LOYALTY PROGRAMS TAKE IT PERSONALLY

From time to time, marketing conferences take a step back to reflect on where we are in the evolution of personalization. Sometimes they add a twist, such as focusing on new data sources or location-based marketing, but the common thread is the  promise of relevance.

I recently participated on a panel discussing how far consumer marketers have progressed in unlocking the value of data to enable personalization.

Such discussions often begin with a short debate about what constitutes “loyalty.” Some will argue that incenting people to buy more isn’t enough—loyalty takes emotions as well as behaviors. The emotional connection needs to be strong enough to survive lower prices from competitors, and to encourage more than just patronage, but actual advocacy in recommending products and services to friends.

While I don’t disagree, I assert that sets a very high bar. Only a small sliver of shoppers will meet those criteria. Beyond that, there is a larger number of shoppers who can be persuaded to buy more and buy more frequently. Perhaps it’s loyalty, perhaps it’s simply frequency marketing. But upselling and cross-selling through personalization are critical to increasing shopper lifetime value.

At the LEAD Conference, we broke the question down into three areas:

1. How much do we know about who we need to target?

2. How do we develop the most relevant offers and promotions?

3. What new platforms—particularly social and mobile—are most promising?

1. How much do we know about who we need to target?

One of the most important things we’ve learned over the past two decades is that the value of targeting varies by industry.  Some industries like banking and retail benefit more from incenting top customers. The California Management Review found the top 20% of banking customers delivered 82% of profits, a confirmation of the Pareto principle. Forrester found that loyal retail consumers are less likely to switch than consumers of other services. A full 80% would prefer their current banner for future purchases, as opposed to 60% of airlines patrons.

Consumer packaged goods manufacturers, on the other hand, benefit less.  Half of their loyal shoppers are fleeting. Joel Rubinson and Allan L. Baldinger reported this in 2006, Catalina found the same outcome in 2009, and AdAge reported a few weeks ago the same results: 50% of loyal brand  consumers reduced their loyalty from one year to the next. CPG is not Pareto. It doesn’t follow the 80/20 rule, it’s more like 50/20, according to Professor Byron Sharp of the University of South Australia.

This makes sense, after all. Retail stores can satisfy more needs by virtue of greater selection than individual manufacturers can provide. They are also closer to the shopper AND the underlying data.

What else have we learned? Even in more privileged sectors like banking and retail, many loyalty programs chiefly subsidize existing buyers. The Ehrenberg-Bass Institute found purchase frequency didn’t differ between members and nonmembers of loyalty programs. This was true for credit cards, supermarkets, gas stations, and department stores. These programs actually reduced the profitability of certain buyers. And these programs are very difficult to exit once you have customers signed up.

Another thing we’ve learned, accelerated by online marketing, is that we run into the universe problem earlier than we think. In other words, we discover that marketing to most valuable customers isn’t enough to grow our businesses. We can’t simply acquire more most valuable customers or simply coerce our less valuable customers to buy more. We run through this universe of loyal opportunity faster than we think.

So what have we learned about who we need to target? Stitching the three observations together:

  1. Some industries are more fertile ground than others. Banking and retail are better than consumer packaged goods manufacturing.
  2. All players need to work their data and activation plans to reach (a) non-buyers (especially those who are heavy in the category and buy one’s competitors) and (b) light buyers who can be upsold
  3. Firms can’t ignore mass marketing because (a) they need to succeed on penetration more than buying rate and (b) there’s a new 50% out there who will become your loyal buyers next year.

2. How do we develop the most relevant offers and promotions?

Generally, there are four ways to target offers.

  1. Present a lot of offers, adjust a priori by season, segment, or the like, and let shoppers sort them out
  2. Let shoppers choose the kinds of offers they wish to receive by “opting in” in an online sense
  3. Aggregate data to find segments (behavioral or demographic), put shoppers into those segments, and extend offers relevant to those segments
  4. Use individual shopper purchase history and other behavioral data to recommend personalized offers

Items 2, 3 and 4 have been called “personalization.” They work best depending on shopper willingness to express preferences, availability of information, and sensitivity to privacy.

