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Customer Centric Loyalty Programs As Key To High Performance Retailing


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Customer Centric Loyalty Programs As Key To High Performance Retailing

  1. 1. Customer Centric Loyalty Programs as Key to High Performance Retailing
  2. 2. 5-points summary of the article 1. Intensifying competition and 4. Accenture research identified three growing customer expectations archetype loyalty program concepts have made companies doubt appealing to unique customer whether customer loyalty programs segments. Selected customer are actually effective and create a characteristics determine the value sustainable competitive advantage. of each loyalty program design element to the customers. 2. Most of the retailers employ limited customer segmentation 5. By following the guidelines of and value analysis therefore fail Accenture research, organizations to identify customer-centric are able to consciously develop strategies for loyalty program customer-centric loyalty programs design and communication. for the existing and new customer segments. 3. Accenture research has proven that there is no one-size fits-all loyalty program concept and that customers are heterogeneous in their preferences for loyalty program designs. Introduction Current business environment is characterized by slim margins, uncertain economic times and ever Survey details 1. An empirical study of the Dutch For retailers a loyalty program is a retail market critical relationship instrument aimed more demanding and knowledgeable 2. Sample of 1,207 loyalty program at capturing and growing customer customers. To achieve a consistent members, representative for the loyalty. Despite the widespread preva- growth pattern, High Performance Dutch population lence of loyalty programs in the retail retailers have to deliver on their 3. Loyalty program design elements industry, the risk of customer churn loyalty promise by creating and are identified by means of case remains high. Accenture research preserving value for their customers. studies of different retail categories shows that 85 percent of the “loyal” In this paper we provide more 4. We use ‘fractional factorial’ design customers are willing to shop else- background on customer-centric to test existing and hypothetical where if properly enticed. In response, approaches to customer loyalty combinations of loyalty program some retailers have adjusted their loy- program concepts. elements. Design fulfills the requi- alty programs to align them better rements of efficiency and robustness. with what they believe matters most 5. We perform choice-based conjoint to their target customers. analysis to measure customer pre- ferences toward loyalty program Popularity of loyalty programs has elements. Choice-based conjoint surged among both customers and tasks directly represent market retailers in the last years, with as behavior, because customers much as 90 percent of customers choose the best alternative out having at least 1 loyalty card and of successive choice sets. 50 percent of customers being a 6. We use latent class choice mode- member of 4 or more loyalty pro- ling that accounts for customer grams. In some retail categories, e.g. heterogeneity in preferences to petrol stations, the adoption rates of derive three customer loyalty loyalty programs have reached 100%. programs with their distinctive customer segments. 2
  3. 3. The Relevance of being Customer Centric Getting closer to customers and customers. Insufficient segmentation no one-size fits-all loyalty program. responding to their preferences, wish- conveys poorly targeted marketing Instead, retailers have to adapt the es and needs is key for enhancing campaigns. In the end customers value proposition for different seg- loyalty, encouraging deeper business do not respond to the campaigns, ments of clients. relationships and indirectly boosting might withdraw from mailings or 1 Jain, Dipak and Siddhartha S. Singh (2002), profitability. Retailers had loudly wor- even ignore all promotions which “Customer Lifetime Value Research in Marketing: A shipped this opinion for a long time increases the risk of customer churn. Review and Future Directions,” Journal of Interactive forgetting to apply the customer- By failing to understand and manage Marketing, 16(2), 34-46. centric approach to their loyalty the effectiveness of their loyalty program design and communication. program, retailers ended up asking Stuck with a tendency to overreact to questions “Are loyalty programs competitor’s marketing actions and profitable?” or “Do loyalty programs copying the retail-category-specific work?” Instead, those retailers should loyalty program concepts, retailers face the fact they might be aiming at ended up with loyalty programs that the wrong customers or even not are not tailored to their customers. aiming at any of their customers. The majority of retailers employ limit- As proposed by Jain and Singh ed customer segmentation and value (2002)1 , it is important to under- analysis which results in a failure to stand how customers perceive the identify key value segments and design elements of loyalty programs makes it difficult to adjust the loyalty simultaneously as well as to account program concepts to the wishes, for potential heterogeneity in their needs and preferences of their preferences. In other words, there is “Businesses should face the fact they might be aiming at the wrong customers or even not aiming at any of their customers.” 3
