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Using Loyalty Management To Increase Customer Mindshare
Confidential Page 1 05/20/2010USING LOYALTY MANAGEMENT TO INCREASE CUSTOMER MINDSHAREThe recent global downturn in the market has every company small or big lookat ways to cut spending and seek fresh ideas to increase revenue andprofitability. There is an ever-increasing competition to cut the time fromproduct conception to product launch. With the rapid commercialization oftechnology, it has become easier for competitors to launch new products withsimilar features and at cheaper prices. Companies cannot solely rely on theadvantages they get by being the first mover in the marketplace. Companiesare focusing more and more on providing the best services to their mostprofitable customers and retaining the existing customer base. The lifetimevalue of a customer can be considerable. Carl Sewell the owner of a chain ofauto retailers in the USA calculates that the lifetime value of a lifelongcustomer can be as high as $332,000. Sewell competes on the superior qualityof the service that he provides, the best way to develop loyalty in customers inthe long-term. The focus is clearly shifting from selling based on specific set offeatures in the product line to enhancing the Customer Experience and theability of an organization to gain bigger share of Customer’s Mindshare.WHAT IS LOYALTY MANAGEMENTLoyalty management is an important tool in an organization’s arsenal to helpretain its customer base. Companies use Loyalty management to build lastingrelationships with customers who contribute the most to profitability andcapture a larger share of profitable customer’s business.Although the best loyalty programs are based upon delivering superior valueto the customer through the products offered, customer service and value-added marketing communications, most programs start out by offering pointsfor purchases that can be exchanged for rewards, to build an interactiverelationship with the target customer. This facilitates the collection of customerinformation that can be leveraged to improve the company’s basic valueproposition - better products, better customer service and more value-addingmarketing communications at lower prices. Going back to 70s and 80s whenthe Airline Deregulation Act was signed into law, Airline Carriers started tothink about brand loyalty. American Airlines became the first airline to launcha computerized Frequent Flyer Program in 1981. By 1990, every airline worthits salt offered its customers a Frequent Flyer Program. Frequent FlyerProgram became a commodity in the Airlines industry and very few airlineswere using it as a strategic differentiator.Fast forward to 21st century, there is a clear shift happening to Loyaltyprograms which are multi-channel, provide 360 degrees view of the customerand respond to customer needs in real time. Companies today want to be ableto identify the performance of customer relationships from multiple dimensionsand be able to track and analyze them in near real-time. Once the customersAuthor: Vineet Pahuja
Confidential Page 2 05/20/2010that contribute the biggest share of profits are recognized, these customersneed to be recognized and rewarded in real time. Aeroplan is a good exampleof a company which started of as an internal Frequent Flyer Program for AirCanada in 1984 but later spun off as an independent Loyalty marketingcompany managing Loyalty Programs for other companies such as Esso, HomeHardware, Sobeys, Thrifty foods and others. The company is worth more than$3B as standalone entity. Aeroplan has taken multiple initiatives like CustomerProfitability Model (CPM) that provide a member centric view of the customerand the value that every individual customer brings to Loyalty Program thatAeroplan manages.A good loyalty program buys information and earns loyalty; a poor one tries tobuy loyalty. Research has shown most retail customers show ‘polygamousloyalty’ - where they share their dollars spent with a number of companies’brands. Today, people in general are registered with 14 loyalty programs andhave 6 or more active loyalty cards in their wallet. A typical frequent travelerhas between 3 and 4 Frequent Flyer Program cards in her wallet.Companies that have successfully implemented Loyalty managementprograms have long realized that developing a detailed understanding of whatdrives target customers’ buying behavior is the one of the key drivers in asuccessful loyalty program. Only when the needs, wants and opinions of thecustomer are fully understood can the program’s value proposition be decidedand the other pieces of the loyalty program jigsaw built around it. A case inpoint is the example of Frequent Flyer Program offered by Lufthansa andBritish Airways.Lufthansa research suggests that its Miles & More Frequent Flyer Program isonly the 10th most important flight selection decision factor for businesstravelers. The failure of its FFP to significantly alter flying behavior issupported by the discovery that non-members have a higher satisfactionrating with the airline than Miles & More members.In complete contrast, British Airways Executive Club in partnership with AirMiles has identified the behaviors that lead to loyalty to the airline and hasused this information to micro-segment its customer base. It then uses acombination of personal service, highly targeted flight promotions and rewardselection to develop the ‘multi-collector-redeemer’ behavior characteristic ofits most loyal customersWHY GO IN FOR LOYALTY MANAGEMENTAlthough a loyalty program can have a big impact on the profitability of targetcustomers, it is not appropriate in all market situations.Author: Vineet Pahuja