Marketers opinions will vary. My experience has been that shopper history works best because it allows shoppers to segment themselves rather than be jailed by predefined segments or clusters. If you’re an e-commerce business and can test different approaches, even better. Just remember to install filters that consider brand loyalty so you don’t upset people like Nikki Baird.

So what have we learned about developing better offers? Not enough. The academic research doesn’t tell us which of the above four approaches targeting yields the highest ROI. Companies may be testing different approaches, but they’re not sharing the outcomes ( though Amazon.com has filed a patent on choosing between different personalization algorithms)

3. What new platforms—particularly social and mobile—are most promising?

Social and mobile are fast-moving spaces. Conclusions grow stale quickly.

That aside, the best social platform to incorporate into loyalty strategy is clearly Facebook. Facebook is replacing brand websites. Fortune 100 companies’ web visits are down 23%. Fan counts of brands like Starbucks and Coca-Cola are an order of magnitude higher then website unique visitors.

Opinionway found 84% of a typical brand’s Facebook fans are existing customers. These fans say what they want most are members-only benefits like special offers and advance word on new products. Marketers are plugging in. P&G and other CPGs are adding storefronts, and vendors like American Express are linking Facebook Likes to savings delivered when you use the Amex card in-store or online.

On the other hand, Groupon and Twitter are not ideal social loyalty platforms. Groupon is much stronger in customer acquisition. Twitter only serves 8% of the US based on account-holders compared to Facebook, which serves 51% of US adults.

To find the most encouraging mobile platform requires a full solution. Google Wallet, launched September 19, is a contender. It consists of:

  1. Software, in the form of Android 2.3 with Near Field Communications (NFC) technology
  2. Hardware, first through the Nexus S 4G with NFC chip and later through Google’s direct control of handsets produced by Motorola Mobility
  3. Payment, via partnerships with Citi, Mastercard, and now Visa, American Express and Discover
  4. Merchants, exemplified by 20 chains and 900 stores (including Macy’s, CVS and American Eagle) that have already joined the pilot in San Francisco and New York

Another is Modiv’s Scan-It. The company is on the mark now that it has jumped from a dedicated handheld to a smartphone app. With its partner Stop&Shop, Scan-It presents a triple play of targeting: purchase history, items in the basket, and location in the store. The new iPhone app is being piloted in 3 stores this year, and the company announced another major retailer will begin a pilot later this year. Admittedly, the retailers will need to do better than the mere 7% of users who adopted the dedicated hardware.

On the other hand, check-in type mobile has less potential. Only 12% of smartphone owners (4% of all adults) use a geosocial service such as Foursquare, Gowalla, ShopKick or Loopt, according to a Pew internet study from May. When all is said and done, location data by itself is of limited value. According to a survey of 2000 adults by Luth Research, a full 60% of smartphone users say they would rather get offers tailored to their interests compared to 14% by location.

How far have we evolved in delivering the promise of relevance? To paraphrase Thomas Edison, we’ve found thousands of filaments that don’t work and a few that do. These include learning that some industries are better than others for loyalty marketing, that we can’t single-mindedly pursue our most-valuable segments and still grow our businesses, and that no new interactive platform without the blessing of giants like Facebook and Google is going to change things. But while the payout from individual programs is dubious, the rich data that flows from loyalty efforts is priceless. This data helps us improve our products, tailor our selection, and find out more about what motivates our most valuable customers.

Advertisements
Categories: Loyalty, Mobile, Promotions | Tags: , , | 2 Comments

Post navigation

2 thoughts on “LOYALTY PROGRAMS TAKE IT PERSONALLY

  1. BKraus

    I missed the conference but appreciate the summary. Have been a reader of Bill Hanifin’s blog and was glad to stumble across this.

  2. BK: Thanks for your post. You’ll see a great piece from Bill loosely related to the conference here: http://blog.hanifinloyalty.com/2011/09/08/twitter-redefines-loyalty.html

    Dan

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s

Create a free website or blog at WordPress.com.

%d bloggers like this: