It seems like nearly every retailer of any size is offering a scheme of some sort or another these days. You’d think then that there must be significant benefits to a retailer from having a scheme in place. According to a survey recently conducted by TRA, retailers are of the opinion that this is the case. They stated that their schemes were delivering benefits such as changes in customer behaviour, higher profits and better customer retention.
The reality, however, seems quite different. According to an article by Andrew Lewis in the current issue of New Zealand Marketing magazine, all the research strongly disagrees with this assessment. Most significantly a 2013 study from McKinsey showed that businesses with loyalty schemes experienced the same or slower growth compared to companies without them.
This is very surprising to a lot of people but it’s hard to see why. A typical level of generosity for a loyalty scheme (the percentage of every dollar that a customer can get back as a reward) is between 0.5 percent and 2 percent of spend. When was the last time you took a special trip to the shops for a 1 percent off Christmas sale? Why are we so surprised, then, that loyalty schemes don’t return positively on their investment?
So if these schemes that we’ve all invested so heavily in don’t deliver enough behaviour change to justify their cost, how can we get a return on this investment? In one word, data. The most important product of a loyalty scheme is the data that it creates and the value comes from using that data in two ways: personalised direct communications and insight-driven decision making.
Fully leveraging the data for personalised communications means tailoring every aspect of the communication to the customer. Not just the audience but the offer, the message, the creative and the timing as well. Tesco, for example, send 15 million mailings to customers every quarter in the United Kingdom, most of which are totally unique to the customer.
Probably the biggest opportunity for loyalty scheme data, though, is in using it for insight-driven decision making. How many decisions are made today around your organisation without the benefit of real numbers and hard facts? These days, every business wants to be customer-centric but without good data and analytics about what customers want, this isn’t really possible beyond just lip service. Data from a loyalty scheme can support decisions right across the business. It can identify price sensitive customers in order to better direct price investment; it can measure the effectiveness of promotions and define an optimal promotions plan; it can even inform marketing strategy and then measure the effectiveness of those marketing efforts.
Assessing the value generated for a supermarket client running a successful loyalty scheme, we found that the direct effect that the scheme mechanic had on customer behaviour barely covered the costs of the scheme, the personalised communications program delivered significant value but the biggest benefit and the one with the highest potential for future value came from the insight-driven decision making. The bottom line is – if you have a loyalty scheme and you’re not using the data for personalised communications and insight-driven decision making then you’re leaving value on the table – and in all likelihood, losing money on your scheme.