The objective of any loyalty scheme is to establish long-term relationships with customers so they count on the programme as they would a trusted friend. If that friend – or programme – starts interacting with them superficially or ignoring them altogether, they will probably disengage, if not leave outright, without ever revealing that something is wrong.

You have to catch your customers before they reach this point, because once they are disenchanted, you will probably need a big infusion of creativity and cash to win them back. That is why it pays to look for signs that your loyalty programme is in a rut before the customer notices.

MJA Associates have identified three important trouble markers along with steps you can take now to turn your programme around.

Member participation rates are declining. A thriving loyalty scheme has steadily increasing participation rates. Although rates vary widely depending on the level of customer involvement, the size and scope of the programme and the marketing strategy of the organisation, a few ground rules apply.

New programmes should grow steadily over the first two years. A mature programme should generate enquiries at a monthly rate of 4%-5%.

The most common cause for declining participation rates is loss of creative focus on the scheme. Too often, the loyalty programme gets major support and attention from the sponsor only through the launch year, the assumption being that a successful launch signals the end of the really hard work.

Nothing could be further from the truth. The day that you decide that your scheme can be relegated to second priority is the day you plant the seeds of disenchantment in the minds of your members.

It is also common for newly launched programmes to settle in a rut of self-imposed sameness. Members repeatedly receive the same kinds of offers. Member communications repeat themselves in form and substance. Benefits begin to lose their lustre as their delivery becomes inconsistent or insincere. The relationship’s special character is belied by the homogeneous nature of all member interactions with the programme.

There is no excuse for this, and it’s easy to fix. Simply set as your goal the creation of some kind of surprise value-added offer for at least one segment of your membership base each quarter. By surprise, MJA Associates mean something different in style and substance from anything you have already done.

Of course this kind of commitment to testing new and different tactics on a continuous basis means that you will be pushing yourself harder. But that is the price of the game, and the impact is both cumulative and positive. Customers like pleasant surprises and they tend to talk about them, which generates more new members and increasing activity rates.

Return on investment has diminished. When ROI begins to slip in a loyalty programme, management’s first reaction is often cost reduction (let’s cut the value of the points!). But that is like opening a vein. Reducing programme funding may improve short-term ROI, but it only weakens your ability to recover and thrive.

The better approach to declining ROI is to tackle your benefits structure with fresh eyes and open ears. Talk to members. Ask them what they like and dislike about the scheme and what kinds of recognition and reward they wish for. Look for new benefits or variations of existing benefits that might be offered to stimulate incremental purchase behaviour.

Test carefully. The appropriate approach is with a scalpel, not a butcher’s knife.

ROI can be affected dramatically if you focus on member segments where share of customer is already moderately strong. These customers are already willing to select you over your competition. By giving them evidence of added value, you might see large gains – without having to deliver the same new benefit to the entire membership.

The Loyalty Programme’s been orphaned. Whether through attrition, reorganisation, mergers or downsizing, chances are that both the original ‘parent’ and objectives of your company’s loyalty scheme are no longer around. An alternative scenario is that the whole marketing department oversees the loyalty programme, rather than one individual person being directly responsible.

Loyalty Programmes need a corporate champion and a day-to day leader. The business stays focussed on the customers’ wants and needs and that the programme is positioned as one of the key direct contact points that the company has with the customer. The leader ensures that the scheme is directly linked with corporate and product marketing strategies and that the consequences of other marketing decisions take the loyalty programme into consideration.

The day-to-day leader of a loyalty programme needs special skills in order to manage it effectively. He or she must recognise the potential for the programme to build a dialogue with the best customers. He must be well respected within the organisation and recognised as someone who is close to the customer. And he must understand the many facets of making a scheme successful, such as linking programme to strategy, effective communications and ensuring that operating systems deliver information quickly.

One more attribute to look for in finding your programme champion: courage. Select someone who has the dedication and courage to fight for the customer.

It is all too easy to allow the loyalty scheme to settle into the broader portfolio of marketing projects, which are buffeted by the stress and strains of organisational budgets and politics. Unlike your advertising and sales promotion efforts, your loyalty programme constitutes a genuine, tangible connection to your most valuable customers. Your champion must be willing to march straight into the CEO’s office, if necessary to defend the integrity of that connection.

