Published on January 29, 2014
Looking ahead The business case for Loyalty Jan, 2013
Executive Summary Almost all market participants in the cards and payments industry are trying to grab a larger share of the increasing payments value. One of the most potent weapons that need to be leveraged in future to achieve this is Loyalty. This is because it would help all the market participants scale up seamlessly. It would also allow card holders a lot of flexibility in purchasing and making their purchasing decisions, and thus a reason for adoption. So, a strong case for all parties would make Loyalty a potent weapon in ecommerce. All market participants would put their best foot forward to exploit the benefits of Loyalty in increasing their share in the overall payments value. But changing paradigms in technology would change the way Loyalty programs are delivered by market participants. With the near doubling of mobile phone adoption from 2006 to 2011 and steep increase in the share of smart phones in this segment, mobile technology would not only determine how Loyalty programs are delivered but also dictate them. So not only would different delivery channels be leveraged for Loyalty but the success of Loyalty programs would be determined by how the market participants are able to exploit emerging technologies in coming up with more personalized and targeted offers, generating spend analytics of consumers and building an intelligent system to trigger offers based on their purchasing patterns, encouraging Loyalty linkage and helping consumers in managing different Loyalty programs coming from various market participants. Although Loyalty provides a lot of flexibility to the consumers, it would also bring with it their share of problems. Adoption of Loyalty would bring a lot of challenges to the market participants and a lot of problems to the consumers. The challenges would lie in the form greater intrusion into the life of consumers and misuse of data provided by consumers during registration for Loyalty programs. Market participants need to be aware of the implications of these challenges to prevent dilution of their brand equity. Trade-offs between targeting consumers and intruding in their private space must be properly decided to maintain a proper balance between them and make Loyalty a sustainable business driver for all stakeholders in the payments industry. Whitepaper Page 2 of 12
Loyalty-What is it all about? Loyalty can be defined as something that “conjures up various notions of affection, fidelity or commitment” (McGoldrick and Andre, 1997, p. 74). From a retail perspective it is the commitment of a consumer towards a particular scheme, merchant, brand or a combination of them. As a customer’s relationship with the company lengthens, profits rise. Companies can boost profits by almost 100 per cent by retaining just 5 per cent more of their customers. (Reichheld and Sasser, 1990, p. 105).Hence a lot of brands have been trying to cash in on customer loyalty. It has resulted in the increase of memberships in Loyalty Programs over the passage of time. % of population that belong to a Loyalty Program 100% 90% US Loyalty Memberships by Census Year 2.5 0.45 41% 90% 80% 2 74% 0.4 0.35 35% 0.3 70% 60% 1.5 60% 0.25 Billion $ 50% 42% 40% 33% 30% 0.2 1 0.15 16% 0.5 20% 0.1 0.05 10% 0 0% 0 2000 2006 Membership Source: COLLOQUY for the year 2011 2008 2010 Increase Source: The 2011 COLLOQUY Loyalty census Traditional Loyalty programs rewarded consumers for using the payment card. Loyalty was mostly funded by the issuing banks and other financial institutions and earned rewards took the form of cash back and points towards redemption for select merchandize in an online mall, air tickets, gift cards and even donations to charities designated by consumers. Over the years consumers with rewards cards have spent more than their non-rewards counterparts. 49% % Spend 80% Rewards Whitepaper 51% 20% Source: Affinity Solutions Non Rewards Page 3 of 12
Merchant funded Loyalty emerged whereby the merchant rewarded its repeat consumers through loyalty points which could be redeemed later. It helped merchants in the following ways: Customer Acquisition Customer Retention Up Selling Cross Selling Loyalty-Why would it be needed? Merchants running Loyalty programs have witnessed an aberration between the attitude of consumers towards their brand and their behaviour. So, a favourable brand perception always doesn’t lead to Loyalty. The relation between attitude of consumers and their behaviour can be demonstrated through Dick and Basu’s Customer Loyalty model shown below: Repeat Patronage High Brand Loyalty Relative Attitude High Low Low True Loyalty Latent Loyalty Spurious Loyalty No Loyalty Program Loyalty The above framework actually demonstrates that Loyalty is not the consequence of brand perception at all times. So the investments in generating a brand pull don’t always ensure customer retention. Hence investments should be directed not only for creating a brand pull but also for designing Loyalty Programs which ensure commitment of the customers. A properly designed Loyalty Program delivered through the proper channels and at an appropriate time would convert some of the customers in the No Loyalty segment to that in the Spurious Loyalty segment. It would also help in the retention of customers in the True Loyalty segment and prevent their movement to the Latent Loyalty segment. A recent survey conducted by the Maritz Loyalty Marketing on 6000 customers in the US confirms that Loyalty is a key component of the Brand Relationship Loyalty. It also confirms that Loyalty Programs influence purchase behaviours. Whitepaper Page 4 of 12
