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USING LOYALTY MANAGEMENT TO INCREASE CUSTOMER MINDSHARE
The recent global downturn in the market has every company small or big look
at ways to cut spending and seek fresh ideas to increase revenue and
profitability. There is an ever-increasing competition to cut the time from
product conception to product launch. With the rapid commercialization of
technology, it has become easier for competitors to launch new products with
similar features and at cheaper prices. Companies cannot solely rely on the
advantages they get by being the first mover in the marketplace. Companies
are focusing more and more on providing the best services to their most
profitable customers and retaining the existing customer base. The lifetime
value of a customer can be considerable. Carl Sewell the owner of a chain of
auto retailers in the USA calculates that the lifetime value of a lifelong
customer can be as high as $332,000. Sewell competes on the superior quality
of the service that he provides, the best way to develop loyalty in customers in
the long-term. The focus is clearly shifting from selling based on specific set of
features in the product line to enhancing the Customer Experience and the
ability of an organization to gain bigger share of Customer’s Mindshare.
WHAT IS LOYALTY MANAGEMENT
Loyalty management is an important tool in an organization’s arsenal to help
retain its customer base. Companies use Loyalty management to build lasting
relationships with customers who contribute the most to profitability and
capture a larger share of profitable customer’s business.
Although the best loyalty programs are based upon delivering superior value
to the customer through the products offered, customer service and value-
added marketing communications, most programs start out by offering points
for purchases that can be exchanged for rewards, to build an interactive
relationship with the target customer. This facilitates the collection of customer
information that can be leveraged to improve the company’s basic value
proposition - better products, better customer service and more value-adding
marketing communications at lower prices. Going back to 70s and 80s when
the Airline Deregulation Act was signed into law, Airline Carriers started to
think about brand loyalty. American Airlines became the first airline to launch
a computerized Frequent Flyer Program in 1981. By 1990, every airline worth
its salt offered its customers a Frequent Flyer Program. Frequent Flyer
Program became a commodity in the Airlines industry and very few airlines
were using it as a strategic differentiator.
Fast forward to 21st century, there is a clear shift happening to Loyalty
programs which are multi-channel, provide 360 degrees view of the customer
and respond to customer needs in real time. Companies today want to be able
to identify the performance of customer relationships from multiple dimensions
and be able to track and analyze them in near real-time. Once the customers
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that contribute the biggest share of profits are recognized, these customers
need to be recognized and rewarded in real time. Aeroplan is a good example
of a company which started of as an internal Frequent Flyer Program for Air
Canada in 1984 but later spun off as an independent Loyalty marketing
company managing Loyalty Programs for other companies such as Esso, Home
Hardware, Sobeys, Thrifty foods and others. The company is worth more than
$3B as standalone entity. Aeroplan has taken multiple initiatives like Customer
Profitability Model (CPM) that provide a member centric view of the customer
and the value that every individual customer brings to Loyalty Program that
Aeroplan manages.
A good loyalty program buys information and earns loyalty; a poor one tries to
buy loyalty. Research has shown most retail customers show ‘polygamous
loyalty’ - where they share their dollars spent with a number of companies’
brands. Today, people in general are registered with 14 loyalty programs and
have 6 or more active loyalty cards in their wallet. A typical frequent traveler
has between 3 and 4 Frequent Flyer Program cards in her wallet.
Companies that have successfully implemented Loyalty management
programs have long realized that developing a detailed understanding of what
drives target customers’ buying behavior is the one of the key drivers in a
successful loyalty program. Only when the needs, wants and opinions of the
customer are fully understood can the program’s value proposition be decided
and the other pieces of the loyalty program jigsaw built around it. A case in
point is the example of Frequent Flyer Program offered by Lufthansa and
British Airways.
Lufthansa research suggests that its Miles & More Frequent Flyer Program is
only the 10th most important flight selection decision factor for business
travelers. The failure of its FFP to significantly alter flying behavior is
supported by the discovery that non-members have a higher satisfaction
rating with the airline than Miles & More members.
