By Kishore K Somaraju
EXECUTIVE SUMMARY The old retail truism of having the right product at the right place at the right time is now being adjusted to include for the right customer. Modern Loyalty programs are ideal tools for achieving these expectations. Loyalty programs make a lot of sense for retailers: they allow rewarding best customers through discounts, special promotions, gifts, etc. in exchange for a better knowledge of his customers and new purchase patterns identification. This paper takes a look at the way Best in Class loyalty programs are defined (in terms of practices and processes). It also reinforces the obvious advantages of having a well-managed loyalty program in place. Also outlined are some best practice business levers for each stage of Loyalty program cycle. And finally a brief on Smart Loyalty & Customer Intelligence Technical Architecture & Process Flow is brought to light.
TABLE OF CONTENTS Introduction...4 Customer Retention What difference it makes!!...5 Loyalty Card Programs Benefits: Customer Standpoint...6 Fuel Cost Savings...6 Security & Controls...6 Exception Monitoring...7 Flexible Billing Options...7 Loyalty Card Programs Benefits: Retailer Standpoint...7 Roadmap Levers in each stage of a Smart Loyalty Program...8 Smart Loyalty & Customer Intelligence Technical Architecture...10 Integration at Point of Interaction...10 Real-time Customer Data Store...10 Customer Intelligence Analytics...11 Operational Customer Segmentation...11 Campaign and Loyalty Rules...11 Data Quality & Integrity...11 Loyalty Program Support Services...11 Measuring Effectiveness of Customer Loyalty Program...12 Emerging Trends...13 Conclusion...13 Appendix...14 References...14 About the Author...14
Introduction Loyalty programs are a great way to entice customers to keep returning to your stores as they seek to gain rewards on routine purchases. Finding the right fit when it comes to a loyalty program will help store operators differentiate their offering and could generate a steady stream of repeat customers. The main purpose of a loyalty program is to retain regular customers, to increase commitment from occasional customers and to acquire new ones. Some of the expectations of the companies are: Increase the amount of product purchased Lower price sensitivity Higher customer retention What is expected from a successful fuel card loyalty program? Competitive differentiation Increased single brand loyalty Greater consumer resistance to competitor offers Parameters of a successful fuel card loyalty program 4 www.wipro.com
Loyalty programs are initiated by businesses with two main goals: Primary goal: Acquisition of information relating to their customers' spending habits Secondary goal: Actively cultivate loyalty amongst customers to ensure they continue patronizing the business Loyalty programs may offer benefits in a number of different ways. Many loyalty programs offer a sustained discount (such as 10%) for a period of time. Others offer a discount once certain criteria have been met, for example, a 20% discount on a single purchase at the convenience store once a customer has spent $50 at the fuel station. Others offer points which may then be redeemed for products which may or may not be directly related to the business. Loyalty programs are structured marketing efforts that reward, and therefore encourage, loyal buying behaviour behaviour which is potentially of benefit to the firm. Ultimately, the success of loyalty programs depends on how well the business uses the data it gathers to further refine its policies and loyalty programs. Customer Retention What difference it makes!! There are many reasons why retaining a customer makes business sense. Some of these are: Enterprise Loss is Competitor's Gain! If an enterprise doesn t retain its customer, competitor will gain the customer. It Costs You More! It is 6-9 times more expensive to get a new customer than to retain one. Loyalty reaps Rewards! A loyal customer base could contribute nearly 40% of the enterprise turnover. 5% makes the Difference! Companies can boost profits by nearly 100% by retaining just 5% more of their customers. 20/80 Rule applies here too! 20% of customers contribute 80% of the turnover (currently analysts are speculating a 20/65 scenario-but the big picture remains). Retention decreases Churn! Customer retention decreases churn-rate (rate at which customers change service providers). This is especially critical in technology driven industries. Retention increases LTV! The estimated Lifetime Value (LTV) for a combo store with fuel & grocery/supermarket of a customer with a family of four in the US is approximately $350,000. Value surrendered by not retaining a customer could severely erode top and bottom lines. The implications are thus, obvious. 5 www.wipro.com
Loyalty Card Programs Benefits: Customer Standpoint Today s loyalty card schemes empower the customers to get the most out of every drop of fuel they buy. They are simple and easy to use, which is important for busy customers on the move and they leave the station with an experience of getting quality fuels whilst earning rewards. There are many key advantages and reasons to choose the fuel loyalty card: Fuel cost savings Security & controls Easy to check your daily fuel transactions and spending! Exception monitoring Flexible billing options Apart from the key benefits discussed in this section, there are some more generic benefits of fuel card customers: Saving money Convenience factor with ease of payment (speed and simplicity) Special offers/discounts for card holders Feeling of belonging to a membership community Possibility of receiving other financial services (For Example, Barclaycard Freedom, Tesco Club card, etc) Fuel Cost Savings The fuel cards have one of the most robust fuel saving programs. Using fuel cards usually saves customers 1-5% or more on their cost of fuel. This is attained through administrative savings as well as a discount on the cost of fuel. Fuel card can offer customers a cost plus pricing model or retail minus pricing at several locations. Security & Controls The fuel card is as secure as an armoured car for your fuel purchases: Assign fuel cards to vehicles, drivers or any combination Lock to pay at the pump only to restrict fuel purchases inside the store Driver ID & odometer prompting protects from unauthorized fuel use Block after hours or weekend fuelling Restrict purchases to specific stations or brands Fuel Only, Fuel & Maintenance or Fuel, Maintenance & Other Spending limits can be set for each fuel card, per day, week or even month Fuel transactions can be restricted by dollar and/or gallon amount or transaction per day, week or month. The high level of controlled spending limits & restrictions which can be customized from card to card will help promote spend savings and enhance card security. Full internet access to all transactions through online management tools help customers to track, control and record their spending with respect to fuel and conveniences. 6 www.wipro.com
Exception Monitoring Exceptions such as time of day variances, excess fuel tank capacity, pattern discrepancies, product variances, and excess fuel purchases made to the account could be automatically e-mailed to key contacts or the card holders themselves. Flexible Billing Options Today s fuel card has flexible (including weekly, bi-weekly, monthly) billing terms. Customers will receive an e-invoice for their transactions. Loyalty Card Programs Benefits: Retailer Standpoint Benefits Increase customer acquisition Increase customer spends and Increase frequency of spend Increase customer satisfaction Stimulate customer reactivation Maintain customer retention Increase customer referrals Increase customer lifetime value Impacts Customers identification enables deeper relationship marketing Identification of market trends and customer behaviors who buys, what, when, where, how much, how, etc Increasing in sales volume and margins Triggering other opportunities (For Example, financial services) Triggering of one of the most important marketing weapons, the word of mouth this happens automatically if the deal is really good Differentiation Reduce markdowns We can summarize the value as below: Value for the Retailer Drive Bottom-line sales growth Understand how customers shop to drive desired behaviour Save marketing dollars by reducing waste on low-return promotions Increase redemption rates Value for the Customer Get more for every dollar spent Receive promotions that reflect individual buying preferences Easy to use; register and participate with a swipe/dip/ tap of a credit, debit or store loyalty card Instant rewards are simple; no paper coupon clutter, and everything is conveniently accessed through the card 7 www.wipro.com
Roadmap Levers in each stage of a Smart Loyalty Program Stage Lever Collect & Cleanse Analyze & Deploy Interact & Optimize Stage Description Develop Data Model & Collect Customer Information Conduct focus groups & customer research Analyze, Segment & Implement Program Analyze customer product & transaction information to establish customer segments Leverage Customer Data & Increase Pervasive Interaction Marketing & merchandising - leverage customer data to determine product mix, promotional strategies & investments. Process Details & Organizational Alignment Develop loyalty roadmap & strategy Develop data model & populate with customer data Explore organizational re-alignment & cross functional metrics Finalize customer intelligence, loyalty roadmap & strategy Establish loyalty program rules, thresholds, policies & success criteria Train customer facing teams to implement the program and explain the benefits to customers Customer facing teams to become an extension of the loyalty and promotional strategy by providing assisted selling, enhancing service & recommending appropriate products Investigate the use of consulting firms in strategically developing the program Create & execute mass advertising, batch promotions & in-store/location collateral Formulate a committee comprising marketing, merchandising, IT and consulting vendors Provide customer facing team incentives for registering new customers Technology Requirements Create the program technology framework & budget Define functional requirements & identify software vendors Define & implement operational customer database Implement & integrate analytical planning, operational segmentation, campaign management & loyalty rules applications Integrate the program into advances selling technology framework Deploy & format loyalty program interfaces for multiple devices viz. kiosks, digital signs & mobile technology Leverage data cleansing software or service 8 www.wipro.com
Stage Lever Collect & Cleanse Analyze & Deploy Interact & Optimize Stage Description Develop Data Model & Collect Customer Information Analyze, Segment & Implement Program Data collection ratio New members New members Leverage Customer Data & Increase Pervasive Interaction Customer expectations Conversion Conversion Measurements Brand awareness Frequency Up sell Market Basket Service Levels Dormancy Employee productivity Margin Turn Lifetime value Data is collected via reverse append of credit card or telephone number Customers register for the program, be it manual application, kiosk, online, telephone etc Customers receive electronically and card is optional Customer Interaction Customers may receive promotions that retailer is testing which may not be affiliated to a loyalty program, but used to test offers and help create segments Members have online access to order history, applicable promotions, services & product recommendations Members will receive mass advertising and can redeem rewards, discounts and promotions Consistent and individualized promotions, discounts, services and recommendations at every interaction across channels Optimized self service and assisted selling experience Source: AMR Research This roadmap provides details regarding process, organizational alignment, technology requirements, key measurements, and customer interaction for each of the stages. Retailers will need to tweak existing processes and procedures and invest in technology to support these activities. Retailers should understand that the loyalty program journey will be undertaken in parallel with other initiatives, particularly the high-level strategy of enhancing customer interactions with advanced selling technologies and building a demand driven supply network. All these initiatives are tightly integrated and rely on each other. Thus, these initiatives must move together. 9 www.wipro.com
Loyality & Customer Intelligence Technical Architecture Loyality Program Rules Engine Point of Interaction Third Party Network Web enabled Corporate Portal Frirewall Customer Intelligence Analytics Operational Customer Segmentation Real-time Customer Data Store Data Quality & Integrity POS Kiosk Mobile Web Call Centre Partner Service SAP ETL Middleware Loyalty Program Support Services Enterprise BW Loyalty Customer Data Warehouse Data Quality & Integrity Source: AMR Research Successful technology architecture to support a smart loyalty program requires the following components: Integration at Point of Interaction Integration component manager new/revised customer data flow into operational customer database and allows real-time integration of loyalty rules through any point of interaction media viz. POS, in store kiosks and Web etc. Real-time Customer Data Store This data store acts as a central repository for customer data, standardizing, cleansing, aggregating and organizing the information to enable analysis and syndication. Customer Intelligence Analytics This component provides predictive modelling, data mining and analytics to enable users to extrapolate information about customers and better understand marketing, merchandising, and promotion activities that will likely influence behaviour. 10 www.wipro.com
Operational Customer Segmentation This component sits on top of the real-time customer data store to provide segmentation in preparation for campaign execution. It allows business users to create slices of different customer segments based on answers to predefined attributes without deep analytical regimen or time consuming data crunching. (For Example, show me customers that purchased 1000 gallons of fuel in March.) Campaign and Loyalty Rules This component enforces program design and rules by using a complex set of business rules to process incoming data. These rules define program characteristics such as: A number of points any customer can earn on each type of transaction The start and expiry time-lines of a rewards program to which a member is linked The rewards that a particular member is eligible to redeem Additional bonus opportunities for members The thresholds that trigger applicable offers and discounts Campaign rules set the parameters for outgoing marketing programs such as e-mail, kiosk advertising, etc. Loyalty rules set the parameters for incoming customer redemption of applicable rewards. Data Quality & Integrity This component is responsible for cleansing customer information and cross-referencing this information with third party databases. Loyalty Program Support Services This component creates and fulfils loyalty cards, marketing material and rewards. This component also allows contact centre operations to support operational enquiries from customers. Fulfilment and service functions are often outsourced by retailers to third party service providers. 11 www.wipro.com
Measuring Effectiveness of Customer Loyalty Program Once the customer loyalty program is in place and running, the enterprise needs to monitor various parameters so as to measure the effectiveness of the whole exercise. These various parameters could be: Subscription Rate actual number of sign-ups versus the budgeted figure for a given period Sales -Total member spending versus non-member spending for a given period Average bill value member versus non-member Member Retention rate Number of members active after one year of subscription Profitability Member Life Time Value (LTV) An increase in LTV indicates a successful CLP A research project was conducted for a major fuel loyalty program pioneer in the US. 50,000 loyalty customers and 4.8 million transactions were analyzed for a period of 14 months. Highlights of the research are given on the right. The study clearly shows that a smart loyalty program is effective in increasing purchase frequency and basket size from loyalty customers. In addition, the retailers would see the success of the loyalty program in getting fuel only customers back inside the store to make store purchases as well. Loyalty customers spent 36% more than regular customers. Average transaction size of loyalty customers grew 25% over the period. Loyalty members purchase frequency more than doubled from 1.79 to 4.08 times per month. 29% of non - loyal fuel purchases were paid in the store while 58% of loyalty fuel purchases were made in the store. The percentage of double category buyers (Fuel & Store) increased by 22%. 38% of loyalty fuel purchases in the store included store items. 26% of non - loyal fuel purchase in the store included store items. Between 1,500 to 2,500 consumers enrolled into the loyalty program per store. 12 www.wipro.com
Emerging Trends To spice up loyalty programs, more chains are crafting partnerships between non-competitive entities. Grocers sending people to fuel retail outlets as part of their reward mechanism, a win-win for both of them, is one such example. Also on the horizon of this decade, we can expect to see more channels integrating an ongoing cause with a loyalty program. One great example is Shell and Safeway partner with a coalition called Air Miles in Canada, which integrated the cause of going green and being more eco friendly into their program. Customers can earn rewards from buying green products at certain retailers, get a bonus for buying that product, and can redeem points for ecologically responsible items. This also encourages more socially responsible behavior, which is also an overall consumer trend. Another emerging trend is a shift in how the data is being used to communicate promotions. Data gathering reveals a wealth of information about customers, but a lot of companies don t look at that data for insight. In the next five years the companies that are going to do the best in this space are going to be the ones who turn their attention to the treasure trove of data they ve gathered. This data provides insight provides about your most profitable customers and how you can market to them more effectively. Many marketing chains are sending coupons, special offers, bar codes to mobile phones in order to reach customers where they are, but it is important for them to see that this strategy works as the risk is the customer most of the times write-off such offers as SPAM. Conclusion Rewards offered through loyalty programs will continue to be a key differentiator. With so many loyalty programs available to consumers through multiple market channels it will be a necessity to offer creative and personal rewards. Consumers will increasingly demand more offers that are relevant to their personal needs and interests. Loyalty programs recognize and reward the best customers of a business. Nearly one-third of U.S. consumers (32.3%) consider their participation in retail rewards programs to be more important as they seek to stretch their household budgets in the recessionary economy. 13 www.wipro.com
Appendix References [2005]. James A. O Brein, George M. Marakas. Management Information Systems. [2006]. AMR Research Survey. Loyalty Programs that actually create Loyalty Retail Imperative. [2009]. Barry Berman, Joel R Evans. Retail Management. About the Author Kishore K Somaraju works as Senior Consultant, Oil & Gas, within the Energy & Utilities vertical of Wipro Technologies. With over 16 years in downstream retail automation, Kishore brings with him rich experience from companies like IBM and Reliance and adds a synergistic value to Energy & Utilities vertical of Wipro. 14 www.wipro.com
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