Market and Customer Management - Customer Loyalty 1 OVERVIEW

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Market and Customer Management - Customer Loyalty

OVERVIEW

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02 Overview.ppt© MCM Switzerland

Content

Page Introduction to Loyalty Programmes 3 Change Drivers for Loyalty Programmes 6 Loyalty and Relationship Marketing 8 Basic Principles of a world-class Loyalty Programme 9 Overview of Possible Loyalty Programmes 16 Loyalty and Industry Specific Situations 24 Pros and Cons of Loyalty Programmes 26 Customer Perception of Loyalty Programmes - The Loyalty Paradox 28 Benchmarks 31 Citations 34

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Introduction to Customer Loyalty Programmes (1/3)

Several G-500 companies face the challenge, that they have to retain their customer base, when going global and standing in front of competition. Empirical studies show, that an ongoing customer relationship does not only cost less, but also secures a higher revenue stream.

Retaining customer means building up a long-term customer relationship based on the clients whishes, needs and requirements. The customer loyalty programme helps installing a dialogue between the customer and the company; enabling the last to target its offers and to customize its marketing and sales activities.

With this Guide, PricewaterhouseCoopers provides not only the best in class examples of loyalty programmes, but also shows the complex interactions, which determine the success of these kind of programmes.

In addition, the Guide gives a structured approach of the handling of customer loyalty projects. Specific instruments help recognize the most important issues and support the consultant in the client specific situation.

Customer loyalty is a key success driver for G-500 companies

The PwC Guide to Customer Loyalty gives an insight how to handle customer retention and delivers instruments to make it come true

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More than 500 consultants within PricewaterhouseCoopers are specialized in Market and Customer Management services. Based on a world-wide common framework, the offering of PricewaterhouseCoopers is divided into three areas: Products and Services, Channels and Networks, Market and Customers (see below).

The PwC Guide to Customer Loyalty is based on the overall PwC methodology and builds a part within Customer Equity / Relationship Marketing.

PricewaterhouseCoopers offers a wide area of market and customer management specific services

Markets and Customers

Sustainable and

Profitable RevenueGrowth

Sustainable and

Profitable RevenueGrowth

Products and Services Channels and Networks

• Product/Service Innovation

• Speed to Market

Data Warehousing / MiningData Warehousing / Mining

Sales ProductivityComputer Assisted Sale

Sales ProductivityComputer Assisted Sale

Go to market Customer management

Market Intelligent Enterprise

Customer Equity /Relationship Marketing

Customer Equity /Relationship Marketing

Customer Care / Call Centers

Customer Care / Call Centers

Revenue Builder

New ProductDevelopment -

Introduction

New ProductDevelopment -

Introduction Electronic CommerceElectronic Commerce

Sales and Marketing

Channel ManagementChannel ManagementMarketing StrategyMarketing Strategy

Customer

• Channel Management

• Sales Productivity

• Management of Customer Segments and Relationships

Source: Price Waterhouse 1998

STRATEGIC MARKETINGIn defining and implementing 'go to market' strategies, this Guide covers segmentation, targeting and positioning, marketing plans and promotion campaigns.

CHANNEL MANAGEMENT AND ELECTRONIC COMMERCETo manage the complexity of existing sales, marketing and distribution channels, PwC examines the future outlook of the distribution structure and the design of ideal and optimal channels.

SALES PRODUCTIVITY AND SALES AUTOMATIONPwC redesigns the management of sales functions and defines and implements new strategies, processes, organisational structures and technologies to ensure that every sales interaction is educated, co-ordinated and optimised for customer value.

CUSTOMER EQUITY/RELATIONSHIP MANAGEMENTTo enhance customer development, improve retention and build loyalty, PwC looks at the management of customer equity and customer relationships as well as direct marketing and database marketing.

CUSTOMER CARE AND CALL CENTERSTo enhance customer front-line activities, PwC redesigns Customer Care processes and designs or transforms Call Centers into true customer interaction centers.

SALES, MARKETING AND CUSTOMER DATA WAREHOUSING/DATA MININGPwC designs and implements a Sales, Marketing and Customer Data Warehouse, selecting and using appropriate data mining tools and techniques.

NEW PRODUCT DEVELOPMENTPwC aims to reengineer the business to develop and introduce new products and services faster and more efficiently. Key performance indicators are the success rate of new products, speed to market and their revenue growth objectives with new products and services.

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All topics in the area of customer relationship/ customer equity are based on the customer equity framework.

The PwC Guide to Customer Loyalty is an important step within this framework, obtaining the long-term relationships with customers.