In complete contrast, British Airways Executive Club in partnership with Air
Miles has identified the behaviors that lead to loyalty to the airline and has
used this information to micro-segment its customer base. It then uses a
combination of personal service, highly targeted flight promotions and reward
selection to develop the ‘multi-collector-redeemer’ behavior characteristic of
its most loyal customers
WHY GO IN FOR LOYALTY MANAGEMENT
Although a loyalty program can have a big impact on the profitability of target
customers, it is not appropriate in all market situations.
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Situations when a loyalty program will help an organization
• When loyalty program directly supports the company’s value proposition
for target customers
• When relationship building adds to perceived value - when customers want
a relationship
• When the target customer’s lifetime value is high
• When customer retention costs are less than acquisition costs
Situations when a loyalty program will not help
• When target customers buy many brands in the category - not cost
effective
• When brands imitate each other’s strategies - any moves will be quickly
neutralized by competitors
• When the product-in-use experience is key - the experience is key not the
factors that loyalty program can influence
• When technology changes lead to better price or performance - better
value is the key
• When the brand is highly differentiated - fashion a key motivator
• When natural customer retention is low - customer behavior is usually too
hard to change
STRATEGIC GOALS FOR RUNNING A LOYALTY PROGRAM
Most loyalty programs concentrate on achieving one or more of the following
publicly acknowledged goals
• To maintain sales, margins and profits with the current customer base in
the face of increasing competition
• To increase the loyalty and lifetime value of current customers in the face
of increasing customer choice
• To induce current customers to cross-buy other products
• To maintain market share with the current customer base in the face of
increasing competition
Usually, these goals are references to particular target customer groups on the
basis that only a small percentage of customers (those targeted) deliver the
majority of profits, and that these customers can be ‘bound’ to the company
through the loyalty programs.
In highly competitive markets, the decision to launch a loyalty program is
often driven by threats of competitive parity as much as anything else, the
program having other underlying goals
• To pre-empt a competitor from introducing a similar loyalty scheme
• To differentiate a brand to avoid parity
• To pre-empt the entry of a new brand
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PRINCIPLES OF A GOOD LOYALTY PROGRAM
A good customer loyalty program works by improving the long-term
relationship between the organization and its target customers, normally those
who spend the most and are the most loyal, so that both their spend and
loyalty are increased. Although long-term promotions also aim to increase the
customer’s spend and loyalty, they differ from loyalty programs in that they
cannot realistically expect to influence the customer’s behavior once the
promotion has ended. To be interesting to the target customer, the loyalty
program must offer interesting rewards (a mixture of rebates, rewards and
recognition) that are achievable by the customer within their normal buying
behavior be easy to do business with, and offer good two-way channels of
communication. To be interesting to the company, the loyalty program must
be affordable with limited long-term liability, be flexible enough to cope with
changes in the customer’s behavior or in the competitive market, and it must
be able to terminate the program without incurring heavy closure costs or
alienating the customer.
The real value created by a loyalty program is the data about the customer
and their buying habits that the program provides. This is the key enabler
when developing a customer information data warehouse with which to run
customer-specific marketing campaigns for target customers
A loyalty program is a powerful marketing instrument, the introduction of
which rarely goes without being rapidly copied. The program should therefore
allow the company to leverage an inherent advantage that cannot easily be
copied or improved upon by its competitors. In competitive markets, this is
where most undifferentiated loyalty programs fail, becoming expensive
operating costs that need to be carried by all players in the market
IMPLEMENTING A LOYALTY PROGRAM
When it comes to implementing a Loyalty Management Program, the debate
about whether to outsource the company’s Loyalty program is a hot topic.
Because of the strategic nature of the Loyalty program, most companies focus
on designing and managing the program in-house. There are pieces of the
program that are highly standardized like snail/email management which are
being outsourced. However, the design and execution of the Loyalty Program
are by and large being managed by the companied internally.
SAP – a leading software vendor in the CRM space, offers the best of the breed
Loyalty management applications. The applications offered by SAP not only
offer strong Loyalty Management functionality but also provide integration with
Marketing, Sales and Service functionalities, Customer data management, E-
commerce offering, Backend integration and provide open interfaces to
connect to the Loyalty Partner’s system landscape. The applications also
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provide real time analytics tools to gain thorough analysis of customer profile,
dynamic preferences, and cost and margin information that provides a solid
foundation to build and retain the right customer relationships. SAP launched
their Loyalty Management offering with SAP CRM 7.0 solution in Q4’ 2008.