When all is said and done only a steadfast, courageous commitment to continuous innovation and creativity in the pursuit of delighting high value customers will keep your loyalty programme out of the ruts that can sidetrack and deplete them.

MJA Associates have taken a look at some of the biggest mistakes that can be made in a B2B Loyalty Programme:

• Over-reliance on discounts. The problem with discounting is that it almost always erodes the marketers pricing integrity. Any equity-style loyalty programme, which involves a promotional currency that converts to a genuine hard benefit, allows the marketer to avoid traditional discounting. An over-reliance on discounts wastes the opportunity to recognise and reward high-value customers while reinforcing standard pricing.
• Ineffective use of incentives. Interestingly, some B2B marketers perceive as loyalty programmes what have traditionally been incentive programmes. Whilst the two are not the same, many incentive programmes are logical opportunities for a loyalty transfusion. Traditional incentive programmes are usually reward driven and characterised by one-way communication. True B2B loyalty programmes are data-driven and characterised by sophisticated two-way communications, which isn’t to say that rewards are absent from these schemes. Instead, the relationship is the key, and rewards and benefits are configured as evidence of the value of the relationship. The dialogue between customer and marketer takes on a more prominent importance.

Managing the customer relationship is an even greater challenge in B2B programmes because the relationship is more complex, involving both an individual and a business. This complex relationship requires the right blend of hard and soft benefits. Hard benefits are tricky in a B2B programme, because they absolutely must be business related to avoid any possibility of motivating inappropriate employee purchase preference. So, creative soft benefits are all the more essential in the form of special information, special service and special access. Information is a benefit when it enhances the customers’ ability to improve their business performance. Extra dimensions of customer service are perceived as evidence that the marketer is acknowledging the customers’ special status.

All benefits in B2B programmes must directly accrue as a corporate benefit, even when they are bestowed upon individual employees. Examples would be professional training or education.

On the other hand, when a loyalty programme’s membership is primarily business owners, mixing in business-related rewards that might also be used by the owner personally is fair, acceptable and very effective.

• Inadequate database development. Two-way communication – particularly communication aimed at developing the customer database – is another often-overlooked aspect of B2B programmes. Although most companies know what customers buy, the billing database seldom has the information needed to customise relationship-building communications with customers, such as size of the customer’s business, his use for the product or service purchased and special situations based on his industry, geography or business life-cycle. Even basic address and key contact data can be sometimes missing.

Thus, benefits early in the programme need to stimulate dialogue aimed at identifying the key decision makers/influencers and knowing how to reach them in the future. Subsequent communications should expand the customer record further. Mailings should include short surveys/questionnaires. Customer service calls should include two or three extra questions designed at filling data gaps. Even personal sales calls should involve collecting specific information for the database.

As important as collecting the information, however, is using it. Communications should reflect individualised knowledge of the customer, adding relevance to the content and reflecting respect for the customer’s involvement in the programme.

Imagine a hypothetical customer who is, by any standard of measurement, an avid and active department store and speciality retail shopper. We’ll call her Jane. If you are a retailer with a store in the local ‘mall’, you can bet that Jane has been in your store. She is clearly a ‘best customer’ – she visits your main store at Bluewater an average of four times a month and spends an average of £50 per visit. Jane also spends three times that amount with your competitors. But you have never seen her. In fact, when she walks into your store, she’s invisible. And when she walks out, you have no idea that she was ever there at all.

See Jane ignore her Department Store Card

Let’s say that Jane stops at the Store A at her local shopping centre to pick up a dress as a gift for her daughter. Along the way, she sees a handbag that her mother had asked her to pick up for her. But she is fairly certain she can get it cheaper at Store B, so she leaves it behind. When she stops at the cash desk, the assistant asks her if she would like to charge the purchase to her Store A card.

‘No, Barclaycard,’ Jane says. The assistant rings up her purchase and Jane and her sister go off into the shopping centre. To Store A marketers, she is invisible. Unless she uses that Store A card, they don’t know what she buys, when she buys it, or how often she buys. Jane knows she is invisible because the mail-shots that she gets from Store A are not targeted to the buying habits of her or her husband. She only becomes visible if she chooses to do so – and Store A simply hasn’t given her a good enough reason. Jane only took a store credit card at Store A because they were offering 10% on the day she was buying her Christmas presents. She paid the account balance in full and has not used it since!

