Loyalty Programs and IT: Do you have your membership card?
Copyright Gene Leshinsky, distribute freely with proper crediting.
IT enabling
IT makes loyalty programs more feasible by facilitating the creation of large volumes of researchable data that describes the consumer, thereby providing sustainable competitive advantage to the company through effective use of knowledge systems. Reward programs have existed for more the 100 years from as early as 1896 with S&H Green Stamps[Wikid] beginning to issue redeemable stamps to the present with Nectar and Tesco reward programs dominating the British market and numerous reward programs through out the world from the corner Star Bucks to Credit card sky miles. The idea of a reward for loyalty has existed since the beginning of commerce since every discount, bargain, and trade treaty is in essence a loyalty program designed to bring the customer back.
The difference between reward programs as they were run by S&H and Canadian Tire [Wikic] 50 years ago and today is the advent of IT. While the loyalty programs of yesterday were mainly paper based redeemable stamps or coupons that one had to meticulously collect and redeem, today the swipe of a Shaw’s card is all you need to get your discounts taken off your purchase. The ubiquity of reward programs has made it easier for consumers who were not ordinarily price conscious to become price conscious through the ease of redeeming loyalty points. The stunning difference lies in the amount of data that a company is now able to quickly aggregate without hiring an outside marketing and research company. Every time a loyalty card is used, whether it is a frequent flyer miles card or a Mobil Speed pass, a new set of data is added to the existing tables and archived.
The advent of IT into the rewards market has produced quantities of data that early market research companies could only imagine. This data is neatly stored in data warehouses and data mined for information that could lead one consumer to receive four coupons of particular value as opposed to his neighbor next door receiving one coupon. [Dei05]
Many companies still use the methods of pre-IT to market to their customers and attract them through colorful coupons and “Buy 10 get one free” offers, however the real players in the rewards market are those companies that have fully adopted IT into the research and reward programs and are quietly stockpiling information on their customers to learn better and more effective ways of selling the same products at higher margin.
Competitive Advantages
The competitive advantage that Nectar achieved was the information that the sponsors gained form participating in the program. Nectar also showed that if a customer could redeem his reward points at two or more locations then the incidence of the customer actually shopping at the first location increased.[Dei05] This is a fundamental behavior modification that Nectar achieved establishing a clear competitive advantage for the firms that participated in the program over those that were recalcitrant. The firms achieved a sustainable advantage as long as their neighbor across the street did not participate in the program. This also ensured that the participating sponsors knew more about their customers then those that did not sustaining their competitive advantage.
The market efforts by the Nectar team that composed the coupon mailings targeted these businesses and diminished their marketing costs far below that of ordinary mailings.[Dei05] Thus, the participating stores were able to attract new customers, but more importantly Nectar collected information on how certain customers behaved allowing the sponsors to tailor their ads with that information.[Dei05] This approach to marketing allowed Nectar sponsors that had a lagging program to compete with a state of the art system enhancing their own marketing prowess.
Such market correlation makes good sense especially with targeted marketing campaigns that were conducted on carefully aggregated consumer data. IT enabled Nectar to enable its participating businesses to gain comparative advantage by exposing their consumers to more choices and by educating the consumers about their business because of the data collected through Nectar.
Justin King [Dei05] pointed out another important strategic advantage implicitly when he described the re-hauling of ASDA program without the loyalty platform. While a company can concentrate it’s efforts on creating better values for people and attracting customers in the fashion of Wal-Mart, the rewards program is a more long term approach that can predict consumer behavior so that the company will know when and how to react giving it a competitive advantage over the company that has no rewards program and does not meticulously observe the behavior of its customers.
Technologies
Nectar is reminiscent of m-Business technology as it uses a highly internetworked approach to marketing. From the perspective of the UPS [Max03] example each reward card can be see as an individual package and each customer as part of that package. Every time a customer hits the package the systems is carefully tracking the customer’s progress. Over time Nectar learns everything about the customer from the kind of cookies a customer may like to eat during the fall to how many kids a customer has to an innumerable number of details, purchasing habits and even more obscure behaviors that many consumers would not even know they possessed. Through this the tracking system keeps a very close eye on the changing habits of a customer not unlike the tracking system of UPS can always tell you where a package is at any given time.
Nectar also takes advantage of the internet by promoting its products aggressively on line and on its website. Nectar goes so far as to create games [Nec07a] for children that create brand loyalty to Nectar from a young age. This approach ensures that Nectar stays a dominant part of British purchasing psyche, much like the TTCP/IP foundations of the internet are critical to any future development of information technology.