The customer equity framework builds the fundament of the Guide

Source: Price Waterhouse Customer Equity

Creating valuefor customers& prospects

Creating valuefor customers& prospects

Creatingloyal

customers

Creatingloyal

customers

Creatingprofits

Creatingprofits

Learningfrom customers

& prospects

Learningfrom customers

& prospects

Acquiring newcustomers

Acquiring newcustomers

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2

4

6

3

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Focus of the Guide

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Change Drivers for Loyalty Programmes (1/2)

Several change drivers have a direct impact on the customer loyalty...… market liberalisation and entry of new competitors (e.g. European Telco)… new technologies conclude in fast change of competitive forces, market

erosions and higher win-back costs… more sophisticated customers… information overflow due to ineffective marketing campaigns and lack of

knowledge about customer behavior… globalization of markets and products and the need for a better

transparency about the market offerings (e.g. internet)… new technologies enabling a company to target their offerings towards

the individual customers (mass customization)

Several change drivers affect the rising customer defection and the need for loyalty programmes

Not caring about customer loyalty has a negative impact on shareholder value

1.30%

2.70%

0.20%

0.10%

1.20%

2.30%

2.00%

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00%

Turnover grow th rate

EBITDA margin

Tax rate

Working capital to sales

Capex to sales

Cost of Capital

Grow th duration period

Companies will not only loose market share when staying „as is“, but also the customer contact. Research studies show that revenue growth has a large impact on shareholder value. A loss in this value driver will strongly effect the shareholder value.

Source: Dr. A. Black, P. Wright, J.E. Bachman: “In search of shareholder value”

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Change Drivers for Loyalty Programmes (2/2)

The main driver for the rising awareness for customer retention in general and for customer loyalty programmes in particular lies in the following idea: To retain a current customer is cheaper, than to win or win-back a new one.

The main emphasis for marketing and sales activities is therefore shifting towards retention strategies and loyalty programmes. The chart below shows the advantages of keeping loyal customers.

The core idea of customer loyalty: Retaining customers is cheaper than winning them back!

0

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

No (Re-) entry offerings

Referrals

Cost Reductions

Cross Selling

Basic Turnover

Costs for acquisition

Source: The Loyalty Effect, Frederick Reichheld

Profit Impact of Loyal Customers

Profit

Customers

Additional profit with loyal customers

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Loyalty and Relationship Marketing

The shift from mass marketing to customized marketing will have an impact on the marketing approach tomorrow:

The relationship marketing is not a completely new concept. Especially the marketing concepts of key account management helped the loyalty approach to become what it is today (see below).

The new focus in marketing is to create longterm relationships with customers

Loyalty marketing focuses on long-term relationships with a lot of customers (mass customization)

Marketing today ...• Objective: to make a sale.• Sale is the end of a customer relationship.• Buyer and seller are independent.• Focus on products (mass production).• Anonymous customer.• Customer buys values.• Costs + profit = price.• One way communication.• Products and resources determine the

activities.

Marketing tomorrow...• Objective: To create a Customer.• Sale is the beginning of a customer relationship.• Buyer and seller are dependent from each other.• Focus on overall value creation and customer service

(mass customization).• Known customer.• Customer creates values.• Price - Profit = Costs (Target Pricing)• Two way communication.• Relationships determine the activities.

Source: Wehrli 1994

Customer focus

Time focus

long-term

short-term

Individual Mass

Key Account Marketing

Transactional Marketing

Mass Marketing

Loyalty Marketing

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What is loyalty … ?

Loyalty also means very intensive communication

Basic Principles of a world-class Loyalty Programme (1/7)

Loyalty is the perception of trust and commitment to an institution or a person. The loyalty term comes historically from the relationship to its government and nationality. Loyalty is a feeling of being indepted something to somebody.

Loyalty doesn’t start with a first impression, but needs a long time to be built up. A company gets loyal customers, when these customers get more for their money, than they could expect before buying something.

Loyalty is not a short term oriented feeling, which a customers gets when giving him just a present. Loyalty means for a company “having trust be honest to its customers”.

Excellent products, services and a good quality builds up the ground for loyal customer but is not enough. The customer must believe to the brand and must become an active player for the company and its products and services (word of mouth).

Excellent products and services are not enough to “create” loyal customer. In addition, a company has to build up a two way communication with its customer. The communication flow can be the following:

Company asks - customer answers Company says thank you - customer enjoys Company improves - customers perceives Company asks again - customer gets more and more loyal

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Basic principles of a good loyalty programme

A good loyalty programme is interesting for the target customer

A good loyalty programme is hard to copy


A good customer loyalty programme works by improving the long-term relationship between the company and its target customers.

