Next-Gen Loyalty Strategy

By  Robert Garf — July 27, 2006

 According to a recent AMR Research/RIS News survey, more than half of participating retailers have loyalty programs, but 68 percent of them plan on revamping their programs within the next two years. Why? The reason is that first-generation loyalty programs are broken. They were not created with a long-term strategy and they have not evolved to meet the needs of the business or the customer. As a result, these programs end up reducing margins without delivering on the promise of why they were created in the first place to increase the loyalty and influence the buying behavior of retailers most profitable customers.

There are plenty of problems with current loyalty programs. For example, because most programs do not leverage existing customer transaction and market-basket data, retailers are unable to effectively segment, advertise, and reward their most valuable shoppers. Since retailers have no way to gauge the ROI of specific program activities, they waste trade-fund dollars, and initiate and repeat fruitless promotional activities that hurt the bottom line. Other program-related challenges rampant use of generic store cards and expired coupons, lack of program training for store associates, ineffective marketing of membership benefits, misdirected product and discount offers, and the need to help customers easily manage their loyalty cards.

The misalignment between marketing and merchandising is a key reason loyalty programs are not working. A critical goal of second-generation, enhanced loyalty programs is to align marketing and merchandising and increase the quality and usefulness of customer intelligence data. Realignment will allow: 1) marketing to deliver more relevant communication and personalized promotions; 2) merchandising to more accurately forecast the programs effect on merchandise sales and margins; and 3) business executives to more effectively plan everything from new store locations and private-label development to store training and labor forecasting.

New loyalty programs will require technology investments in a variety of areas:
Integration at the point of interaction will manage the processes of entering new and revised customer information, enable its flow into the operational customer database, and allow the customer database and loyalty rules to be accessed in real time.
A real-time customer data store will standardize, cleanse, aggregate and organize information to enable analysis and syndication.
Customer intelligence analytics will enable predictive modeling, data mining and analytics.
A customer segmentation system will analyze and sort the data for campaign execution.
A rules engine within the programs database will help retailers design and enforce campaign and program recruit- ments and awards.
A data quality and integrity component will cleanse customer information and cross-reference it with third-party databases.
Support services will create and/or fulfill loyalty cards, marketing materials and rewards.

Three Stages of Loyalty Development

Implementing a second-generation loyalty program will require the organization to gradually migrate its processes, systems and customers from the existing program to one that is fully integrated with the rest of the business. For most retailers, the journey will be a three-stage process, encompassing organizational alignment, supportive technical architecture and a roadmap with milestones and success metrics.

In Stage 1, retailers will establish a cross-functional team (including marketing, merchandising, store operations and finance) to develop a customer intelligence roadmap. They also will create a data model and then collect and cleanse the data. In Stage 2, the retailer will segment its customers, determine the new programs benefits, and then roll out the enhanced offering with specific attention on store associate training. In Stage 3, retailers will optimize the program by seeking ways to exploit the ever-growing pool of accurate demand intelligence data, and use insights to provide timely and relevant communications at each stage of the shopping process.

While each retail segment has its own characteristics that will determine the applicability and relevance of the following best practices, organizations can learn from the hard work of retailers that have already begun the journey. Keys to a successful program the following:
Determining just the right amount of incentives and rewards necessary to attract and retain customers
Leveraging the program data for a variety of uses, such as marketing, determining new store locations, merchandise planning and forecasting, and private-label development
Understanding that simple mass discounts wont create loyalty alone; retailers must find the right mix of benefits, rewards, and special services that create an emotional connection with customers
Properly training store associates the main ambassadors of a second-generation loyalty program
Providing consistent, cross-channel offers and redemption opportunities
Not requiring physical, easily misplaced loyalty cards, but rather offering alternative forms of identification such as biometrics, username/password, or email address
Ensuring that program enrollment is easy and accurate to streamline the checkout process while avoiding barriers to participation
Constantly consolidating and cleaning customer data to increase the accuracy of analysis, and avoid customer dissatisfaction through potential misappropriation of rewards

The effort to create an effective loyalty program should not be seen as a separate, isolated initiative. Rather, it is part of a broader strategy that encompasses two critical, high-level strategies:
Pervasive Interaction Pervasive Interaction is about enhancing the shopping experience: personalizing marketing, delivering a consistent, cross-channel experience, and delivering clear value while remaining unobtrusive.
Demand-Driven Supply Networks (DDSN) The goal of DDSN is to accurately sense, interpret, and characterize customer demand and desires, and then profitably respond to these demand signals in a timely manner.

By understanding the value of a second-generation loyalty program and placing it in proper context with overall objectives like the ones mentioned above, retailers will be prepared to invest in the strategies required to successfully build loyalty programs that actually establish loyalty.

Robert Garf is a retail research director at AMR Research.

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