Auckland University research : loyalty programs designed to make sure customers don't get rewards

An article earlier this month in the New Zealand Herald claimed that "Shoppers may be missing out on millions of dollars of savings through unclaimed rewards every year". It referenced research from Auckland University' Senior Marketing Lecturer Rick Starr under the headline "Loyalty schemes rely on shoppers forgetting to cash in their points". Rick's view was that "people often forget to redeem their points. And companies count on customers doing so because full redemption would "cut their profits"".

True - in part. But. It depends what type of program you're talking about. In the programs we operate, the driving principle is to get all the points that have been issued turned into rewards by the customers who have earned them. This isn't some egalitarian approach but a very mercenary one.

[Full Disclosure - the article mentions ASB True Rewards and The Warehouse's Rewards MasterCard - both are programs we work for].

There are two key behaviour changes that occur when a customer joins your performing, well designed, rich, relevant loyalty program.

Behaviour change 1.

The first occurs when they begin to earn points and is particularly marked if you've made them pay a fee or annual subscription to join (always a good idea if possible). For example - credit card customers who join the loyalty program attached to the credit card will almost immediately spend more on that card by a multiple of 2 or 3 times what they were spending on the same card before they joined the associated loyalty program.

Behaviour change 2.

The second and far more significant behaviour change occurs when the customer makes their first redemption for a reward. At this point their spend on the card increases again by a factor of 3 to 8 times their pre-loyalty program spend. This second spend lift is determined by what it is they've redeemed for. Customers who redeem for cash back or against their annual fee don't generally increase their spend markedly after redemption. If they've redeemed for merchandise, gift cards or travel - then the second lift is particularly marked.

Customers who don't redeem don't experience this second lift.

The upshot - redemption is good (very good) and points that don't get redeemed (termed "breakage") are bad. How much breakage is there in New Zealand? Rob Mercer of Forsyth Barr Research reckons it's 10% of all points.

Far from cutting a company's profits - points that don't get redeemed are bad business and a missed opportunity to lift spend for the points issuer.

Barclaycard Freedom - the (nearly) new credit card loyalty model

Barclaycard Freedom launched in the UK this month. It's an unusual model which has been implemented in similar forms in other parts of the world - most notable in our neighbourhood : Asia. BPI bank in the Philippines run this technology as their card loyalty program (called Real Thrills) as do Axis Bank in India (theirs is called Spice Rewards). The technology that underpins these offerings comes from France based Welcome Real-time who have been developing their solution for over 12 years (and with whom Carlson has a Asia Pacific partnership).

The mechanics (there are two) are similar in all applications :

(1) customers of the card company receive segmented offers at point of sale when they swipe their cards. These offers are printed on the till slip and are redeemable either back in that merchant or at another merchant.

(2) Customer of the card company can use their points to pay for their purchase at that merchant (not unlike ASB Bank's True Rewards program here in New Zealand).

The value of the first mechanic (offers on till slips) is clearer perhaps than the second (burning rewards points at the till). Most retailers want to get their customers through the till as fast as possible and any delay occasioned by a new process to redeem points wouldn't be appreciated. Importantly the retailer never knows the name or details of who they're making the offer to. They're simply card X which belongs to segment Y.

Merchants can set up segments of card carrying customer types from that issuer - a "frequent visitor" or a "never been here before" segment for example. These segments get different offers on the till slip. Frequent Visitor might get a "bring a friend for free next time offer" while Never Been Here Before might get a "come back and get a discounted item" offer. Merchants self manage these offers through an web portal.

What's different about Barclaycard's Freedom is that this is the first time this type of solution has been implemented on such a large scale in such a mature and sophisticated card market. The scale is significant. Barclaycard have 8 million customers who will be able to benefit from this solution at a large portfolio series of merchants (30,000 have been invited but less than that are available today). The goal is to have 200 outlets withing 5 miles of each customer making relevant offers.

If it pans out as its intended to then this is a great example of a marketing network in action. The three parties involved all benefit from relevance and richness.

The merchant is able to make different offers to different customers instead of the classic One Size Fits All structures. They don't have to incentivise business they were already going to get.

The customer gets an additional benefit on top of the others they're already receiving which, if the merchant gets their campaign management right, should be differently rich and differently relevant to each of them.

The bank in Barclaycard adds significant value to the near-commodity business of merchant acquiring as well as making their program an order of magnitude (again - if the merchants get their campaign management right) richer than competitor's card programs.

There are no average customers

The Sydney Morning Herald carried an article entitiled "Consumers paying high price for loyalty card rewards". The article was based on research from Choice (most likely similar to New Zealand's Consumer magazine). Their research argued that shopper loyalty cards offer "little benefit to shoppers" and profiled the value the key grocery retail programs offered .

