experience for many companies. The new rules of the market will be that customers seek individuality and speed, are more likely to leave you and are less likely to listen.

21^st century loyalty will be built around integrated customer management: it will be based on trust; it will feature alliances and partnerships; it will be wired into the real-time world; and it will polarise.