The key building blocks of Loyalty Management Program are
Program Management
• Program Design which includes designing a tier management scheme to
reward members for their loyalty and a points management scheme to
influence and reward member interactions with the program
• Program Partner Setup which includes defining the partners and who would
be part of the Program and defining the rules of engagement for the
partner e.g. multi partner joint promotions and cost sharing agreements
• Tier Management which includes defining tier levels, assigning members to
tier levels and defining rules to upgrade/downgrade/retain tier levels
• Point Management which includes managing qualifying and redeemable
points in the program and point expiration rules based on flexible attributes
Reward Rule Management
• Rule Modeling includes defining of rules for different tier level assignment,
point assignment and rule scheduling.
• Campaign Eligibility and Enrollment which includes the eligibility to execute
campaigns for a specific set of loyalty members
• Seamless integration of reward rules between the company’s customers
and its partners
Membership Management
• Membership type and Registration for both individuals and Organizations in
the Loyalty Program and definition of individual, joint or shared
memberships.
• Member Tier Management which includes assignment of members to
multiple Tiers and movement across tiers
• Member Activities which includes managing the changes to member profiles
based on loyalty point earnings / redemptions and Tier changes
• Member Profile Maintenance which includes dashboard for each member’s
profile and activity reports
• Point Account Maintenance which includes both qualifying and redeemable
point maintenance and related tier determination
• Basic Membership Card Handling which includes the financial data related
to the membership profile and linkage to external card service providers
Processing / Loyalty Transaction Engine
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• Processes a loyalty member’s accrual and redemption transactions in batch
or real-time
• Validates transactions for data adequacy, duplication and accuracy
• Determines member eligibility and calculates the number of points by point
type that a member should earn
• Determines eligibility for tier upgrades and downgrades and effects tier
changes based on tier assessment model
• Determines member eligibility and calculates redemption price for
redemption of products and services. Supports multiple redemption pricing
options multiple currencies, and dynamic redemption pricing
• Expires points and vouchers based upon validity
Multi Channel Integration
• Sales Order Processing to update and revise change in member point
earnings/redemption, tier changes etc
• Marketing integration to enroll loyalty members in ongoing promotions and
campaign and provide the ability to earn rewards based on these
promotions
• Web channel for customers to register for membership, view a dashboard
of membership activities, order products/services and run reports on
demand
• Customer Interaction Center integration by offering the contact center
agents to service the needs of the members of loyalty program by enrolling
members, creating member transactions, enrolling members in promotions,
processing member orders and responding to service requests
Analytics
• Dashboards that provide loyalty members with access to reports related to
recent transactions, tier levels, point earnings/ redemptions
• Ability to provide a 360 degrees view of the customer by capturing and
analyzing information from multiple channels that the members uses, sales
orders history and profitability to the organization
• Define and measure Key Performance Indicators (KPIs) e.g. net revenue
per customer, cost per member etc that provide better insights about
customer’s behavior and results in business’s profitability
• Ability to analyze the loyalty campaigns to measure the performance based
on pre-defined Key Performance Indicators (KPIs)
Technology Infrastructure
• Service Oriented Architecture based infrastructure that allows integration
with the partner’s technology infrastructure using open standard APIs
• Real-time analytics tools that provide the most updated information to
loyalty members, loyalty program partners and loyalty program owners
• Harmonized flow of customer, partner and product data across all channels
and the partner ecosystem
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The battle to get a share of the customer’s wallet will always be there – boom
or bust. As history tells us, the current recession like many others in the past
will pass and we will have positive growth in the economy. When the economy
rebounds, the companies that would do well will be the companies who have
taken advantage of the downturn to focus their energies and efforts to create
a lasting Customer Experience and gained a bigger share of the
Customer’s Mindshare. The key to thriving in the 21st century is not only to
understand and serve the customer’s needs and wants but also to turn your
customers into Loyal Fans by providing customer delight in everything that
you do.
Author: Vineet Pahuja