70% Programs are part of my relationship with the company Programs are part of my relationship with the company I modify what brands I buy, to maximize the points I receive for purchases 46% I modify what brands I buy, to maximize the points I receive for purchases Programs are definitely worth the effort of participating 80% Programs are definitely worth the effort of participating 57% 0% IImodify when and where IIbuy items, to maximize the points IIreceive for purchases modify when and where buy items, to maximize the points receive for purchases 50% 100% Source: The 2013 Maritz Loyalty Report The results reiterate the necessity of good Loyalty Programs for not only the retention of existing customers but also for the acquisition of new customers. Hence Loyalty would always remain a value proposition for merchants trying to generate a brand pull. Loyalty-Why won’t old be gold? With the advent of new delivery channels in electronic payments, traditional methods of disbursing a Loyalty Card along with promotion of Loyalty Programs would only work partially. Only merchants who are able to customize their Loyalty Programs in terms of the offers, communication and time of delivery to its customer would be able to maximize their return on investment. 73% Smart phone users interested in interacting with their Loyalty programs with their devices 46% 53% 0% 50% % of members who would like to receive communication from 3 or more channels The communications I receive from the program are relevant to me 100% Source: The 2013 Maritz Loyalty Report With customers modifying their choice of brands based on Loyalty programs and with increasing number of choices for customers, it is imperative that the timing of communication of the Loyalty Program would be of utmost importance to get the customer to the store. Mobile Users use their mobiles for Comparison Shopping to evaluate products and check prices. So if the customer receives a communication about the Loyalty Program during his period of evaluation, it would definitely be factored in his decision making process which ultimately affects his purchasing decision. So, merchants offering Loyalty programs would have to align the communication of their program with the emerging delivery channels of payments so that they are targeted more appropriately to match the requirements of the customers and the time of purchase. Whitepaper Page 5 of 12
60% of Smartphone users use their phones for comparison shopping 56% of Smartphone users want to receive location based offers on their phones when they are near a store Source: First Data Learnings from experience-A case for market participants The new trends emerging in the business models of Loyalty would be an opportunity for all market participants to cash in. The following trends would bring the maximum opportunity of different market participants. Strike when it matters: The 3 T’s of Loyalty Targeted Timely Tech-savvy Targeted Customized to consumers purchasing history and his need of the hour There are moments that matter during the purchasing decision of a buyer. Delivery of communication presented to the buyer at these Timely moments would significantly affect the purchasing decision of the buyer Sent to him at such a time which would influence his purchasing and the establishment of a possible relationship with the brand. So, if a decision buyer is entering a shopping mall thinking of making some purchase of garments and has no particular brand in mind, communication of a Tech-savvy Loyalty Program at that point of time can significantly affect his decision Easy to receive & redeem through the device the consumer normally of the order in which he planned to visit the stores, something the uses consumer would have been indifferent about had he not received the communication. This would give merchants a better chance of establishing a relationship with their potential consumers and retaining their existing customers some of whom were only demonstrating Spurious Loyalty. This timely communication is only possible when the potential customers are geo-tracked by the devices they are carrying. Whitepaper Page 6 of 12
Changing trends in Loyalty 91% 100% 80% 60% 40% 20% 0% 73% 46% % of members who % of smartphone users % of smartphone users would like to receive who are likely to who would like to communication from download the app interact with their three or more channels Loaylty Program through their device Source: The 2013 Maritz Loyalty Report Increase delivery channels: Delivery of the communication of Loyalty Programs at an TECHNOLOGY TRENDING appropriate time requires the increase of delivery channels through which customers receive the communication. With GEO TRACKING increasing number of smart phone and tablet users and with MESSAGING the increasing number of customers wanting to receive the MOBILE COUPONING communication about the Loyalty Programs through the devices they carry, merchants need to ensure that they have the adequate infrastructure to send the communication through multiple channels and also allow their customers the flexibility to redeem it conveniently when they do avail the offer. Merchants would need to ensure that they have systems which are capable Mobile couponing, messaging services and compatibility with mobile payments which would facilitate redemption of the Mobile coupons. The following chart shows the change in the preferred Banking mode which resonates with the Loyalty findings. SMS/Text Banking Mobile Banking Smartphone 12% 57% 64% Source: Cognizant Research Center Whitepaper Page 7 of 12