  4. 4. Customer Centric Loyalty Program defined In times of economic uncertainty, A customer-centric organization In the current business environment changing customer behavior, increas- focuses on creating, communicating, being customer-centric has many ing customer expectations and and delivering value to customers and challenges (such as pressure to reduce eroding loyalty, mastering customer- managing customer relationships in costs, hard to predict customer centricity, i.e. putting the customer ways that benefit both the customer behavior, channel fragmentation and at the center of the organization, and the organization with its share- proliferation). Only by staying focused has become a critical capability holders. Customer centric organiza- on customer-centric essentials (see for staying relevant, competitive tions focus on the needs and behav- Fig.1), high performance businesses and profitable. In order to manage a iors of its customers, rather than can remain profitable and drive customer-centric approach and use internal drivers. Being customer growth2. Developing and maintaining customer-centricity to differentiate centric means balancing an inside- profitable customer relationships is a from the competition one needs to out perspective (the perspective of crucial step for enhancing customer have a clear understanding of what the organization) with an outside-in satisfaction and growing loyalty. It a customer-centric organization is. perspective (the perspective from the can be achieved by creating differen- customer). By aligning organizational tiated customer experiences. A cus- Customer-centricity starts by under- resources and goals, to effectively tomer-centric loyalty program is a standing individual customer needs respond to ever-changing needs and tool that answers both to the needs then improves the customer experi- preferences of customers, organiza- of organizations and customers. ence thereby creating sustainable tions can build mutually beneficial 2 Creating Customer Loyalty: A Customer-Centric profitable customer relationships relationships at all stages of customer Approach, customer acquisition and retention impermeable by competitors. life cycle. research, Accenture, 2008. 1/ Know the customer 2/ Reach the customer 3/ Deliver the experience Understand changing needs and Address channel proliferation e.g. dig- Define segment-based differentiated behaviors ital & social networking channels and experiences and propositions rising customer control Stay close to valued customers View the entire value chain to be Create ongoing two-way dialogue via consistent, e.g. third party Know how to measure loyalty, it’s direct & indirect channels more than just satisfaction Consider and measure all factors: Develop loyalty even before the features, price, service channels Invest in loyalty analytics to customer becomes your customer understand main drivers Manage complexity of differentiated Use analytics to measure effective- experience cost-effectively Recognize different loyalty types: ness of initiatives conditional, emotional and passive Empower front-lines to build trust- based relationships Key Capability Actionable segmentation and Customer-Centric Marketing & Customer Experience design insight Sales channel management and management Figure 1. Customer-centric essentials 4
  5. 5. Customer-Centric Loyalty Programs – Research Findings Accenture conducted research3 aimed at determining the structure concepts. The archetype loyalty programs concepts were found at the “Prevailing belief of and key dimensions of a customer- cross-retail category level. Each a one-size fits-all centric loyalty program design for retailers. The research showed that concept reflects preferences for the loyalty program design of a homoge- loyalty program the prevailing belief of a one-size nous consumer segment. The research misleads organiza- fits-all loyalty program misleads retailers and makes them suffer identified the most prevalent and desired loyalty program dimensions tions and makes from a performance gap, i.e. lower being: economic rewards, privileges, them suffer from a customer retention due to ineffective card types and redemption options. targeting. While focusing on the Accenture found that each segment is performance gap.” market as being one entity, retailers characterized by a strong preference fail to distinguish unique customer for one of the design dimensions. voices and fail to deliver on cus- Different customers reveal distinctive tomer-centric value propositions. preferences for loyalty program con- cept elements. Based on these cus- Accenture identified three customer tomer preferences, 3 segment-specific segments of different sizes: 45%, loyalty program concepts can be 33% and 22% with unique prefer- identified (see Fig. 2). ences for loyalty program design ele- 3 Customer Loyalty Programs: How to design a cus- ments, which were further translated tomer-centric loyalty program?, Accenture, 2009. into three archetype loyalty program Redemption option Segment 1: Frequent Loyalty 13% Card Users Customers being represented by Economic reward segment 1 identified the type 34% of card as being very important, especially the basic, free of charge Card type version of the loyalty card. In addition 45% customers prefer the discount they receive on repeat purchases, the Privileges combined currency redemption and 8% special services made available only to members. This segment is being Economic reward: dominated by female customers Discount on repeat purchase (62%), with a high percentage of Privileges: variety-seeking shoppers and who are Special services available only to looking for personalized treatments. members 65% of customers indicated to use their loyalty cards at least once a Card type: week and 35% of customers in this Normal card segment possess 5 and more loyalty Redemption option: cards. Combined-currency redemption Figure 2. Customer-centric loyalty program concepts 5
  6. 6. Segment 2: Card type High Income Families 23% Customers being represented by the Economic reward 2nd segment put high importance Redemption option 18% on the single-currency redemption option, where customers can only 54% redeem accumulated poins in exchange for a loyalty reward. In Privileges addition, this segment favors the 5% Gold card, products from a catalogue Economic reward: and priority treatments over non- Product from a catalogue members. This segment has the high- Privileges: est percentage of variety-seeking Priority over non-members shoppers and the lowest percentage of economic shoppers. Customers Card type: in this segment typically are below Gold card 55 years old. More than 45% of Redemption option: customers belonging to this segment Single-currency redemption indicated to live with child(ren) and only 15% compose single-person households. Customers falling into this segment have the highest dispos- able income per month. 50% of seg- ment members has a net income of more than 2,500 Euro. Segment 3: Card type The Economic Shopper 10% of the Aging Population Economic Privileges Economic rewards, especially reward 16% rebates, are of very high importance 66% to customers in the 3rd segment. Further, customers in this segment prefer a combination of priority over Redemption non-members and special services option made available only to members, Gold 8% card and single-currency redemption. Economic reward: This segment is characterized by male Rebate customers, who typically use their Privileges: loyalty cards once in 2 weeks or even Priority over non-members and less and possess up to 4 loyalty cards. special services available only to This segment has the highest per- members centage of customers older than 55 years (37%) who shop economical Card type: (65%). Majority of the customers Gold card belonging to this segment are part of Redemption option: a two-person household (50%) with Single-currency redemption a disposable income falling between 1,000 and 2,500 Euro. 6