Confidential Page 3 05/20/2010Situations when a loyalty program will help an organization• When loyalty program directly supports the company’s value proposition for target customers• When relationship building adds to perceived value - when customers want a relationship• When the target customer’s lifetime value is high• When customer retention costs are less than acquisition costsSituations when a loyalty program will not help• When target customers buy many brands in the category - not cost effective• When brands imitate each other’s strategies - any moves will be quickly neutralized by competitors• When the product-in-use experience is key - the experience is key not the factors that loyalty program can influence• When technology changes lead to better price or performance - better value is the key• When the brand is highly differentiated - fashion a key motivator• When natural customer retention is low - customer behavior is usually too hard to changeSTRATEGIC GOALS FOR RUNNING A LOYALTY PROGRAMMost loyalty programs concentrate on achieving one or more of the followingpublicly acknowledged goals• To maintain sales, margins and profits with the current customer base in the face of increasing competition• To increase the loyalty and lifetime value of current customers in the face of increasing customer choice• To induce current customers to cross-buy other products• To maintain market share with the current customer base in the face of increasing competitionUsually, these goals are references to particular target customer groups on thebasis that only a small percentage of customers (those targeted) deliver themajority of profits, and that these customers can be ‘bound’ to the companythrough the loyalty programs.In highly competitive markets, the decision to launch a loyalty program isoften driven by threats of competitive parity as much as anything else, theprogram having other underlying goals• To pre-empt a competitor from introducing a similar loyalty scheme• To differentiate a brand to avoid parity• To pre-empt the entry of a new brandAuthor: Vineet Pahuja
Confidential Page 4 05/20/2010PRINCIPLES OF A GOOD LOYALTY PROGRAMA good customer loyalty program works by improving the long-termrelationship between the organization and its target customers, normally thosewho spend the most and are the most loyal, so that both their spend andloyalty are increased. Although long-term promotions also aim to increase thecustomer’s spend and loyalty, they differ from loyalty programs in that theycannot realistically expect to influence the customer’s behavior once thepromotion has ended. To be interesting to the target customer, the loyaltyprogram must offer interesting rewards (a mixture of rebates, rewards andrecognition) that are achievable by the customer within their normal buyingbehavior be easy to do business with, and offer good two-way channels ofcommunication. To be interesting to the company, the loyalty program mustbe affordable with limited long-term liability, be flexible enough to cope withchanges in the customer’s behavior or in the competitive market, and it mustbe able to terminate the program without incurring heavy closure costs oralienating the customer.The real value created by a loyalty program is the data about the customerand their buying habits that the program provides. This is the key enablerwhen developing a customer information data warehouse with which to runcustomer-specific marketing campaigns for target customersA loyalty program is a powerful marketing instrument, the introduction ofwhich rarely goes without being rapidly copied. The program should thereforeallow the company to leverage an inherent advantage that cannot easily becopied or improved upon by its competitors. In competitive markets, this iswhere most undifferentiated loyalty programs fail, becoming expensiveoperating costs that need to be carried by all players in the marketIMPLEMENTING A LOYALTY PROGRAMWhen it comes to implementing a Loyalty Management Program, the debateabout whether to outsource the company’s Loyalty program is a hot topic.Because of the strategic nature of the Loyalty program, most companies focuson designing and managing the program in-house. There are pieces of theprogram that are highly standardized like snail/email management which arebeing outsourced. However, the design and execution of the Loyalty Programare by and large being managed by the companied internally.SAP – a leading software vendor in the CRM space, offers the best of the breedLoyalty management applications. The applications offered by SAP not onlyoffer strong Loyalty Management functionality but also provide integration withMarketing, Sales and Service functionalities, Customer data management, E-commerce offering, Backend integration and provide open interfaces toconnect to the Loyalty Partner’s system landscape. The applications alsoAuthor: Vineet Pahuja
