Reverse Loyalty - An Alternative Approach to Customer Loyalty

Reverse Loyalty - An Alternative Approach to Customer Loyalty www.wipro.com

CONTENTS Retailers Walking the Tepid Waters Customer Loyalty An Elusive Goal Customer Loyalty The Concept Study of Existing Loyalty Systems Why did Loyalty Programs suffer such a Fate? Reverse Loyalty - The Loyalty Program with a Difference! The Concept The Concept Illustrated for Multiple Retail Formats Reverse Loyalty- A WIN-WIN Conclusion Appendix References Research Methodology About the Author 2 2 3 4 5 6 6 7 8 9 10 10 10 10 This paper studies customer loyalty as a concept, its business needs, its benefits and then analyzes why Customer Loyalty has failed to deliver results, even though it held out lot of promise. The paper then introduces Reverse Loyalty as a concept which can help in achieving true customer loyalty while leveraging existing loyalty infrastructure. The main hypothesis of the concept paper is, the lack of differentiation between retailers and the absence of any real value which retailers can demonstrate to their customers, leading to lack of loyalty and spread of purchases to different retailers by the customers. By Amit Dhall Consulting Manager, Wipro Technologies

Retailers Walking the Tepid Waters In the retail industry, margins are getting squeezed and customers have become more demanding. With customers confidence at an all time low, stagnant population growth and increasing competition in existing markets; customer retention and customer loyalty are the top most priorities for any retailer. Retailers have explored almost all areas which could potentially lead to increased customer loyalty. These include setting up loyalty programs, exceptional customer service, channel integration, lowest prices, relationship marketing, and other such initiatives. Even though some of these areas have generated loyalty, the response has been more or less lukewarm. Also, most of these systems require huge resource investments with long Return on Investment (ROI) cycles. With several retailers basing their strategy on lowest prices for items every day, the concept of price being the only differentiator is fast gaining ground in the minds of customers. This in turn has led to a vicious circle of price reductions and cost optimization, taking customer centricity and in-store service as the price; retailers have to pay, to achieve ever-so elusive profits. Customers hunt for deals and retailers have no option but to comply. Customer Loyalty An Elusive Goal Achieving customer loyalty has been an elusive goal for most retailers. Customers now-a-days are aware and have access to multiple sources of information. With the resurgence of online retailers and numerous websites showing price/features/merchant comparisons, the level of Customer Loyalty The Concept One program which had given an opportunity to move out of this vicious circle was customer loyalty. The concept was hailed as a way out of cutthroat competition, as something which could help mitigate the effects of information transparency available with customers. information and control in the hands of customers are phenomenal. Instead of buying items from a single retailer, customers split their sales evenly or buy items based on lowest price offered by a retailer. This turns the whole strategy of getting customers in the door - with promotions, deals and then making them stay to buy higher value items, upgrade their sales, or increase their average basket size - on its head. Strategies like loss leader pricing, product placement, attractive displays are fast losing competitive advantage for retailers and have become a basic service quotient. Figure 1: Loyalty Process Flow 02

Needs for Implementing Customer Loyalty Programs and their Expected Benefits Needs Need for in-depth customer information Requirement to reduce customer churn Mitigate high cost of attracting new customers Need for increased brand awareness of the retail chain in an increasingly cluttered market Benefits Higher customer retention Increase in frequency of visits More cross-selling opportunities leading to increase in customer spend Strengthening of partner relationships Increase in turnover and profit Fostering of long term relationship with customers Reduction in the need for mark-downs and promotions Improvement in the effectiveness of customer communication with personalization and selective targeting What eventually came out was a card-based program which could be Study of Existing Loyalty Systems As part of this study, secondary research was done on multiple loyalty systems currently available in the market. These included leading software players and niche software vendors. The conclusion from the study was: For all the software vendors, loyalty as a concept involves business flows similar to the traditional loyalty system, where the retailer offers customers a card/loyalty ID to track their purchases. The Retailer then uses the data generated as a result of customer s purchases at the Point of Sale terminal and the e-commerce site to understand customer s shopping behavior. This data is used to send specific promotions/offers to the customer and to develop products which satisfy specific customer needs." easily replicated, and in fact, was easily replicated by all retailers. The program was hailed with the benefits of increasing customer loyalty, upgrading of purchases, winning more customers and retaining existing customers. However, in the end, customers ended up with loyalty cards and retailers with a huge bill to implement and maintain these cards. The perceived benefits never saw the light of the day and the data which was supposed to get mined out of such programs either could not be generated due to huge resource requirements or due to customers not following expected purchase patterns and just doing bargain hunting. Retailers also spent huge amount of money on setting up systems for maintaining these programs, on cards, magazines, promotional coupons, business process flow changes, on training their store associates, on getting a buy-in within their organizations. But, the benefits either never came or were insignificant in value. Retailers in turn, were saddled with a huge system which could not compete with the fast changing business scenarios, even while draining precious resources and management time. Why did Loyalty Programs suffer such a Fate? The question which was asked by retailers was: Why Loyalty programs, even though they looked so promising on paper and had so many tangible and intangible benefits, suffered such a fate? What was the cause of downfall of these programs which were considered to be game changers? The reasons can be summarized as follows: Loyalty programs were offered by all and sundry, with no real differentiation between any two programs. Most retailers looked at loyalty as a means to offer discount on existing merchandise, in exchange for customer s personal information and buying patterns. Retailers did not fully anticipate the costs or the scale of complexity of such programs and hence were not prepared for the long drawn efforts required to make these programs work. Retailers believed customer loyalty programs to be a quick-fix to all their problems and hence did not delve into the details of achieving real benefits from the program. 03

The result was huge failures, cost escalations and general disillusionment with customer loyalty and loyalty programs as a concept. The truth however is entirely different. Loyalty as a concept is inherent in human psyche. Human beings want to relate to one or more socioeconomic groups due to their need for association and recognition. They prefer proven solutions and items which satisfy their explicit and implicit needs. Human beings also look for value in their purchases and want recognition for placing this value in a product/service. However, retailers have been unable to display/demonstrate value in their offerings and hence made it easier for customers to switch. There is nothing which holds customers from moving or spreading their purchases across multiple retailers; end result the customer is considered disloyal and a bargain hunter! Reverse Loyalty - The Loyalty Program with a Difference Most loyalty programs require the customer to make a purchase either online or in-store, register their details with the retailer and if the purchase amount is above a certain threshold value, get a loyalty card/id which they can use for future purchases/redemption of loyalty points. Customers in this kind of program have limited or no loyalty. It is very easy to get enrolled in one or more programs being offered by retailers at any given point of time and then use a particular loyalty ID, whenever the corresponding retailer has an offer/discount higher than the competing retailers. This mechanism fails to solve the purpose behind a loyalty program, as it does not guarantee loyalty or any additional benefits to the retailer, but leads to a cycle of discounting, which affects all retailers. To overcome this and to achieve true loyalty, retailers can introduce a new form of loyalty, one that will bind the customers and will generate benefits commensurate to the commitment from each party. The Concept Reverse Loyalty is a form of loyalty program which puts the onus of showing loyalty back on the customer so that the customer can get tangible benefits based on the level of loyalty demonstrated to the retailer. It also requires the retailer to provide tangible monetary benefits to the customer and not just points for future redemption Reverse Loyalty involves setting up a loyalty account with a retailer. The account here will be like a checking/savings account. Anyone can register with the retailer, by paying an initial amount called the registration amount. The retailer will then issue a loyalty ID to the registered customer. The customer then has to deposit an amount equal to the registration amount at fixed intervals and will be able to redeem the deposited amount plus a defined bonus at the end of specified time frame, in exchange for merchandise from the retailer. Reverse Loyalty can be illustrated by the following example: Customer A goes to a retailer R and registers with an initial amount of 100 dollars (minimum limit can be 10 dollars per month or whatever the retailer decides). The customer in turn gets an online account and a loyalty ID which can be used to enter personal details, contact information, update product wish list, browse products and even buy items online or in-store. Customer A also sets up an automatic payment (wire transfer) or payment from the customer s online account for 100 dollars (or his registering amount) every month to the retailer. For every quarter that the customer stays registered, pays money and does not redeem, the customer gets a bonus of 10% on the registration amount which increases to 15%, 20%, and 25% after each quarter ending at the end of a year when the customer has to redeem the amount for items. So after 3 months, the customer pays 300 dollars to the retailer and gets a bonus of 10 dollars (10% of 100 dollars). After 6 months, the customer would have paid 600 dollars and would get a bonus of 15%, that is, 15 dollars and so on. Customer A can redeem this amount after any quarter but will have to redeem in full along with the bonus amount accrued to the account and can use this amount only to purchase merchandise from that retailer. Each time the customer redeems, the clock for bonus payment will start from the beginning that is, first month, second month, and so on. For any purchase that the customer makes during this duration from the store outside this redemption amount, reward points will get added to the customer s account and can be converted to cash at the rate of 1 dollar for every 100 points. Each point is accumulated after spending 1 dollar at the retailer. At the time of redemption, the customer can use the amount that is deposited with the retailer, plus 04

the bonus amount, and the points accumulated for buying merchandise from that retailer. Customer A can use the amount on anything available online or instores with the retailer. At the time of redemption the customer can be offered free shipping if the registration amount is above 50 dollars. Customer A is also eligible for lucky draws, special offers, discounts, preferred shopping offered by the retailer. All this can be based on the registering amount of the customer. concept of traditional loyalty systems holds more value as it can help the retailer understand customer shopping behavior and help the customer get benefits based on the loyalty shown to a retailer. Reverse Loyalty- A WIN-WIN Reverse Loyalty can deliver benefits to both the retailers and the customers. A concept that can be adapted for a WIN-WIN situation! The Concept Illustrated for Multiple Retail Formats Take the example of an auto parts retailer. A customer for the auto parts retailer purchases items which are both high tickets such as tyres, body repairs, and music systems. The customer also buys small value items such as oil, bumper stickers, and minor repairs. A customer, who is enrolled in the traditional customer loyalty scheme with a retailer, would look for the best bargain and would buy the high ticket item as a planned purchase. He would also look at the lowest price and then purchase the item from the retailer. This retailer may or may not be the one where the customer has a loyalty account, but could be the one offering the most value for money. In such a scenario, the concept of traditional loyalty system gets defeated, as the customer has not purchased from the retailer with whom he has a loyalty account or someone who is trying to build a relation with the customer. In the case of Reverse Loyalty system, the customer would add the big ticket item in his wish list. It will allow the retailer to purchase his inventory, based on the possible demand for the item. The customer will also be able to plan his purchase of the item and would purchase at the time of redemption of his amount. Since the customer is saving money with a particular retailer, it will help generate loyalty, as the customer will prefer to make the purchase from the same retailer. Similar scenario would be true for an electronics retailer, where the customer plans a purchase and then buys a big ticket item at the time of redemption of the amount. In case of a grocery retailer, the concept of Reverse Loyalty might not help, as the purchases are periodic, at short intervals, are mostly low value items and cannot be planned over a longer time period. In such a format, the

Benefits for Retailers Will get a fixed/assured amount of business from the customers Will know the amount of purchase that the customers will make, in advance and thus can do better forecasting of demand Will be able to forge productive relationships with customers and define the level of involvement based on the business offered by the customer Will also get much needed working capital for their operations. This capital can be utilized to fund their other initiatives. Ensures loyalty, though other retailers can offer such promotions, the business which gets generated is fixed and cannot be taken away Induce the customer to upgrade their purchases by tying the benefits accrued from this program to the amount spent by the customers (registering amount, purchases) Can get word of mouth/viral marketing through this program, if they quantify the benefits for their customers Will reduce the cost of operations of a loyalty program by providing steady and risk free cash to the retailers at a low rate of interest Will also have benefits of traditional loyalty programs as the retailers will get customer details and buying patterns and can use this information to make targeted promotions Benefits for Customers Customers can do planned sales and get tangible benefits for the money they spend with the retailers The entry barrier for this program is very low, as the registering amount can be as low as 10 dollars thus inducing lot of potential customers Customers also get a good return on their investment with bonus, free shipping and loyalty points redemption Customers can accumulate money for big purchases and wouldn t necessarily have to be burdened with debt/credit charges The initiative can be an ideal way to get redemptions during holiday season wherein the cash saved in the year can be used for bargain purchases Conclusion The goal for any consumer loyalty program is to make the primary choice for their customers by creating a collaborative and efficient dialog that delivers greater value and makes the in-store and online experience truly exceptional for its members. Loyalty programs need to create a twoway dialog with the customer to deepen the brand relationship and present unique and exclusive opportunities to their members. The emphasis of any loyalty program should be to induce customers to maintain a productive relationship. While the value of customer service, in-store ambience, and product quality cannot be de-emphasized, retailers should try to setup an infrastructure which mines and generates new insights into customer behavior and then uses those insights to constantly find new value propositions for the customers. While promotions and deals can get customers to the store, it is the real benefits that are provided to them that will hold them there and make them truly Loyal. References The following knowledge sources were referenced during the development of this Concept Paper: http://www.google.com/patents http://en.wikipedia.org/wiki http://www.mycustomer.com http://www.creatingloyalty.com http://searchcrm.techtarget.com http://www.loyaltyworks.com http://www.cioinsight.com http://www.loyaltyone.com http://www.loyaltylab.com http://www.bitpipe.com http://whitepapers.techrepublic.com http://retailindustry.about.com Figure 2: Reverse Loyalty Process Flow http://www.customerinsightgroup.com http://www.customerthink.com 06

Research Methodology The study involved secondary search to understand and find various methodologies/business processes, which retailers use to implement loyalty in their operations. It also involved research on various software vendors, to understand the loyalty processes implemented in their solutions. Reverse Loyalty as a concept is still in its nascent stage. The purpose of this concept paper is to elaborate on the concept and understand the acceptability of changing the traditional loyalty with vendors, customers and retailers. About the Author Amit Dhall is a Consulting Manager in Industry Advisory Group at Wipro Technologies. In this role, he is responsible for bringing thought leadership and innovative solutions for Wipro's global retail clients. He has worked on various consulting assignments with US and European retailers in the areas of Workforce Management, Store Solutions, Point of Sale, Supply Chain and Marketing Analytics. He can be reached at amit.dhall@wipro.com. About Wipro Technologies Wipro Technologies, the global IT business of Wipro Limited (NYSE:WIT) is a leading Information Technology, Consulting and Outsourcing company, that delivers solutions to enable its clients do business better. Wipro Technologies delivers winning business outcomes through its deep industry experience and a 360 degree view of Business through Technology helping clients create successful and adaptive businesses. A company recognized globally for its comprehensive portfolio of services, a practitioner s approach to delivering innovation and an organization wide commitment to sustainability, Wipro Technologies has 120,000 employees and clients across 54 countries. For more information, please visit www.wipro.com 07

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