In fact, Jane sees little value in her Store A card. She received a 15% reward voucher when she opened her account, which was nice. But when she purchases anything at Store A, she still uses her ‘Barclaycard’. See Jane walk out of Store B

Now let’s say that Jane heads over to Store B to pick up that handbag for her mother. Jane spends almost as much time and money in Store B as she does in Store A; she likes the store layout and the customer service is always outstanding. When she looks for the handbag, however, she finds that they are out of stock. Jane sees that the bags had been on sale, but the display was now empty.

‘When did these bags go on sale?’ Jane asks the assistant.

‘Yesterday,’ the assistant answers. Don’t you have a Store B card? You should have received advance notice.’

‘You mean that you are penalising me for not having your store card?’ Jane asks. ‘Look, I’m a good customer. I probably spend a couple of thousand pounds a year in this store. But because I don’t use your store card, I get left out. Now I am going to have to walk all the way back to Store A and pick up the handbag there. I feel like I’m invisible to you guys.’ These examples beg a question: are Store A and Store B retailers, or are they card marketers? It’s difficult to succeed simultaneously in both agendas. Card brands have become so powerful that, in order to win the battle of share of wallet, they have been forced to add significant reward value to their cards. As a result, the Card business has developed huge muscle behind a shrinking list of monster brands.

So the rules have changed. Retailers who continue to fight for loyal customers by requiring them to use a store credit card are ignoring reality: many shoppers would rather be invisible than give up their frequent flyer miles or their Nectar points, and many others still prefer to pay with cash and cheques.

Offer a multi-tender loyalty programme, and previously invisible customers will magically reveal themselves, inviting you to engage with them.

With cultural needs somewhat satisfied, a bevy of High Street merchants are on the “shopping” list including Burberry’s, Fortnum & Mason, Harrods and Marks & Spencer, to name a few.

In these challenging economic times, one might assume that these big names might be viewed almost as touristic destinations with discounters being given the nod for actual purchases. That is not necessarily the case as the retail phenomena in the UK seems to favour the high and low ends of the market with only those mired in the middle encountering difficulty.

The grocery price war underway seems to reflect the trend as Asda; Wal-Mart’s European subsidiary is prospering while perennial market leader Tesco is seeking to re-establish its position by offering double points for the first time ever as part of its Club Card rewards program.

There appears to be a significant change in the UK Retail Fashion Market. Similar to the grocery retail sector, consumers are seeking bargains and the trend is for the low-price retailers (e.g. Primark, George at Asda, H&M) to enjoy growth in revenues, the middle-market retailers (e.g. Next, M&S) suffering a decline in sales whilst the high-end market is performing well with the likes of Hackett, Hugo Boss and Harrods showing significant results.

Over the past decade one of the most enduring trends on the UK high street has been price deflation. Fast and inexpensive fashion has become a fact of life for consumers used to being able to grab the latest looks at throwaway prices.

The rise of value fashion has seen some of the biggest success stories of recent years with the likes of Primark, New Look and the supermarkets establishing cut-price clothing offers. Retailers have been working with ever tighter margins to keep pace with the intense competition on price. But the global financial crisis has skewed a lot of the economic dynamics that made the rise of the value retailer possible, and now manufacturers, brands, retailers and consumers are all feeling an unprecedented pressure on finances.

The dramatic changes in the value of currencies, most notably the weakness of the sterling against the dollar and the euro, have meant that in the space of just a few months, suppliers and retailers have seen the cost of buying product (retailers typically buy in dollars from the Far East) rise significantly. In this sector, Harrods’ posted surprisingly strong results as the Knightsbridge retailer owned by Mohamed Al Fayed said sales grew by 9% to hit a record £751.7m in the year to January 31. For Loyalty Marketers, the news was good as well as the retailer commented that “take up of its loyalty card scheme had been strong over the period“.