To be interesting to the target customer, the loyalty programme must

... offer interesting rewards (a mixture of discounts, rewards and recognition)

… that are achievable by the customer within their normal buying behaviour

… offer good two-way channels of communication

A loyalty programme is a powerful marketing instrument and should be hard to copy for competitors. The programme should therefore allow the company to leverage an inherent advantage that cannot easily be copied or improved upon by its competitors.

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To be interesting for the company, the loyalty programme must be

… affordable with limited long-term liability

… flexible enough to cope with changes in the customer’s behaviour or in the competitive market, and

… able to terminate the programme without incurring heavy closure costs or alienating the customer.

Although the best loyalty programmes are based on delivering superior value to the customer through the products offered, customer service and value-adding marketing communications are often forgotten. Most programmes start out by offering points for purchases which can be exchanged for rewards, to build an interactive relationship with the target customer. This facilitates the collection of customer information which can be leveraged to improve the company’s basic value proposition - better products, better customer service and more value-adding marketing communications at lower prices.

Loyalty cannot be set equal with customer satisfaction. A satisfied customer doesn’t have to be loyal to a company. A loyal customer is one, who has the feeling of getting more from a company, than he/ she could expect. Satisfaction is therefore not enough to keep a customer loyal. AT&T had 95% satisfied customers, but lost 6% market share.

It is attractive for the company

Customer information is the key enabler

Loyalty is not just customer satisfaction

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A loyalty programme is not only a communication event, but must be based on its products and services. The best programme won’t have success in the marketplace, when the quality of the core products and services does not fit with customer expectations.

The technology and quality of the products and services builds the ground, to build customer satisfaction and helps identifying and rising the barriers of exit.

Customer satisfaction is a short term optic and needs an additional trusting element, before it becomes loyalty. The corporate branding and identity can give certain impact on loyalty on that stage.

Loyal customer get partners, when they actively work together with the company for the long term success of both. This is the highest objective: Create a relationship and a partnership with your customers.

By the end, a company has to be aware of several factors when designing or thinking about loyalty programmes. Price cutting or promotions alone are not creating loyal customers.

A good loyalty programme is based on trust and needs excellent products and services as a fundament

Quality and Technology of Products and Services

Quality and Technology of Products and Services

Satisfaction / Good Feeling for the offered Services

Satisfaction / Good Feeling for the offered Services

Trust in the BrandTrust in the Brand

Loyalty to a Brand and a Company

Loyalty to a Brand and a Company

Partner-ship

Partner-ship

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A good loyalty programme must be viewed as a long-term action

Source: Price Waterhouse, 1998

A customer loyalty programme is a long-term activity, that normally doesn’t end. So, a customer loyalty programme can’t be compared with a standard single marketing campaign.

The added value of loyalty programmes is therefore not the positioning of a certain product or service for a small period of time, but the integrated positioning of the whole full-service package of the company in the market.

Launch loyalty programme

single marketing campaigns

no end

loyaltyprogramme

time

A long term loyalty programme is characterised by:

• ongoing / long term schemes

• providing added value

• brand integrated

• high degree of systems integration

• high data collection / usage

• flexible functionality

• customer driven and focused

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A good loyalty programme pursues several objectives

Objectives of a loyalty programme

Customer Win-Back; Customer Acquisition

Cross Sales,Up Sales

Customer-Retention

Long Term Offers

CustomerProfitability

Target Selection

Customer Masterview(see right)

Call Details Call Details CustomersCustomers

Customer

Addresses Customer

Addresses

Business

Customers Business

Customers Residential

Customers Residential

Customers

Installed Products

Installed Products

Installed Services

Installed Services

Network

Infrastruct Network

Infrastruct Prod & ServProd & Serv

Prod & Serv Group

Prod & Serv Group

Customer Contact RecCustomer

Contact Rec

Billing PositionsBilling

Positions

Example of a Customer Masterview Structure in a Data

Warehouse of a Telco

Source: Price Waterhouse, 1998Source: Price Waterhouse, 1998

A good loyalty programme enables the company not only to rise the customer retention, but pursues also several other objectives. (Identifying a customer profile or creating a customer masterview).

The customer masterview enables the company to select and target the customer very specifically (e.g. for cross- and up-selling). In addition, a clear customer profile and masterview helps winning back defected customers with a customized offer based on their profitability.

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A customer loyalty programme has always a direct market and customer impact. On the other side, a loyalty programme needs the full internal support from the organisational and technical point of view.

A state of the art loyalty environment consists therefore of a customer profitability analysis, a customer segmentation and targeting tool, a campaign management and a state of the art data warehouse with several data mining tools. A lot of these functionalities are part of modern sales automation / sales productivity environments.