An average Australian shopper (according to Roy Morgan Research) spends a mere $156 per week.

To earn a $50 gift card in Fly Buys requires spend of $15,000 at Coles (or think New World in New Zealand). At an average shopper's purchase rate of $156 per week that would take 2 years.

It would be faster at Woolworths Everyday Rewards program (think Progressive Enterprises Onecard in New Zealand) with customers earning the same $50 gift card after $11,000 or 1 year and 4 months.

One could indeed argue that for the average customer a $50 gift card in return for either 1.3 (Woolworths) or 2 years (Fly Buys) worth of dedicated shopping may not be enough return. That's debatable and some of our data would say otherwise.

However the real issue here is the use of "Average". There are no average customers and loyalty programs serve to enhance differences, especially financial ones, between them.

The figure shows an extract from an actual retail program. The customer base is ranked from best (buys the most) to worst customer along the x axis. The y axis then shows total sales from these customers. It's clear that the first few customers produce significant sales and the bottom customers very little.

For instance - the customer base once laid out from best to worst - is then cut into 10 deciles of equal turnover. In this case total turnover is $44m and each of those deciles is worth $4.4m. The first $4.4m of sales (or Decile 1) comes from only 91 customers. Each spends $49,000.

The last $4.4m of sales (or Decile 10) comes from over 42,000 customers. Each of them spends only $104.

Looking at this distribution, different customers are treated differently and top customers get inordinate amounts of value. In return they provide inordinate amounts of sales.

Don Peppers responds

From Don Peppers: Just to clarify, what I said was that Coles (or any other retailer) should use a loyalty program primarily to bujild and maintain ongoing, one-to-one relationships with individual customers. Data is indispensable for this. Coles could continue with FlyBuys, but only IF the supplier were to make available to Coles all of the shopper data - and this is something I've been told either isn't possible or wouldn't be considered.

And yes, I was hired by Woolworths for a series of appearances this week and last. But I gave them the exact same advice more than two years ago. Whether my advice was influential or not, the fact is that they have now implemented a very good program. - @DonPeppers

"Coles Should Ditch FlyBuys" Loyalty marketing Guru Don Peppers

Loyalty marketing and customer strategy guru Don Peppers of the Peppers & Rogers Group described FlyBuys as ''trinkets and trash'' program that offers little value to the merchants or the shoppers. Peppers recommend that Coles Supermarkets in Australia exit FlyBuys and "get their own program".

Peppers & Rogers Group, which used to be a Carlson Marketing group company, introduced the marketing strategy of 1to1 10 years ago with their book "The One to One Future".

The Sydney Morning Herald reports on "Supermarket Sleuth" Peppers, who helped Coles competitor Woolworths with their new Qantas loyalty program partnership in Australia. Peppers readily admits that he is biased.

As we've discussed before - Peppers likens the supermarket and loyalty program battle that FlyBuys finds itself in to the experience of the UK market. Sainsbury's, who use a scheme similar to FlyBuys called Nectar, was overtaken as the leading supermarket chain in Britain by Tesco less than three years after Tesco launched its Clubcard scheme in the mid '90s.

Peppers said Coles should ditch FlyBuys and find a program that gives it control over customer purchasing data, otherwise it risks losing more market share to Woolworths.

''FlyBuys isn't the right program as they [Coles and teh other partners in FlyBuys] don't own the data,'' said Mr Peppers. ''It's just a trinkets and trash program. We pay you for loyalty and you know what, we don't pay you too much.''

The Sydney Morning Herald also reports [which we've discussed here] that Coles dumped the frequent flyer mechanism of FlyBuys this year so shoppers could accrue points and get discounts on their shopping.

Points expiry - short, long or evergreen?

One of the key questions we're asked when designing loyalty programs is - what should the life of the points be (or how quickly should they expire)? Our analysis frequently shows that performing programs with a three year points life generally perform as well as programs in which points are evergreen or never expire.

Research into a retail loyalty program by Yuping Liu, Ph.D presented at June's INFORMS Marketing Science Conference in Michigan USA ( http://www.yupingliu.com/wordpress/2009/06/15/loyalty-programs-and-crm-insights-from-marketing-science-2009-conference/) may have found a different trend. In a piece of research that looked at a single convenience store moving from no points expiry to monthly expiry and found that participation in the program as well as sales increased.

Consumers told - don't let your shopping rewards program change your behaviour

A news item on Australia's 9 Network titled "Free Shopping Rewards Programs in Australia" (http://www.youtube.com/watch?v=bcXux06jNBQ) carried some comment from industry watcher Cannex.