Customer centric marketing combined with capital expenditure of £24m during the year were just a few aspects of Harrods’ secret to success. The fact that Harrod’s credits the loyalty scheme as a contributor to its recent success tells us that Loyalty works among affluent shoppers as well as the mid-market. There is a similar case in the US, as Niemen Marcus continues to promote its “In Circle” program, generally rated as one of the best structured in the North American retail sector.

In other retail loyalty news, Debenhams withdrew from the Nectar Coalition Programme in 2008 as the relationship had failed to deliver an acceptable ROI for the leading UK department store. I would suggest that Debenhams may have enjoyed greater success from the Nectar relationship if they had focused their Loyalty activities on Nectar rather than confusing customers by also offering their own Store Card Programme.

Nectar has now recruited House of Fraser and Next as new partners although points are only earned for online purchases. Marks and Spencer also operate a Loyalty scheme for their private label cardholders but also fail to recognise and thank other ‘loyal’ customers that prefer to pay cash or use another form of payment. Across Europe there are numerous Fashion Retailer Storecard programmes offering rewards for consumers using high APR (average 19.9%) cards but seemingly ignoring the ‘invisible customer’ who may be a more valuable consumer.

It seems that Loyalty works with the affluent sector as in any other but, unlike the grocery market; Fashion Retailers are failing to create effective Customer Management strategies and only use Loyalty as a promotional tactic.

Apart from evaluating the platform capabilities based on a detailed benchmarking checklist, Atkin also reviews and scores other features and functionalities, including front-end and back-end links, loyalty programme management tools, quality assurance processes, and any relevant accreditations that may be required for the vertical market in which the provider operates.

Among his many findings, the platforms examined come from all parts of the world, and their original location has generally been found to reflect the maturity of the customer loyalty market in each region.

At the same time, apart from focusing on the technical aspects of each solution, Atkin also benchmarks the marketing capabilities of providers that are aiming to develop in other geographical regions – for example, as a SaaS (software as a service) vendor or ASP (application service provider).

The standard capabilities provided by all platforms include a points engine (to increment and decrement the currency of a programme), and some have limited bonussing capabilities.

The majority of the benchmarked platforms are only suitable for single-operator programmes and would require significant enhancement to meet the necessary requirements of a multi-partner loyalty scheme.

All platforms have links to member web sites, fulfilment houses, and are mainly database agnostic (i.e. most common database engines can be used), and most can link to most EPOS and terminal hardware.

One of the most significant weaknesses in most of the platforms is the ability to collect lifestyle data, as most can collect only transactional data. However, if marketers do not track members’ lifestyle changes (e.g. getting married, having children, moving house, and so on) they cannot effectively build enduring customer relationships and therefore strong loyalty. This lack of data collection creates weak member data files and does not enable loyalty practitioners to identify both ‘best customers’ and ‘best potential customers’, and to focus their marketing spending accordingly.

Another major weakness in 80% of the platforms benchmarked is the lack of technical documentation of the platform capabilities, with very few having an enhancement or upgrade schedule to help ensure that the software is kept up to date (i.e. so-called ‘future-proofing’). In fact, many of the retailer-focused loyalty platforms had not been upgraded since their original programme launch, or they were very expensive to enhance due to legacy hardware and software issues. Many of these platforms are not very scalable, and represent a significant part of the operating cost of a loyalty scheme.

Only a handful of the benchmarked platforms had the functionality needed for operating a coalition loyalty programme. For example, managing partners and points is crucial for this type of programme because points are earned and burned at various costs and rates, and the system often needs to account for pre-pay and post-pay arrangements. It is also important that points are managed by date of issuance and redemption in order to control the liability of both the sponsor and the partners. Very few of the platforms have FIFO (first in, first out) points management.

But there are some clear winners among the forty platforms examined. Some of the best have auction capabilities, and several can manage highly sophisticated bonussing based on time, date, member, tier, location, product, payment type, and partner, and two of the platforms had clever applications that enable programme managers to set-up complicated bonus offers via a simple ‘point and click’ process.

In particular, one platform enables the operator to determine the bonus objective and measure the performance of the offer in real-time. Some of the platforms are available for licencing elsewhere, although most US-based providers seem reluctant to allow their software to be hosted outside the US, and some provide full support services for external programme solution providers.