Introduce triggers: Instead of operating in silos, merchants need to collaborate to grab a bigger pie of the spend of their prospective customers. So a cab provider company can collaborate with an airlines company to maximize their share in the spend of a prospective customer who travels frequently. So whenever the particular traveller books an air ticket an offer of additional Loyalty points if he avails the cab service can influence his decision of transport after he gets down from his flight. Similarly casinos, bars and restaurants can collaborate with leading hotels and introduce triggers when the potential customers make payment for booking hotels. Cool uses of Loyalty information Set preferences for purchase on your smartphone such that, upon arriving at partner retail stores, your order is processed and paid for instantly Determine your location using your smartphone and offer you deals if you are near a partner Special benefits to those who “like” or “Follow” a program on Facebook or Twitter Personalized offers you want, based on your preferences, that you can manage and update Personalized discounts on your favorite items, based on your purchasing habits 0% Age 16-34 10% 20% 30% 40% 50% 60% 70% 80% Total Population Source: The 2013 Maritz Loyalty Report Encourage Group Loyalty: The benefits of Loyalty programs can be maximized when merchants hunt for groups of people in family, friends, colleagues etc. Merchants need to ensure that the individual Loyalty benefit of each member in the group is greater than if the member would have been in the Loyalty Program individually. This would Whitepaper Page 8 of 12
ensure that the True Loyals in the group would always put pressure on the Spurious Loyals and Latent Loyals to come into their category so that their benefit is maximized. And the True Loyals can put pressure on the other groups on the rationale that everyone’s benefit would be maximized. Reward also matters. So transfer of benefits between group members when one actually needs it can also lure potential customers. Timing of Reward Delayed Repeated & immediate Direct Direct Individual Loyalty Group Loyalty* Indirect Type of Reward Group Loyalty* Group Loyalty* *Possible areas of implementation of Group Loyalty programs The benefits of Group Loyalty to the customer – An illustration Let’s consider a Loyalty program which has the following rated slab for Loyalty points. The Loyalty points are rewarded for total spending for the month. Considering that all other merchants also have a similar Loyalty Program Simple Loyalty point allocation slab based on monthly spend with a particular merchant Spending with the merchant Points 0-100 2 100-200 3 200-300 4 300-400 5 400-500 6 500-600 7 Family Member Spend in $ Loyalty points earned if shopping with different merchants Loyalty Points earned if shopping with the same merchant Net Benefit for the consumer A 300 2+3+4=9 13 44% B 200 2+3=5 9 80% C 100 2 4 100% Total Spend if A+B+C is a group: 300+200+100=600 Total Loyalty Points rewarded=2+3+4+5+6+7=27 Loyalty points for A= (300/600)*27=13.5 Loyalty points for B= (200/600)*27=9 Loyalty points for C= (100/600)*27=4.5 Whitepaper Page 9 of 12
Loyalty Management: With more and more merchants deciding to offer Loyalty Programs, customers would start facing difficulties in assessing and evaluating the best one for them depending on their nature of spend, shopping patterns and brand preferences. This is where they would need apps which would analyze their shopping and spend patterns and sort the Loyalty offers according to them to help them and choose the Loyalty Program which would make most economic sense to them. The apps can also help the customers track the different types of Loyalty Programs in terms of their classification according to merchant categories(like Retail, Airlines etc.), validity, expiration dates, number of points left for redemption. Challenges Privacy issues: With more and more merchants deciding to use Loyalty as a tool for brand building, customers would find it cumbersome to deal with overflowing Loyalty offers and mobile coupons. The merchants would also utilize the registered mobile numbers to send communication about their other discount schemes, unique products and other promotional offers. Customers might feel that merchants would be intruding too much into their privacy. The fact that there would be a scrutiny of their shopping patterns might also give an uneasy feeling to the customers. Privacy concerns in Loyalty 40% 29% 30% 24% 20% 10% 0% Program requires personal information Privacy Concern Source: The 2013 Maritz Loyalty Report Whitepaper Page 10 of 12
Information Misuse: Loyalty Programs in future would require the registration of the mobile number that a customer uses. It would facilitate timely communication of offers to the customers. Registration would also mean the tracking and profiling of customers depending on their age, profession, average spend and spending patterns. But such information could be misused by criminals in many ways. That would deter customers from registering for Loyalty Programs and the purpose of such programs would be ultimately defeated. Hence data security should be of utmost importance to all stakeholders in the value chain. Wierd uses of Loyalty information Ask personal questions during enrollment to provide offers based on your demography Allowing Programs to review your status updates and send offers Offer special benefits to those providing personal information about others Offers made on status updates on friends profile 0% Age 16-34 10% 20% 30% 40% 50% 60% 70% Total Population Source: The 2013 Maritz Loyalty Report Whitepaper Page 11 of 12
References Can Loyalty schemes really build Loyalty- Lisa O’Malley Customer Loyalty and Customer Loyalty Programs-Mark D. Uncles, Grahame D. Rowling and Kathy Hammond The 4 C’s of Customer Loyalty-Jennifer Rowley Testing Dick and Basu’s Customer Loyalty Model-Ron Garland & Philip Gendall Comparisons of Competing Models between Attitudinal Loyalty and Behavioral Loyalty-Cheng, Shih-I Exploring Loyal Qualities: assessing survey based Loyalty measures-Sharyn Rundle-Thiele Effects of Loyalty programs on value perception, program loyalty and brand loyalty-Youjae Yi and HoseongJeon Brand Loyalty Measurement-A framework-Sancharan Roy The 2013 Maritz Loyalty Report Cognizant Research Center First Data website COLLOQUY Loyalty census Affinity Solutions About the Author Kaushik Basu is an Assistant Manager within RS Software. He can be reached at firstname.lastname@example.org Whitepaper Page 12 of 12
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