The item reviewed Myer 1, Woolworths Everyday Rewards (and their Qantas partnership) and the Fly Buys programs. Cannex was interviewed and advised viewers not to let the various programs they participate in change their shopping habits. Specifically Cannex was talking about not shopping for more than you needed or paying more than you should. Sound advice.

But the fact that these programs do indeed change shopper's habits, albeit it in slightly subtler ways. Clearly none of these program providers would want their customers to buy more than they need or pay over the odds.

They do though want customers buy what they need from their own stores (rather than a competitor's) and also they'd appreciate customers paying full price on as many items in the basket as possible. The more successful the program - the more frequently these two things will be happening.

A new 800lb gorilla in Australian Loyalty gets into grocery

For many years Fly Buys in Australia was held up as a shining example of a coalition loyalty program. Along with Aeroplan in Canada and Nectar in the UK, Fly Buys was the top of the coalition program foodchain in Australia.

Now it seems Qantas Frequent Flyer is challenging that position. This month Qantas has tied up a deal with Woolworths' Everyday Rewards Program. Customers who spend more than $30 can earn a Qantas point for every dollar they spend in store over the initial $30. Shoppers at Woolworths who are not Qantas members today can get membership free through Woolworths Everyday Rewards (an $80 saving). Going forward the Qantas points for spend offer will also be available at other Woolworths group stores.

Richard Umbers of Woolworths told The Australian Financial Review that 300,000 new customers had joined Woolworths Everday Rewards program in the first month - a 10% growth of their registered customer base.

Coles have run a gift card promotion recently which garnered them 78,000 new Fly Buys customers to their base of some 8 million - a 1% growth.

Interestingly - the May Coles gift card promotion cleverly delivered an "on us" shopping reward. Customers earned Coles gift cards whcih of course turn into more transactions in Coles rather than Fly Buys points which turn into rewards transactions across the network of Fly Buys participants.

Australian Food News observed "the Woolworths-Qantas announcement does raise the interesting prospect of a winged EveryDay Rewards offer versus a flightless FlyBuys".

What's the future for coalition programs?

Fly Buys in Australia is going through some changes as leading tenant Coles looks to take on its competitor's Woolworths tie up with Qantas Frequent Flyer.  Woolworths now has 2.7 million customers in its Everyday Rewards program while Qantas Frequent Flyer has 5.4 million members.  Their tie up is expected to come to market in the middle of 2009.

Woolworths customers will be able to earn points in the Qantas Frequent Flyer program.  The revamped Qantas Frequent Flyer program now offers more than just flights.  Since the middle of 2008, it has become a one stop shop offering merchandise, gift cards and experiences.for redemption.

 

In New Zealand, long time tenants of the Fly Buys coalition program Telecom and Ezibuy (who were part of the program when it launched in 1996) left the program in 2008.  Now Shell, which owns 25% of the Fly Buys company, is looking to sell it's stake along with 230 petrol stations and it's investment in the New Zealand refining Company at Marsden Point.  There are 4 shareholders of Fly Buys New Zealand; Shell, Foodstuffs (operator of New World), IAG (State Insurance and others) and BNZ. 

Arguably, Fly Buys customers spend more on food (Foodstuffs - New World) and more often than they spend on credit cards (BNZ) and insurance (IAG).  Even allowing for the host of other places customers might earn Fly Buys points, food purchases at New World must be a significant source of most customer's accrued points balances. 

New Zealand's other major supermarket group (about 50% market share) Progressive Enterprises has grown the chains at which it's competing OneCard earns discounts and points from Foodtown in the early days to incorporate Woolworths and now Countdown.   One of the potential buyers of Shell's quarter share in Fly Buys is none other than the owner of Progressive Enterprises - Woolworths Australia (according to ABN Amro Craigs broker Peter McIntyre on 14th May).

To keep this interesting, Shell New Zealand has the fuel discount offer (earn cents off per litre) with the Progressive Group.  

With such a lot happening to Fly Buys on both sides of the ditch, it's difficult to find any precedent globally that might be instructive for us.  The best I've been able to find is the long running battle between Tesco in the UK and it's rival Sainsburys.   

The Tesco Clubcard (the Grand Daddy of all grocery loyalty programs) might be likened to Progressive's Onecard program.  Points and discounts are earned by shopping in the store and convert to vouchers and coupons which the customer spends in the store.  New World's use of Fly Buys might be likened to Sainsbury's use of the Nectar loyalty program - a coalition program like Fly Buys. Points earned by shopping at any Nectar outlet convert to benefits like those in Fly Buys - gift vouchers, goods and other rewards.

Verdict Research in the UK believes that the Sainsbury's Nectar card has not worked well.  However their senior analyst Malcolm Pinkerton reckons with Tesco upping the stakes "That should change now"

Loyalty programs an imperative at the centre of Retailer's marketing

Retail loyalty programs have been around for a long time and to be quite honest - haven't advanced or developed much.  That's changing with players like Myer in Australia treating theirs as an asset that needs to be (a) sweated and (b) produce a return.

Its always been true that retail loyalty programs are the price you pay to get the customer data - it's what you do with the data that makes you money.   Unfortunately - too many retailers do very little with the data.  For some of them in New Zealand this may be because the competitive bar has been set relatively low.  For others - the strictures of belonging to one of the two major coalition programs in New Zealand (Fly Buys, AA Rewards) means they can't do as they wish with the data.

The bar has been raised in our region by Myer's relaunch of their Myer One card (and their much discussed move into financial services) and Woolworths Australia's Everyday Rewards and Qantas tie up.  Myer's scheme is more sophisticated than your average retail loyalty program and the results are impressive.  The Age reported that the 2.6 million members of the Myer One program account for 60% of Myer's sales.  In 2006 it was only 43%.  These are people it can promote offers to knowing with a high degree of confidence that they are (a) relevant and (b) going to be taken up at good margin.  Remember "Death before discounting".  For example - one retail loyalty program we operate in is 76% accurate in predicting when a shopper will return and spend again. Priceline in Australia is following Myer's lead and relaunched its program in November last year lifting members (now at 2.7 million).  It's still not at Myer's level with only 40% of sales through the program customers and program members having a basket size 30% above ordinary customers.

Are they an imperative?  According to Steve Ogden-Barnes of Monash University in Australia, retail loyalty programs are not only an imperative but "the bar's been raised in terms of expectations and industry practice".  

But there's also casualties.  With the bar having been raised and the retailers of Australia moving to catch up,  the reasons for not using the data (the program's the price you pay to get it) need to be addressed.  A new battle has begun with Coles looking to exit the FlyBuys program in Australia and replace the program with its own offering in-store discounts and benefits.  This is a classic closed loop program as pioneered and perfected by Tesco (Tesco set the bar for retailers globally many years ago and is about to lift it again).  

Coles is in a loyalty program race against Woowlorths who have tied up with the leader in the Australian market - Qantas Frequent Flyer points. Qantas have effectively trumped Fly Buys in Australia and even shareholder Coles will stop using Fly Buys.  (In New Zealand terms - Coles might be likened to New Zealand's New World currently offering Fly Buys who compete with Progressive Enterprise's supermarkets in Woolworths and Foodtown offering OneCard.).  

The race is on for customer data. 

Retailers - the difference between good and bad programs

Aberdeen Group has just published (with support from Carlson Marketing) a report that discusses the differentiation between a good retail loyalty program and a bad one (called Laggards in the report). 

This is a great yardstick to understand whether your program is doing all it should or whether your investment is being squandered.  

The headlines: if you have a retail loyalty program and you're not achieving, year on year increases of:

• 19%  - average basket value increase (the dollars spent by each customer on each shopping trip) 
• 16% - YOY lift in customer retention rate
• 5% - YOY decrease in customer attrition rate
  

...then you're not getting value for your investment (or more bluntly - you have a cost centre, not an investment).  Many of the retailer programs we analyse in New Zealand fall below these metrics and seem to have operated at this level for some time.

However - there's a number of simple steps to radically improving performance.  All of them flow from better using the data that already exists.   Start with financial requirements and make these aggressive.   How much do you want to grow sales by and how much do you want to improve your revenues over your costs?  Loyalty programs are there to grow profits; they're measurable investments that can compete on the P&L with any other investment.  They don't belong to the same family of marketing as brand building or advertising which have returns but not ones you can see in the financial statements.  

Once you know your financial targets  - roll down to the customer value proposition - what do you have to give customers to achieve the financial goals.  Be relentlessly mercenary - incentivise ONLY profitable behaviour.  

If a customer is already giving your business - don't incentivise them for that business.  Incentivise them to bring the next shopping trip to you - the one that they would normally have given to your competitor.  Offer points for uplift and points for growth. And offer points only for these if you're able to. This also suits a good financial model as the cost of the incentive comes out of the new margin earned and isn't a flat cost on the sales you already have.

Once you have these two factors nailed - its a simple matter to design the required business processes that will deliver the customer value proposition.  And once you know those - you know whether you have the assets internally to achieve your goals or whether you need an outsource partner to deliver.