“There are several that I would call real ‘loyalty applications’ that are suitable to work with loyalty software to add value by providing data analytics services with dashboards for remote programme management,” explained Atkin. “But this benchmark clearly shows that the licencing of developed software is still far cheaper than trying to build from scratch or even improve existing legacy software.”

Licenced software is usually based on a fixed ‘cost per active member, per annum’ basis, which enables programme operators to budget for their programme more effectively. However, in recent months, Atkin has also encountered several vendors offering solutions on a performance-based agreement, whereby member fees are increased if the programme creates incremental growth.

The benchmark study provides scoring against MJA’s ‘Best Practices Checklist’, complete with recommendations and a weighted spreadsheet to help vendors grade the importance of various platform capabilities (e.g. partner and points management options are more important for a multi-partner programme than for a standalone loyalty scheme).

That said, discounting is one of the preferred tools of retailers and grocers. The Wall Street Journal reported that leading UK grocers have taken to slashing prices, offering discounts, and launching new private label brands to vie for basket share.

The approach is short of subtle as Asda, Morrisons, Sainsbury’s & Tescoare creating advertising campaigns highlighting price advantages and a slew of discounts.

The price wars were triggered by the economic meltdown started one year ago and each brand that formerly differentiated itself by a unique characteristic (Asda “low prices”, Morrison’s “low priced deli”, Sainsbury’s “good food”, Tesco “broad choice”) now seem to be merging at a rapid pace.

As example, Sainsbury’s renamed a familiar advertising campaign from “Taste the Difference” to “Spot the Difference” and has a celebrity chef instructing on how to “feed your family for a fiver”.

The introduction of new privately branded products is driven by gross margins typically 10% higher than regular brands. The chain that can convince the public that they offer highest quality and best price while looking out for the families’ interest will presumably break from the pack. Waitrose, a traditionally up-market retail grocery chain, have also introduced an ‘own label’ range to retain consumers’ loyalty.

There is an element of Consumer Fatigue in all of this ‘price-war’ activity with each Supermarket claiming to have many prices lower that its competitor. Consumers are confused and research indicates that all retailers are doing well during this ‘credit-crunch’ as many families are eating at home more often.

Fascinating here is that ALL of the competitors seem to be benefiting from price wars. Of those reporting, Morrison’s led with an 8.2% same store sale increase in the latest quarter while Sainsbury’s chalked up a 7.8% gain and Tesco’s 4.3%. In the US, Kroger posted a 13% increase in the most recent period. Tesco, however, has seen a decline in its share value (down 7.4p to 364.5p) and remains bottom of the UK supermarket league table in terms of underlying sales.
Kroger is of interest as they are the second largest food retailer in the U.S. following Walmart and are using DunnHumby, a data analytics firm owned by Tesco to leverage its loyalty program data and enable discounts and special offers choreographed by historical purchase data and customer preference.

Where the current price war will end is uncertain and experts including Darrell Rigby, Head of Global Retail Practice at Bain & Co. are sounding early alarms by saying “price cuts are management heroin“. He notes “they’re addictive …. customers develop a craving for big discounts and an aversion to full prices. Companies get used to the boost in volume and risk a backlash when they try to raise prices later.”

For Asda, its almost business as usual. A subsidiary of Walmart, the company subscribes to the “Always Lowest Prices” motto. For market leaders Tescos (30.8% market share) and Sainsbury’s (16%), pure price competition is new ground.

The question, particularly for Tesco is whether they are progressively eroding the equity they have built into the Club Card over the past decade and how they can change course in time to ensure that this will not, in fact, be the case.

STOP PRESS !!!

Tesco is determined to get back onto the front foot and is doubling Clubcard Reward Points. Members will now receive 2 points for every £1 spent, meaning that a family spending £100 a week will receive £104 a year in rewards. This is the biggest change made to Clubcardsince its launch 14 years ago.

Analysts suggest that, on one level, this strategy could be put down to the fact that Tesco has performed well for a decade, whereas others are recovery plays or have much more patchy records. Also, with a Tesco on almost every corner, there is an element of saturation and some stores are bound to cannibalise sales of others.

The increase in points funding will cost Tesco £400m but their track record suggests this move has been properly planned and is not a knee-jerk reaction to rivals.

