Introduction to the Loyalty Industry

INTRODUCTION TO THE LOYALTY INDUSTRYChris Jacobs, Business Assyst Limitedwww.businessassyst.com
Who said, "Money Can't Buy You Love"? A useful metaphor, though, to help understand the true concept behind customerloyalty. Loyalty programmes are about developing sustainable, mutually beneficial relationships. Price incentives cangenerate a short-term sales uplift but will not engender long-term loyalty. Customer loyalty has long been recognizedas essential, whereas (electronic) customer loyalty systems are still relatively young. The man in the corner shop haspracticed the art all his life; the electronic version was invented to overcome the limitations of the human brain toremember more than a few hundred customers personally.
"Stock 'em High sell 'em Cheap", whether they be groceries, airline seats, hotel beds, electricity units, or whatever, worksas long as your competitor doesn't "sell 'em cheaper". And it only works for a certain segment of the market; the segmentthat is, by definition, least profitable and most promiscuous. Most organisations eventually discover the benefit offocusing on the more profitable customers and the ones they can more easily keep.
British Airways has come full circle recently. After following a successful strategy of providing a superiorservice and focusing on the business traveller where the margins are high, it was distracted into attacking thelow end of the market by setting up GO to compete in the cut price fares market. After pouring millions intofending off the likes of EasyJet, it found its margins in decline and its image tainted. It's now gone back toits old roots and once again focusing on the business sector. As the utilities sector deregulated it became increasingly easy as a consumer to buy services from a numberof different suppliers, most of whom sought to gain share with ever lower and lower prices. Many of thesesuppliers made quick wins, but equally quick losses as competitors adopted the same 'price as the carrot'strategy. How easy it is to attract disloyal customers who by their very nature defect very easily, but howdifficult it is to sustain revenue growth against a background of a volatile customer base and decreasingmargins. The high street banks pay great attention to acquisition and, until recently didn't need to worry aboutretention. Never ones to miss a money-generating trick, they work hard to attract teenagers to open anaccount, and will offer all sorts of incentives to do so. Not surprisingly this yielded very little in the earlyyears but it certainly paid off, more than handsomely, over the following forty or so years! This is not so easyany more as the choices are so wide, and the inducements to switch never greater. They now have toconcentrate on after sales service and work hard at retention as well. M&S now realize that loyal customers can't be taken for granted. Having established a unique position witha very loyal band of followers, which it exploited by pushing up prices (and hence margins), ignored whatthey wanted and we all know what happened next.
Follow the logic through, allow for the odd 'knee-jerk' reaction by the likes of Safeway, who stopped its ABC scheme tocut costs as a quick fix to declining sales, and most companies will eventually conclude that customer focus delivers inthe long term. Hence, the value of the Customer Loyalty Industry. The customer now has even more choice, even morebuying channels, even more offers and promotions and incentives. Customer loyalty has never been more important.
The industry has matured. It started with Green Shield stamps many years ago, moved to electronic points in the early90's, and is now about collecting information, and, more importantly, using it. In the UK 75% of the adult population aremembers of a loyalty scheme. The benefits can be huge with some organisations claiming sales uplifts of up to 30%.Members of loyalty schemes, on average, spend four times that of non-members. These are the customers most likely tojoin in the first place, of course, but a scheme enables them to be identified, and then cherished. The biggest gains comefrom retention where a small increase can double the lifetime value of the customer base.
1The focus has changed from being promotion driven to being marketing driven. The objective is now to establish thatall-important one-to-one relat... [download for more]