Research - Unley Business Loyalty Card Program. Author: Chris Williams Business & Economic Development July 2009

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1 Research - Unley Business Loyalty Card Program Author: Chris Williams Business & Economic Development July 2009

2 Unley Loyalty Card Program Introduction 1 The Loyalty Concept 1 Rise of Loyalty Programs 2 The Impact of a Successful Loyalty Program 3 Loyalty Card Scheme 4 Business Involvement 4 Consumer Registration 5 Incentive Rewards 6 Initial Start-up Costs 7 Conclusion 7 Reference 9

3 Introduction Customer relationship management is a strategy which focuses on creating and retaining relationships with the customer. Loyalty programs are established as an effective means for the development of such relationships. These programs are fast becoming one of the most influencing factors for increasing revenue. Loyalty programs serve two purposes; the first being to boost profit while increasing the number of purchases among customers. The second purpose of the programs is to create stronger relations between customers, while seeking to strengthen the database of consumers. 1 The popularity of loyalty programs is based on the fact that businesses can profit significantly from these objectives. Loyalty programs have changed the way consumers interact with the companies in which they trade and the amount they spend. During the past decade customers have increasingly began to request more from sellers. Taking these expectations into account, businesses have created various loyalty programs aimed at stimulating loyal buyer behaviour. This trend has seen loyalty programs develop into an established part of the retail scene. Popularity has led to Australian consumers being drawn to rewards and incentives they receive as a loyalty cardholder. The Loyalty Concept The popularity of loyalty schemes has seen a worldwide increase in programs, due to their potential to alter the normal market patterns of repeat-purchase behaviour. They ve become common practice in many industries such as the airline (frequent flyer programs) and in retail. Businesses use loyalty cards to identify and reward customers for their loyalty. More precisely, loyalty cards enable companies to acquire knowledge and develop a better relationship with their customers. This is accomplished by rewarding cardholders with benefits on goods and services in order to encourage the desired loyal buyer behaviour. The concept of loyalty marketing is an approach to marketing based on strategic management, whereby businesses focus their efforts on retaining 1

4 and expanding clientele. Loyalty marketing should however be considered a long term strategic investment rather than a short term tactical manoeuvre, the benefit of this being that store loyalty provides a degree of assurance in future earnings. 2 Conversely, failure to encourage loyal buyers may potentially result in future earning being put at risk, regardless if current earnings are high. Other important benefits of retaining customers lie within the fact that loyal customers are generally more profitable, cost less to serve, are less price-sensitive and generate positive word of mouth. Statistics have also shown the cost of attracting new customers is ten times greater than retaining existing ones. 3 For these reasons loyalty programs have been established as a fundamental tool for both marketing and advertising since the mid 1990 s. Loyalty programs provide a platform for businesses to collect marketing data direct from the customer. A database of consumer information is collated to gain a better understanding of buyer behaviour. Consumer databases are then used by retailers in order to develop new services, define target groups and enhance marketing strategies. This is seen as a major benefit of loyalty schemes from the retailers point of view, with the opportunity provided to get to know the customer better, through the personal details and general information that are taken when a customer opts for a card. 4 As a result of this the application of loyalty card data in direct marketing is considered by many to be the fundamental benefit of loyalty programs. Rise of Loyalty Programs Recent years have seen an exponential growth in the number of loyalty card programs worldwide. According to the Australian Centre for Retail Studies (ACRS) at Monash University, Australian businesses have welcomed the rise of loyalty programs with 63% of Australian retailers currently operating a formal program to further develop customer relationships. 5 All major Australian banks now offer credit cards with reward programs, many of which offer points towards free flights. Amongst the most successful Australian loyalty schemes is the Priceline Club Card, the Myer one program, Pulse Rewards program and the Millers Retail Club to name just a few. 2

5 Fly Buys is Australia's largest consumer loyalty program and one of the world's largest in terms of coverage. Retail outlets involved in the program represent more than 20% of Australian retail spending and cover not just store patronage but also credit card usage and petrol sales. The program offers points to cardholders that can be redeemed for free air travel or accommodation. The program was launched on the 29 th August 1994 and as of the beginning of 2009 Fly Buys had a membership base of over 8 million, with one in every four Australian households being cardholders. 6. Fly Buys operating budget is reported to be in excess of $20 million per annum, a figure which does not include customer rewards. Rival retailer Woolworths launched its everyday rewards fuel discount card nationally in 2008, which reached 3 million members within one year of operation. These figures indicate the popularity of loyalty program is likely to ensure loyalty cards will continue to maintain a permanent place in business marketing, particularly in the major chains. The impact of a successful loyalty program In contrast to other marketing efforts, loyalty programs operate differently to advertising campaigns and sales promotions, therefore having a distinctive impact on businesses. An effective loyalty program should have a prominent effect on the average purchase frequency and share of requirements. In contrast to this, the increase in market penetration is generally not as pronounced. This is due to loyalty programs appealing more to existing customers and heavy buyers, who tend to be existing buyers, given that heavy buyers are inclined to maintain a larger repertoire of businesses. 6 This means that the brand will have a higher average purchase frequency than would be expected given its level of penetration. In addition to these deviations, there should also be a higher than normal duplication of purchase between participant businesses and far less switching to non-program brands, thereby creating a degree of market 'partitioning'. 6 The impact of loyalty programs that reward specific types of consumer behaviour should be evaluated in terms of the type of behavioural changes 3

6 they aim to achieve. 6 A successful loyalty program should ensure cardholders show changes in repeat-purchase loyalty which are absent in non-program members. Customer behavioural changes may specifically include: Decreased switching to non-program businesses. Increased allocation of share of requirements. Increased repeat-purchase rates. Increased usage frequency. Greater propensity to be exclusively loyal to participating businesses. Greater propensity to switch between participating businesses and fewer propensities to switch to non-program businesses. These characteristics may be achieved by an emphasis on building repeatpurchase behaviour, procreating the desired marketing effects. 6 Loyalty card scheme A successful loyalty program provides substantial benefits to businesses, relying on the simple fact that people appreciate receiving rewards. Numerous methods for managing loyalty schemes have been trialled, all of which functioning on the rewards principle. Through implementing a well prepared and developed loyalty program, businesses can ultimately gain a strengthened relationship with customers, increase sales, improve customer product awareness and form a better understanding of customer preference. 7 Establishing a loyalty program tailored to businesses within a particular district typically follows a similar format, proven to increase loyal buyer behaviour. This generally entails an initial recruitment of business to participate in the program. Businesses provide benefits on goods and services in order to encourage store loyalty. Promotion of the program and its rewards is used to target consumers, enticing them to register for cards. Signing additional members profit businesses by the potential increase in sales and in expanding the consumer database. 8 This provides an effective marketing strategy focused on retaining existing customers and attracting new ones. 4

7 Business Involvement Businesses operating within the city of Unley will potentially have the opportunity to join a loyalty program, aimed at increasing revenue within the city of Unley. The greater the total number of businesses recruited in the program, directly translates to an increase in benefits available to cardholders. This broadens the range of services offering rewards, thereby encouraging cardholders to increase purchase frequency within the city of Unley. Providing a comprehensive range of services is likely to attract new buyers to participating businesses. This will include consumers that frequent other businesses within the program and hence see the benefit in expanding their patronage to other participating stores. It s therefore within the customer s interest to add these businesses to their repertoire, resulting in business gaining new customers. Businesses will be approached to join the program, whereby they ll receive an information pack outlining details of the scheme. Packs will provide information regarding logistics, objectives, benefits and the terms and conditions of the program. A template will be included, outlining how the program will work for the businesses, suggesting possible reward offers and providing an example of the card and promotional media. This will aim at attracting businesses to join the loyalty card program through highlighting the advantage of encouraging loyal buying behavior. There is expected to be no fee involved for businesses to join the loyalty program, with material and advertising costs absorbed by the council. The only perceived cost to businesses will be in providing discount on goods and services. Participating businesses will be identifiable to cardholders by a sticker on shop fronts displaying the Unley loyalty card logo, indicating they may receive discounts on selected goods and services within the store. Customer Registration Customers today tend to expect more from businesses. Fortunately the introduction of a loyalty card program will provide an avenue for customers to gain additional benefits on purchases. Registration will be open to the 5

8 general public, with benefits redeemable at participating businesses within the city of Unley. Customers will have the opportunity to take out membership at any participating outlet, distribution point or by forwarding a registration form to the city of Unley council. Registration forms will be available through the Eastern Courier, Unley Life, online and by letter drop. These combined media sources have the potential to reach a total audience of 18,000 within the city of Unley alone. A small registration fee of between $30-$40 is likely to be imposed for purchase of the card. This is inline with competing programs, for example the Melbourne Street Loyalty Card which charges a $35 membership fee. Funds may be used to recoup the costs of materials and support advertising. Members will receive a ready to use card, enabling them to take advantage of discount offers and promotional activities, simply by presenting the card upon purchase of goods. A brochure identifying participating outlets will accompany the loyalty card, outlining benefits available at the respective businesses. Cardholders will also receive updates on the latest offers and recently signed businesses. Incentive rewards Loyalty card programs work on the principle of rewarding loyal buyer behaviour, therefore the reward itself is an intrinsic part of the scheme. In recent years, the competition for high income customers has led many loyalty programs to provide significant rewards in seeking to attract customers. 9 These rewards are distinguished between sales promotions due to their long term nature. At the conclusion of sale periods, there are no measures to stop consumers reverting to their previous buyer behaviour and indeed this is what appears to happen. 10 Contrary to this, loyalty programs offer a long term reward strategy to maintain customer loyalty and overcome this problem. Typically rewards are tangible elements such as discounts and gifts, but can extend to soft rewards such as special communications and preferential treatment. Soft benefits are generally emotionally orientated, providing consumers with a sense of recognition or making them feel important in 6

9 comparison to other shoppers. Soft rewards play the role of increasing consumer satisfaction with customer service, whereas tangible rewards circumvent post-program loyalty by drawing customer attention to the reward rather than the brand. Tangible attributes may also influence the customer s perception of merchandise, purely by highlighting products they previously haven t used. 11 While tangible attributes are the most important predictors of store satisfaction, soft attributes are important predictors of store loyalty. The right balance of rewards is considered an important element of the rewards program. Loyalty card rewards act to increase the value of consumer items. This mean the price is no longer the only financial criteria used by the customer to evaluate retail items. Therefore customers that are satisfied with loyalty rewards will value loyal shopping behaviour to a greater extent, due to the value of using the card. Generally this is observed to decrease price sensitivity in comparison to non-cardholders. Non-cardholders typically choose not to adopt loyalty cards because their shopping frequency and spending is insufficient to benefit from rewards. 12 These customers are the least loyal and most price sensitive because they only visit the store to take advantage of special promotions. In this case retailers may offer additional rewards relating to the loyalty program in order to encourage repeat purchase. When providing loyalty rewards, the expectations of the consumer must be considered. Consumers typically seek rewards that match their needs, are achievable and don t require excessive time and expenditure in order to receive benefits. 12 Other factors to consider in guaranteeing reward satisfaction include the range of rewards, cash value and the perceived likelihood of achieving rewards. Common examples of rewards that follow these stipulations range between complementary gifts, two-for-one offers and percentage discounts. Initial Setup Costs The costs of establishing a loyalty program lies in the design, materials, printing and advertising of the loyalty card. Producing loyalty cards and 7

10 promotional stickers on a citywide scale requires a budget of approximately $ This is broken down to the cost in graphic design of five double sided loyalty cards and five single sided loyalty stickers for the city of Unley precincts, utilising similar templates quoted at $ The cost of then printing 1000 loyalty cards and 50 loyalty stickers is quoted to cost $ These figures indicate the minimum cost involved in founding a loyalty program of this scale and will be considered in determining the cost of registration. Promoting the launch of a City of Unley loyalty card would occur through media release by the council. This entails advertising the program through council affiliated media including street banners, Unley Life magazine, Eastern Courier and the city of Unley website. This has the potential to reach a large target audience at minimal cost to the program. Any ongoing costs of the program will be largely due to wages and supply of promotional media; however this is expected to be low with minimal upkeep required. Conclusion Loyalty card programs have proven there potential as marketing tools for encouraging loyal buying behavior. Many organisations have clearly benefited from implementing loyalty schemes; however this requires meticulous planning and evaluation of the program in order to warrant success. Literature highlights the importance of establishing a loyalty program that enables retailers to differentiate themselves from their competitors. The card must offer sufficient advantages to ensure that customers will adopt and use the card. Moreover, the reward scheme must motivate customers to modify their purchase behaviour and their preference with respect to the business. If managed successfully, a loyalty program operating within the city of Unley has the capacity to increase both customer numbers and purchase frequency. Implementing an Unley loyalty program has the potential to provide the framework necessary for boosting revenue. Through the provision of incentives and direct marketing capabilities, loyalty programs may be the long term answer to attaining loyal customer behaviour in Unley. 8

11 References [1] Gudonaviviene, R., Rutelione, A., Decisions of customer s loyalty programs formation. Economics and management. 2009, (14), [2] O Malley, L., Can loyalty schemes really build loyalty? Marketing Intelligence and Planning. 1998, 16, (1), [3] Byrom, J., The role of loyalty card data within local marketing initiatives. Journal of Retail and Distribution Management. 2001, 29, (7), [4] Byrom, J., Hernandez, T., Bennison. D., Hooper, P., Exploring the geographical dimension in loyalty card data. Marketing Intelligence and Planning. 2001, 19, (3), [5] Anns, R., Do loyalty programs really work? Monash Magazine. 2009, (23). [6] Sharp, B., Sharp, A., Loyalty programs and their impact on repeatpurchase loyalty patterns. Journal of Research in Marketing. 1997, (14), [7] Pauler, G., Dick, A., Maximizing profit of a food retailing chain by targeting and promoting valuable customers using loyalty card scanner data. Journal of Operational Research. 2006, (174), [8] Bhattacharya, C. B., Is your brand s loyalty too much, too little, or just right?; Explaining deviations in loyalty from the Dirichlet norm. Journal of Research in Marketing. 1997, (14), [9] Rowely, J., Loyalty kiosks: making loyalty cards work. British Food Journal. 2000, 102, (5), [10] Bridson, K., Evans, J., Hickman, M., Assessing the relationship between loyalty program attributes, store satisfaction and store loyalty. Journal of Retailing and Consumer Services. 2008, (15), [11] Demoulin, N. T. M., Zidda, P., On the impact of loyalty cards on store loyalty: Does the customers satisfaction with the reward scheme matter? Journal of Retailing and Consumer Services. 2008, (15), [12] Leenheer, J., Van Heerder, H. J., Bijmolt, T. H. A., Smidts, A., Do loyalty programs really enhance behavioural loyalty? An empirical analysis accounting for self-selecting members. Journal of Research in Marketing. 2007, (24),