To do all this, however, they must be used with proper upfront strategy and ongoing testing and refinement.

For example, to provide the starting point in programme design, marketers should do a proper initial analysis. The customer base should be split into at least four segments based on the company’s current share of customers’ purchases in their category and their relative category consumption.

The four major segments include:

• LoLows: low current share, low-consumption customers. The LoLows don’t spend much money with your business now, are not big spenders in the category with your competitors and, for whatever reason, lack the capacity to increase consumption in your category in the future.
• HiLows: high current share, low-consumption customers. HiLows are generally quite loyal and can be reasonably profitable, but they spend comparatively little in the category. While they often represent in the aggregate an important base of business, they have little growth potential.
• LowHighs: low current share, high-consumption customers. LowHighs spend comparatively little with your company but spend significantly more with the competition. If you consider only what they spend with your company now, they may look like HiLows, but in the larger context, they emerge as the real growth opportunity.
• HiHighs: high customer share, high-consumption customers. HiHighs are the crown jewels – your best customers – and all your competitors are scheming to take them away. They are unusually loyal, but with many HiHighs, there may be little room for improving spend.

Getting to that fundamental first level of customer value segmentation requires a little work, adding dialogue where the data leaves off. Most companies with a database loyalty marketing programme segments its customer file using member purchase data that provides only a two-dimensional perspective. Understanding potential value of each segment requires gathering of data directly from consumers via surveys or by obtaining competitive purchase data from other sources. Surveys or questionnaires are the preferred approach because they are voluntary and provide an opportunity for positive customer interaction.

Once segmented, a common error in loyalty marketing programme planning is overlooking the value of varying combinations of rewards and recognition. You need to approach each of the four initial customer value segments differently to maximise programme effectiveness, and as each segment is further refined, you can vary your approaches even more. Blending hard and soft benefits – reward and recognition – in various ways creates the most compelling value proposition to each segment at the lowest cost.

The following suggestions outline a simple strategic approach to applying variable benefits to address the four value segments:

• Starve the LoLows: If you can avoid recruiting them to your loyalty programme from the beginning, do so. In many cases, however, until they have joined the programme, you have no way of assessing their value. To prevent LoLows from consuming a disproportionate share of programme resources, establish a low base offering of rewards and recognition, but promise rich returns for the true best customers. LoLows have little real opportunity to advance beyond basic membership status and soon lose interest, and their inactivity allows you to reduce or eliminate communication with them. The goal is to starve them out of the loyalty programme quietly but effectively.
• Tickle the HiLows: The objective here is low-cost maintenance. Communicate often enough to make the customer feel special, and use occasional bonus offers to supplement the base-earning rate for rewards. Remember, there’s little opportunity to grow these customers’ purchases, so offer only enough benefits to sustain current activity.
• Chase the LowHighs: This is where the big growth opportunities are, but to overcome loyalty to competitors, you have to offer significant added value. Use frequent bonus points, always tied to increasing purchase levels or frequency and designed to produce reward accumulation rates of double or triple the base rate. Being recognised with a special status is also important to LowHighs, but the best approach is to tantalise this segment. Let them sample the advantages of special status while making them reach to achieve and maintain it.
• Stroke the HiHighs: Surprisingly, it is easy to overspend on this segment. HiHighs have reached a level of loyalty and commitment that requires comparatively less reward, but significant recognition. They know they are important, and they are looking for constant and meaningful evidence that you know how important they are. A fixed status bonus rate that rewards them above base on every purchase can replace the lavish bonusing used with the LoHighs. Offer special deals, access, information, unique identifiers and personalised service to keep the HiHighs happy.

Marketeers are often concerned about whether these variable approaches can alienate some customers when they realise they are getting less than others. In practice, however, you can usually turn customer envy into a positive by tapping into the aspirations that variable benefits engender. Tiering, or published membership levels that relate benefits to status achieved through purchase behaviour, is the best way to achieve that. Customers understand that simple equation.

The appropriate combination of recognition and reward has always been fundamental to successful loyalty marketing programmes. By applying the right blend of benefits – varied according to the differing needs and relative value of different customer segments and continually revitalised by creativity – marketers will find loyalty marketing to be among their most powerful and indispensable database marketing tools.