Loyalty card programs today

It is a common fact that it costs ten times as much to attract new customers than to retain old ones (Reicheld and Sasser, 1990). Through this vital statistic, creating relationships with customers has become a widespread phenomenon in the retail industry. Relationship marketing is growing in importance, with companies trying to maintain valuable relationships with their customers to sustain loyalty and furthermore profitability (Reicheld and Sasser Jr, 1990). James Christensen, CEO of Ernex, a loyalty solutions company, states that there's only one way for retailers to create a relationship with their customers. They need to get the customer to say who they are, and loyalty programs do this (Zarem, 2002).

Everywhere in retail today, loyalty programs and more specifically, loyalty cards are in abundance. Privilege cards, frequent shopper cards, frequent flier points are all around the consumer giving them that incentive to come and shop at their particular store and keep coming back. In fact they are so frequent now, that some analysts are stating that the loyalty card market has reached saturation point (Ninness, 2002). David Chalke, of AustraliaSCAN, a researcher of population attitudes believed loyalty schemes were losing their lustre. "They've really had their day. The market is saturated with the things and people are seeing little value in them. People have so many loyalty cards they are beginning to forget where they must use it (Petrys, 2002).

Support for this claim is also in Ireland, where collecting free stamps as part-payment towards products such as chine or furniture remains a winner, despite a fierce challenge from the loyalty-card corner. Even four or five years ago, when loyalty cards were everywhere in Ireland, having done our homework, in other words some pretty in-depth consumer research, we were told loud and clear that consumer attached great value to our loyalty promotions (McCaffrey, 2002). Ms Fitzpatrick, from Supervalu supermarkets in Ireland, argues that no retailer has thus far made a success of loyalty cards, a claim that received some support recently when Dunnes decided to withdraw its card from the Northern Irish market. The ultimate proof that loyalty cards do not create loyal shoppers, comes from the fact that the people who do use these cards frequently don't just have one loyalty card, they have every single one of them (McCaffrey, 2002).

With so many cards in circulation, it is necessary to ask how much value retailers add with these cards. Too often, it appears that these loyalty schemes are viewed from a supply perspective only, the cards representing a way of collecting customer data and enabling more closely targeted marketing programmes to be developed (Through the Loop, 1998). Many companies in Australia and around the world now have to rethink their strategies about loyalty cards and ask if they are worthwhile and beneficial to the company. An example in the Australian industry is that of Shell, who have just recently decided that consumers will lose the power to earn Fly buys points when buying petrol from next month. It is understood that the benefit will be scrapped because some firms have complained employees have driven out of their way to find Shell outlets offering Fly Buys points (Collier, 2002). The latest points crackdown follows a shake-up of several loyalty programs in recent months. National Australia Bank's plans to cut frequent flyer points value for 150,000 Gold Rewards credit card users sparked outrage in May 2002 (Collier, 2002).

Ultimately, for success in loyalty card marketing, a retailer must be able to get the consumer to activate the loyalty card and frequently use it, to ensure that the card scheme is attributing to increasing turnover and profitability (KPMG, 2001). But how do you get the consumer to have a greater rate of activation with their loyalty cards? While retailers have been successful in stimulating usage with their frequent shopper cards, retailers and their manufacturer partners have to date been unsuccessful in generating the true benefits of a loyalty card (Tomei and Hausfater, 1999). Retailers not only have to see what the true value of applying a loyalty card scheme is for them, but also see it from the consumers view. What is in it for them? Retailers have yet to truly understand what is the true value of a consumer wanting to use the loyalty card and what will make them continuously loyal.

The following sections will endeavour to describe ways of which current research and literature advises companies in enhancing their loyalty card programs, in order to achieve better profitability for the company, and better satisfaction and loyalty by the customer.

Known problems in loyalty schemes

"What a loyalty program should not be"

Just a database

When retail organisations employ loyalty card schemes, some get this confused with actual promotional strategies. Retailers have been known to state that a loyalty card schemes are just a database that will send mail-outs on special promotions. This is not the case. Collecting customer data is one thing, but turning actionable data into a customer-focused strategy can be a whole new ball of wax (Peppers, 2001). A company that offers loyalty discounts or points, but fails to properly analyse and act on that data, is forced to compete on price alone; and it has to keep offering more and more rewards in order to keep customers away from competitors with similar programs (Peppers, 2001). There is no point in having a database full of information about your customers without actually using it to fruition.

Research by company SHC Direct has noted that there are five sins in regards to an organisation's activation programs for loyalty cards (SHC Direct, 2002). These will be explained next.

The five sins of activation programs

1. Many offers are not compelling enough to incite action

Many customers while are initially attracted to the offer of having a loyalty card, may not feel compelled to activate the card, simply because the offer is not compelling enough for them to remain loyal to one shop. Many consumers have noted their negativity to programs that require the shopper to spend thousands of dollars in the retailer's store before they actually receive something for their loyalty. The offer has to be enticing and of value to the customer before they will consider activating a card.

Another example is given below. Modest per-customer sales (on average, less than $500 a year per household) and slim margins sometimes limit the ability of retailers to offer attractive benefits in a cost-effective way to customers. However, a retailer must look at the benefit from the consumer's point of view also. A retailer giving a two percent rebate on $500 worth of annual household sales, for example, translates into a rebate check of $10 a year (see exhibit 4)- not much in absolute terms and trivial compared with the 25 to 40 percent markdowns now common in a price-driven retail environment (Cigliano et al, 2000). Why would customers want to remain loyal to that store, while instead they could shop around and wait for the markdowns? The offer has to be valuable for the customer.

2. Most card programs do not require enough frequency of use to establish a purchase habit!

Many times customers receive loyalty cards, but can only use the benefits of them on certain items in a store. This is lost opportunity to cross sell and let the customer become familiar with the store. The retailer may also lose out on more possible chances to capture vital customer information, which could help in assisting marketers in exactly what the customer wants.

Customers need to be able to have incentives to actually come in your store and use the loyalty cards more frequently. One-way to do this is to reward your customers not only for buying products in your store, but also just for entering your stores. An example of a retailer utilising this notion is Nike's Canadian flagship store in Toronto. Its Air Max Club loyalty program operates via in-store point-of-sale (POS) terminals. Each time a participating customer makes a purchase and swipes his membership card, points based on pre-tax dollars spent are immediately awarded and indicated on his receipt (Zarem, 2002). It requires minimal effort by either the customer or the retailers, and the customer can redeem points on the sport for a gift certificate commensurate with the point value (Zarem, 2002).

Besides dollars spent, customers are rewarded on how often they frequent the store, which location they use, or even the time of day they shop. Retail cashiers could be alerted to a most-valued customer by a screen message that appears when the card is swiped, indicating a special thank you or prize for the particular customer (Zarem, 2002). The results from this loyalty program have been fantastic. The information collected from the loyalty cards found that the program members spend 50% more than the average consumer. Considering that the store has over 12,000 members, the increase in sales is staggering.

3. Many activation offers are sent to the wrong people!

Many issuers continue to focus activation offers on cardholders that were acquired though teaser rates and have parked a balance with the intent of transferring to another card at the conclusion of the introductory period (SHC Direct, 2002). These cardholders will not become sales active! (SHC Direct, 2002).

Another interesting fact is that as many as half of all members of loyalty programs are free riders, enjoying benefits without spending more at the store that provides them (Cigliano, Georgiadis, Pleasance, and Whalley, 2000). Since these free riders get more and give nothing in return, the incremental sales from program members who do spend more must cover the costs of the program not only for themselves but also for the free riders.

Don't waste time and money! Retailers should focus on cardholders that accept their card and are likely to see the value in it. A good example of this is video chain Blockbuster in the USA. Video rentals across the U.S. were down 2.6% in 1998, and have dropped another 8.4%. Still Blockbuster Inc., the United States' #1 video-rental chain, perseveres with good performance, and most recently, a bold campaign to increase customer loyalty. Faced with such pessimistic numbers, the marketing gurus at Blockbuster, we imagine concluded in short order that a frequency program was their best option to retain market share and keep their best customers from straying to archrival Hollywood Video or their regional competitors. Blockbuster launched Blockbuster Rewards in a 10-city test program in 1998. Customers who had rented more than a 100 movies or games in the previous 12 months were automatically enrolled at no charge. The linchpin of the program is its mix of free rentals in both primary video categories and Blockbuster favourites. Members not only receive a free Blockbuster Favourite rental coupon once per month, but may also earn up to two free rentals per month - one for every five paid movie or game rentals each months. Finally members get free a blockbuster favourite Monday through Wednesday, with each paid move or game rental. Personalised notes, special members-only offers and upcoming new releases. A toll free number is available for member questions (Colloquy, 1999).

Another example that is closer to home is Esprit Australia, a fashion retailer. Esprit established the Esprit Privilege Card in the 1990's in Australia, and now has over 120,000 members in their database (Ligerakis, 2002). Esprit give a generous discount of 15% off full price merchandise and give members notice of upcoming sales events and special promotion offers (Esprit, 2002). However, to obtain membership, customers must shop at Esprit until they have spent over $300 in one month to qualify. This allows Esprit to ensure that they have quality customers that will buy their products.

4. Activation strategies are often viewed as quick hit, quick fix loyalty solutions!

Building cardholder loyalty is an on-going process. An effective activation event should be followed with a retention activity of equal strength (SHC Direct, 2002).

5. Short term payout for activation strategies is not realistic!

A 90 day activation activity that motivates spending of $350 on average will produce less than $5 in interchange income per activated cardholder, inside the program period, which is simply not enough to fund effective communications to the group and reward the winners. Consider instead measuring the cost against average lifetime value of the activated cardholder. This should include interchange income potential interest and fee income and perhaps reduced expenses for acquisition (SHC Direct, 2002).