  7. 7. Based on the specific customer seg- Key determinant of customer- Importance ment preferences for loyalty program centric loyalty program index concept elements Accenture identi- fied a list of essential customer 1 Retail category 24.65 characteristics that when properly utilized ensure the loyalty program 2 Age 18.25 is designed in a way to achieve 3 Gender 16.47 maximum effectiveness in marketing operations. The archetype loyalty 4 Shopping behavior 16.06 programs are targeted at homoge- 5 Household income 10.22 nous customer segments with key 6 Household size 6.23 customer characteristics determining relevance and perceived value of the 7 Household composition 5.76 loyalty program elements. 8 Number of loyalty cards owned 1.34 Besides customer characteristics, firm 9 Frequency of loyalty program usage 1.03 characteristics represented by a retail category were found to pertain to Figure 3. Key determinants of a customer-centric loyalty program design by importance index. the key determinants of customer- centric loyalty programs (see Fig. 3). Recommendations One of the characteristics of high- Accenture research provided guide- marketing effectiveness and increas- performing retailers is their ability to lines, which retailers should apply to ing profits. Pursuing a loyalty strategy, provide customers with a compelling consciously develop customer-centric which is based on learning from cus- value proposition tailored to the pref- loyalty programs for the existing and tomer preferences, leads to strength- erences, expectations, and intentions new customers. Companies could gain ened value and brand proposition, of the specific segments. Being able an advantage over their competitors and increased long-term profits. to capitalize on the knowledge of by differentiating loyalty program All loyalty programs are not equally customer preferences, high perform- design. A unique, customer-oriented effective. Retailers that ensure that ing retailers can create sustainable loyalty program should cause cus- their loyalty strategy is truly cus- value for customers through cus- tomers to specifically prefer a partic- tomer-centric and use this strategy tomization of loyalty program design ular loyalty program, thus increase to both retain and acquire loyal and communication. Effective design the usage of this program. We customers will be the high performers and delivery of an efficient loyalty propose 2 paths for loyalty program in today’s competitive market. program allows high performing improvement. One direction is to retailers to differentiate from the competition. Only by undertaking match the preferences of the target market with one of the archetype “Tailoring loyalty actions pertaining to a loyalty pro- loyalty concepts. Secondly, companies program design gram strategy different than others that do not offer a loyalty program a retailer can gain a sustainable but are interested in introducing one, to the unique competitive advantage. However a should determine which customer customer prefer- one-size fits-all loyalty program is not segment they want to attract with a a compelling solution to stand out loyalty program and tailor-make the ences ascertained from the competition in the cus- loyalty program to meet customer by customer and tomer’s mind. preferences. Adapting loyalty program design to the unique customer pref- firm characteristics Instead, the loyalty program design erences ascertained by customer and drives the effective- should address the crucial issue of firm characteristics drives the effec- optimizing the customer value propo- tiveness of a loyalty program. The ness of a loyalty sition for different segments of cus- tomers. benefits to retailers of mastering loyalty program concepts can be program.” considerable, including building true loyalty, positive word-of-mouth, 7
  8. 8. About the authors Marc Hoogenberg is a Senior Manager Sylwia Juchnowicz is a Junior at Accenture with 10 years experience Researcher with 2 years experience in in marketing consultancy. He helps applying various research techniques organizations to improve the effec- and model building in the field of tiveness of their marketing spend marketing. Her competencies include with topics like branding, pricing, customer loyalty programs, customer customer insights and loyalty. Marc segmentation, product testing, data- has a Master’s degree in econometrics base marketing, brand management and a MBA with crossmedia special- and sales forecasting models. Sylwia ization. Please contact Marc on has studied Business Administration at the University of Groningen. For more information please refer to Folkert Ruiter is a Manager at Accenture with 12 years experience in strategic marketing consultancy. Folkert is specialized in developing tactical and strategic marketing strategies with a clear focus on cus- tomer experience, customer satisfac- tion, loyalty and CRM. Folkert has a Master’s degree in Business Adminis- tration and an MBA in Strategic Marketing. Please contact Folkert on Copyright © 2010 Accenture About Accenture All rights reserved. Accenture is a global management consulting, technology services and Accenture, its logo, and outsourcing company. Combining High Performance Delivered unparalleled experience, comprehen- are trademarks of Accenture. sive capabilities across all industries and business functions, and extensive research on the world’s most success- ful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With approximately 177,000 people serving clients in more than 120 countries, the compa- ny generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009.