Loyalty Programs In Retail

Loyalty Programs in Retail

Benchmarking Indian against International Retailers

Team Name - In Sanity

Vivek Bhandari vivek.v.bhandari@gmail.com

Executive Summary

Today, with the tremendous growth of the retail market, customers are spoiled for choice. With stores vying for footfalls, companies have resorted to offering more for less - more quantities, better prices and better services available at the same cost to the consumer.

The focus of marketing efforts has also changed today. From merely increasing footfalls, and then focusing on top-line growth, the focus of firms has now changed to customer lifetime value. Customer lifetime value (CLV) is the value the customer generates over the whole period of association with the firm. It considers all the future cash flows of that customer arising from him consuming in the future. CRM should lead to increased CLV. When one thinks of maximizing CLV, one has to take a long term perspective and hence focus on customer retention rather than just making a sale. This, coupled with the concept of the Pareto principle - that 80% of a company's sales come from 20% of their customers - has made firms have realized that retaining that 20% is integral to their increased profitability.

The design of the loyalty schemes is important as small changes can often have a large impact. Standard approaches, while being inexpensive and the easiest to conceive and implement, run the risk of being ineffective. For an effective scheme, it is necessary to take advantage of consumer behavior and economics that differ from the average. The best loyalty programs look to reward customers for their spending in terms other than mere discounts. It is necessary to encourage the customer to spend more in the store by building a relationship with him, and by offering him rewards that he will not get anywhere else, thus delighting him and inciting him to stay loyal.

This paper briefly analyses the various loyalty programs present in the different sectors in India and studies those in the retail sector in detail. We have studied the comparative incentives and rewards present based on the value proposition of the firm and its target market. We have then analysed the phenomena of loyalty programs abroad and the phenomena of coalition loyalty, which still has not caught on in India.

In this paper we have also analysed some of the best loyalty programs in the world that focus on rewarding loyalty with experiences. Finally, we have created a theoretical model by which we believe efficient and effective loyalty programs for consumers should be constructed. We have used that model and our findings from our research of the Indian apparel retail market to suggest changes and improvements that the Industry could adopt to make the scheme more of a success.

Introduction

Loyalty programs today have become ubiquitous in the retail space. Loyalty cards and loyalty points are applicable in fields and sectors as varied as retail petrol sales and airlines. Loyalty programs are devised to systematically boost sales by identifying, encouraging and rewarding customers based on their spending patterns.

Loyalty programs have a number of aims:

* Reward the most remunerative customer-segment of the store

* Encourage higher spending by offering rewards

* Promote cross-selling of products across product lines

Rewards can be of two types (Annexure 1):

1. Hard Rewards: These rewards provide "value-for-money" and include discounts and gifts.

2. Soft Rewards: These are incentives that cater to the individualism of customers and provide them with personalized and customized services. Unique experiences that a firm can offer due to its scope of business are also included.

Loyalty programs need to be carefully built and executed. Some pitfalls to be avoided are:

1. Companies offer discounts and rewards on products that customers would have bought anyway

2. Reward programs are inordinately costly

3. Programs do not increase spending of the target segment

4. Customers often enjoy benefits of a scheme without giving anything in return. According to a McKinsey study, on average, half of the customers in a loyalty program are free riders (Annexure 2), making the program largely ineffective.

Today, financial benefits in terms of discounts and freebies in certain products or product lines are the norm. Non-financial incentives do not play much of a role. Customers have learned to calculate the value of loyalty points, miles or cash-back and it is seen only as a form of discount. Loyalty currency has become simply another element of price differentiation and is now itself a commodity. However since it is being offered by competitors, companies find it difficult to withhold it. This is a vicious cycle leading to price undercutting. However the best loyalty programs do not cause consumers to play companies off against each other but look to reward customers in terms other than mere discounts, offering a variety of soft rewards that they can uniquely provide and that other companies find it difficult to imitate.

Commoditization of loyalty programs can be best understood by taking an example from Australia - when the interchange fee was cut, banks responded by dropping loyalty programs which they could not sustainably finance with the changed fee (Annexure 3). Thus the message they sent was that the consumer had to pay higher fees and obtain points or pay lower fees without points. This is the wrong use of customer loyalty - programs should be used to reward customers who spend the most - not as a discount offer.

Loyalty Programs In India

Loyalty programs in India are generally limited to loyalty points that provide discounts or merchandise at a later date. Loyalty programs in India pervade a large market and a variety of sectors (Annexure 4).

We have analysed the apparel retail sector to understand the general structure of the Indian loyalty programs