Once upon a time…
Remember the friendly neighborhood grocer of yore? He knew each one of his customers by name and he knew just what they bought. He would fill up your basket with just the right things while he chatted with you about work and kids and their school. The weekly grocery shopping was a pleasant experience and never felt like a chore. Whatever happened to him? Well, as the years went by, the neighborhood grew, so did his clientele and with it grew his business. From a small shop it became a multi-aisle departmental store. He needed more people to manage his business, he needed more space and better organization. And that's how mom-and-pop establishments gave way to organized, professionally managed big retail chains. With the growth in the Consumer Packaged Goods (CPG) industry and organized retail sector, newer products flooded the market. Deciding on what to buy was getting complicated. Grocery shopping was progressively becoming an impersonal experience, it was becoming a chore.
Growing up…
With so many retail stores and products to choose from, the average consumer was finding it difficult to lock in on his buying pattern. At the same time, the retail stores were struggling to create a customer base and provide them with personalized service. It was hard to get the customer return to them, harder still to know what he would be looking for. Stocking everything was a logistical impossibility. Enter the Loyalty Program. The loyalty program was not a new concept. A lot of services based industries were regularly using one variant of it or the other but it was the retail sector where it made most sense, after all grocery is something that everybody buys.
What is a loyalty program?
A Loyalty program, as the name suggests, is the art and science of making a customer loyal to your organization by providing him with services that would make doing business with you a rewarding experience. The goal of any loyalty program is to get 100% of the customer’s business. The objectives can be summed up in the following points -
- Increase the number of valuable shoppers
- Increase the number of loyal shoppers
- Meet the needs and desires of more shoppers
- Focus resources on achieving those goals
But how does one do that in the retail sector? Or any other consumer centric business for that matter? There are several ways a loyalty program can be implemented - some reward the customer while some offer status and exclusive membership to entice; yet others join hands to provide the customer a wider range of preferred services.
Trends and patterns
There are no fixed buckets into which each loyalty program can be fit, but more often than not, these programs display characteristics that can be slotted into one or more trends. These are not industry specific though one may suit a particular industry more than the other. Let us examine these trends at a broader level -
Rewards
Offering rewards unrelated to the company’s core products/services to loyal customers. This trend is usually followed by credit card firms who award points to the customer every time the card is used. These points in turn can be redeemed for some products or ‘gifts’. Say, if you accumulate 1000 points on your card, you can redeem it for a premium branded leather wallet. In the retail industry, there are programs that offer the customers rebates to products and services that are not directly related to the retailer. For example, the members of a retailer’s loyalty program are offered a discount at the local restaurant.
Rebates
Offering discounts or cash-back to the customer for doing more business. This is most popular in retail where customers holding the frequent shopper membership card get the products at a discounted rate. Most retailers provide the members with a plastic card that is used to identify the customer and offer a discount whenever the card is flashed.
Appreciation
Offering more of the company’s products/services to the customer as his business with the company grows. This is often the route taken by service-oriented companies like airlines, hotels and clubs. Each time you fly a particular airline, you get some reward miles. These miles can then be redeemed for additional services like upgrades to a higher class or the use of the airline’s airport lounge. This pattern is also common in the retail sector as a logical extension to the ‘Rebate’ type of program described previously. There may be different levels of membership based on the customer’s buying pattern. You may start your membership as a ‘Silver’ member and move up to ‘Gold’ once you have spend a certain amount. This elevation in status may bring with it higher reward points on each purchase, higher discounts, or dedicated check out counters.
Partnership
Several companies joining hands to offer a bouquet of services/products to the customer. Most of the airline companies have a tie-up with hotels and car rental companies. When the customer buys the services of one, the award points accrued thus can be redeemed against the services of another. For example, the customer could use his frequent flier miles to book a room in an affiliated hotel. In retail, a sub-variant of this is seen as several companies joining hands to offer a variety of products under one roof. Its not common to see a coffee shop, a bakery, a fast food joint, a pharmacy or a photo shop within the premises of a retailer. This makes it convenient for the shopper to get all his needs at one place.
Coalition
Several companies sharing their databases and offering a common set of services to the customer. This is a variant of the ‘Partnership’ type of program, but here the services provided is mostly of one kind. Again, lets take the example of the airlines industry. Several airlines can come together and offer a single frequent flier program wherein the customer gets rewarded for flying any of the participating airlines.
Challenges and pitfalls - Do loyalty programs really work?
As we just saw, there are several ways of instituting a loyalty program that mutually benefits all the parties involved. But do these really work?
The success of a loyalty program depends upon the type of program chosen and the way it is implemented. There is no ‘one size fits all’ solution here. Airlines loyalty programs have generally been quite successful. The reason for this is that the rewards are generally substantial and instantly gratifying. A customer may choose to fly only a particular airline as the points he accumulates would lead to bigger rewards like first class upgrades. Similarly, the customer may prefer to use one credit card over the others as it offers higher reward points. But when it comes to the retail sector, things differ a bit. Almost all big retailers have implemented a loyalty program (A Gartner analysis reveals that each year companies spend around $1.5 billion on loyalty programs in US alone) but the nature of these programs are pretty much the same. There is hardly any distinguishing factor between the one program and the other. Added to this is the fact that each neighborhood would have more than one retailer and each retailer would carry almost the same product mix. Given such a situation, the customer can hardly see any benefit of opting for any particular program over the others. A customer would typically hold loyalty cards for more than one retailer (According to Jupiter Research, 75% of the consumers in US have at least one loyalty card, one-third of these have two or more) and in these cases, the decision usually falls on factors other than the lure of the rewards (such as proximity of the store). Thus the customer’s patronage randomly flickers from retailer to retailer without giving any the benefit of the loyalty program to any one retailer. The customer, of course, is still benefiting as he is getting his rewards for the money he spends.
In the face of intense competition, the retailer needs to make his loyalty program stand above the crowd and for that he would need to move from the conventional ‘rewards and rebate’ strategy. He has to make shopping at his store a unique and richer experience in order to draw the customer back in. He needs to understand his customer. Remember our old grocer? People used to go to him because he knew exactly what they needed.
So, does that mean that loyalty programs are not worth it? Far from that, instituting such a program and offering discounts is only a small part of the big picture. It helps the retailer identify the customer and in due course of time, collect enough data to understand the customer’s buying pattern and design offers targeting a specific customer or a segment of customers. Understanding the customers’ buying pattern may also help the retailer choose the optimal product mix and the correct display strategy.
In addition, offering value added services such as the ones described in the ‘Partnership’ type of loyalty programs would also attract the customers who want to save time and effort of going to multiple places to get their things done. Also, adding facilities such as a play - pens that take care of children as the parents did their shopping may draw customers with young ones.
In the end...
Loyalty programs are not magic wands that would bring the crowds thronging to the stores but they can certainly go a long way in optimizing the business according to the customer’s needs. This cannot be done overnight or even over a few months. It needs a patient and diligent effort to gather the data, understand it and take appropriate steps. In due course of time, this effort is bound to yield fruits.