Confidential Page 5 05/20/2010provide real time analytics tools to gain thorough analysis of customer profile,dynamic preferences, and cost and margin information that provides a solidfoundation to build and retain the right customer relationships. SAP launchedtheir Loyalty Management offering with SAP CRM 7.0 solution in Q4’ 2008.The key building blocks of Loyalty Management Program areProgram Management• Program Design which includes designing a tier management scheme to reward members for their loyalty and a points management scheme to influence and reward member interactions with the program• Program Partner Setup which includes defining the partners and who would be part of the Program and defining the rules of engagement for the partner e.g. multi partner joint promotions and cost sharing agreements• Tier Management which includes defining tier levels, assigning members to tier levels and defining rules to upgrade/downgrade/retain tier levels• Point Management which includes managing qualifying and redeemable points in the program and point expiration rules based on flexible attributesReward Rule Management• Rule Modeling includes defining of rules for different tier level assignment, point assignment and rule scheduling.• Campaign Eligibility and Enrollment which includes the eligibility to execute campaigns for a specific set of loyalty members• Seamless integration of reward rules between the company’s customers and its partnersMembership Management• Membership type and Registration for both individuals and Organizations in the Loyalty Program and definition of individual, joint or shared memberships.• Member Tier Management which includes assignment of members to multiple Tiers and movement across tiers• Member Activities which includes managing the changes to member profiles based on loyalty point earnings / redemptions and Tier changes• Member Profile Maintenance which includes dashboard for each member’s profile and activity reports• Point Account Maintenance which includes both qualifying and redeemable point maintenance and related tier determination• Basic Membership Card Handling which includes the financial data related to the membership profile and linkage to external card service providersProcessing / Loyalty Transaction EngineAuthor: Vineet Pahuja
Confidential Page 6 05/20/2010• Processes a loyalty member’s accrual and redemption transactions in batch or real-time• Validates transactions for data adequacy, duplication and accuracy• Determines member eligibility and calculates the number of points by point type that a member should earn• Determines eligibility for tier upgrades and downgrades and effects tier changes based on tier assessment model• Determines member eligibility and calculates redemption price for redemption of products and services. Supports multiple redemption pricing options multiple currencies, and dynamic redemption pricing• Expires points and vouchers based upon validityMulti Channel Integration• Sales Order Processing to update and revise change in member point earnings/redemption, tier changes etc• Marketing integration to enroll loyalty members in ongoing promotions and campaign and provide the ability to earn rewards based on these promotions• Web channel for customers to register for membership, view a dashboard of membership activities, order products/services and run reports on demand• Customer Interaction Center integration by offering the contact center agents to service the needs of the members of loyalty program by enrolling members, creating member transactions, enrolling members in promotions, processing member orders and responding to service requestsAnalytics• Dashboards that provide loyalty members with access to reports related to recent transactions, tier levels, point earnings/ redemptions• Ability to provide a 360 degrees view of the customer by capturing and analyzing information from multiple channels that the members uses, sales orders history and profitability to the organization• Define and measure Key Performance Indicators (KPIs) e.g. net revenue per customer, cost per member etc that provide better insights about customer’s behavior and results in business’s profitability• Ability to analyze the loyalty campaigns to measure the performance based on pre-defined Key Performance Indicators (KPIs)Technology Infrastructure• Service Oriented Architecture based infrastructure that allows integration with the partner’s technology infrastructure using open standard APIs• Real-time analytics tools that provide the most updated information to loyalty members, loyalty program partners and loyalty program owners• Harmonized flow of customer, partner and product data across all channels and the partner ecosystemAuthor: Vineet Pahuja
Confidential Page 7 05/20/2010The battle to get a share of the customer’s wallet will always be there – boomor bust. As history tells us, the current recession like many others in the pastwill pass and we will have positive growth in the economy. When the economyrebounds, the companies that would do well will be the companies who havetaken advantage of the downturn to focus their energies and efforts to createa lasting Customer Experience and gained a bigger share of theCustomer’s Mindshare. The key to thriving in the 21st century is not only tounderstand and serve the customer’s needs and wants but also to turn yourcustomers into Loyal Fans by providing customer delight in everything thatyou do.Author: Vineet Pahuja