Payback
Nectar provided its value by educating consumers about various products and services while collecting terabytes of useful purchasing behavior information for the program partners. The payback is the information gleaned from the consumers participating in the program. The 1% [Dei05] cost of the program is justified by the information collected and the business intelligence collected through careful data mining of the information. This information is the competitive advantage that Nectar brings to its sponsors and enables them to know how and when to market products to its patrons. Another major payback was that Nectar allowed Sainsbury to concentrate on their business model without the distraction of running a huge reward program. Nectar freed resources that before were handling the program to concentrate on creating a more efficient retail chain.
The quality of Nectar justification to those of IT projects in general is sound. The driving business model for Nectar was that through innovating on the existing systems of customer loyalty schemes and adopting a more networked approach of open relationships, Nectar enabled the participating companies to reward profitable customer behavior at a tiny margin of their profits. At the same time, Nectar became a hugely successful business that became profitable within 2 years [Dei05] of operation. Many IT projects are aimed at improving the communication between business users, clients, suppliers, and buyers as well as internal communication; Nectar successfully created the framework for such collaboration with a hefty profit margin of 23% [Dei05].
The complaint against Nectar and many loyalty programs is that they give back a deceptively small “Reward” percentage and seldom redeem for cash. Nectar makes money on the spread between the points sold and purchased, but also on those that are never redeemed [Dei05]. These points are like rebates for customers following the “use them or lose them” principle. A reasonable modification would be to begin to reward consumers more and to treat them almost as partners. The effectiveness of the loyalty card could be measured by how enthusiastic customers are beyond the 59%. [Dei05] An approach that would actively seek out increasing loyal consumers can only add to the data gathered and further reduce the cost of the enterprise.
Nectar already issues credit cards [Nec07] that enable shoppers to collect automatically on every purchase regardless of whether the retailer is in the program or not thereby creating a total rewards scheme. One way to enhance this program in particular is to automatically enlist companies where the credit card is used on a free basis and send those potential partners sample market data about their consumers that would convince them to join the program and make Nectar even more popular.
System Extent and Visibility
The Salisbury Reward program was dropped as a direct result of the outsourcing of the loyalty program to Nectar. This may have had the BPO effect of elimination the departments that ran the rewards program such as the marketing wing that analyzed the data from the program. The cross functional impact on the internal working of the company was a scaling down of their resources and cutting the cost associated with running a reward program. Nectar took an internally visible system and transformed it into a complete external facing operation where everyone could observe the working of Nectar from the individual consumers to the suppliers and partners.
The dismantling of the internal rewards program was a major business structure impact on Sainsbury. All the employees and departments that operated the Sainsbury rewards program such as marketing, procurement, and IT had to be retrained, reassigned, or terminated. The managers that previously gave their attention to managing the reward program could now concentrate on enhancing operational agility and cutting costs, while growing Sainsbury’s revenue without the distraction of a large internal project. The cashiers that signed up the
Sainsbury did not massively outsource any of its operational functions before the introduction of Nectar. [Dei05] This change in culture of outsourcing operations was a major break with their traditions and ushered in a profound change for the management of Sainsbury. The individual managers down to the line cashiers had to contend with a third party marketing one of their most effective promotional tools and sharing that marketing mechanism with their competitors. [Dei05] The collaboration of internal and external resources that market Nectar to customers is a cornerstone of Nectars’ success. This new culture of working with an outside force was a major realignment of the Sainsbury culture and the psyche of its employees. The culture of working within the organization had to transform into one of external visible federation as each partner benefited directly from Nectar running the reward program while the partners improved on their core business model without distractions.
Reference:
[Wikia] “Loyalty Programs”
http://en.wikipedia.org/wiki/Loyalty_program
[Wikib] “Tesco Clubcard”
http://en.wikipedia.org/wiki/Tesco_Clubcard
[Wikic] “Canadian Tire Money”
http://en.wikipedia.org/wiki/Canadian_Tire_money
[Wikid]“S&H Green Stamps”
http://en.wikipedia.org/wiki/S%26H_Green_Stamps
[Dei05] Deighton, John. “ Nectar: Making Loyalty Pay”
[Max03] “UPS to deploy next-gen wireless handheld”, April 2003, www.maxis.com.my/business/MBAOnline/archive/mba200307a/mba_cs200307.htm
[Nec07] Nectar Website
http://www.nectar.com/earnpoints/americanexpress.nectar
[Nec07a] Nectar Website
http://www.nectar.com/dynamic/nirvana/noleftnav/fun