A good loyalty programme has en external effect and is supported by internal marketing tools

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Integrated campaign

management

Integrated campaign

management

Customer

segmentation

Customer

segmentation

Analysis of customer

profitability

Analysis of customer

profitability

Consolidation of customer data

Consolidation of customer data

Marketing tools Customer data and information

Source: Price Waterhouse, 1998

Marketing supportLaunch loyalty

programme

single marketingcampaigns

no end

loyaltyprogramme

time

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Overview of Possible Loyalty Programmes (1/8)

The structure of loyalty programmes depend on several factors like… industry… customer behaviour and customer segments… market structure… company‘s strategy… timing

Loyalty programmes based on a point collection/ point redemption scheme are the most known ones. Nevertheless, several other loyalty programmes are possible and can be turned into market success. Examples for these programmes are shown below.

The European industry giant Asea Brown Bovery (ABB) involves its most important customers in the construction of their latest products and services. E.g. the Swiss Railway Company was involved in the construction of the new electric railway during the whole construction and design process. The advantage for the customer was that they could give their inputs and needs directly and in an early production stage.

The advantage for ABB were that the Swiss Railway Corporation brought their extensive railway know-how into the construction and that they became a loyal customer. This example is typical for a cost intensive industry with only a limited amount of customers.

A variety of loyalty schemes have been proofed in marketplace

ABB creates loyal customer with its “lead customer approach”

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Federal Express has with its world famous tracking system a powerful loyalty programme. The customer can track his letters and packages and check where they currently are.

The advantage of this programme is, that the customer remains loyal to FedEx. On the other hand, FedEx gets less request from customers and can concentrate on controlling the delivery process better and less cost intensively.

A similar loyalty strategy has Sabre with its flight booking system. The travel agency remain loyal to the company because of the handy online information about the available flights and seats.

Microsoft has rigorous approach of loyalty creation. The company sets industry standards with its Microsoft Office. The customers are not yet able to switch to other operating systems because of this standard.

The advantage for the customer is a cheap operating system that offers a wide range of software on this platform. Microsoft's advantage is the high revenue stream created by the standard.

Swatch has a more informal approach for customer loyalty. With their fast changing sets of trendy watches the company built up a „watch cult“ and attracted a lot of loyal collectors all over the world.

Sabre and FedEx create loyal customers by involving them in their value creating service process

Microsoft creates “loyal” customer by setting industry wide standards

Swatch built up a “cult” with its watches

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A state of the art strategy concerning customer loyalty focuses on loyalty for different customer segments. An example of an European service company gives an overview of possible strategies in each segment.

The PwC Guide to Customer Loyalty helps creating these programmes more successfully. The focus of the Guide is in the creation of point collection/ point redemption programmes. Nevertheless the Guide gives strong support for other possible programmes as well.

Different loyalty programmes for different customer segments in the same company

The Guide supports the creation of these programmes esp. focusing on point collection/ point redemption programmes

Retail Small Comp.

Large Comp.

Multi-national

Product Bundling; Cross SellingProduct Bundling; Cross Selling

Customized tariffsCustomized tariffs

Tariff structureTariff structure

Exclusive ContractsExclusive Contracts

Lead Customer

Lead Customer

Club ProgrammePoint collection / Redemption

Club ProgrammePoint collection / Redemption

Industry EventsIndustry Events

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Overview of Possible Loyalty Programmes (4/8)Tesco as a first mover in customer loyalty - an example

February 1995

1 pound purchase = 1 point = worth of 1 penny if 150 points and more per quarter, than the customer gets vouchers for use at

the store together with money off product vouchers (money off vouchers are funded by manufacturers and suppliers)

Quarterly magazine Special rules/schemes for students or pensioners Associate cards for husband and wife Relationships with non-competing organisations such as B&G for home

improvement goods and holidays

February 1997: 9.5 Mio. members although discount is just 1% (£3 - £4 savings as a quarterly average)

Earned vouchers 1996/7: £ 95 Mio. Money of vouchers 1996/7: £162 Mio. (funded by manufacturers / suppliers) August 1997 mailing distributed £75 Mio. vouchers Important are also the cost at initial stages for computer developments needed

to allow the cards to be recognised and processed at the POS

Launch of Tesco Club

Loyalty Scheme

Customer Reaction

Costs for Tesco

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Overview of Possible Loyalty Programmes (5/8) Tesco as a first mover in customer loyalty - an example

Opportunity to know each of its customers spending habits perfectly. The main benefit comes in the long term from:

the ability to communicate with customers on a one to one basis. and to know the names and addresses of the most profitable customers in each store.

Payback from the positive reaction of customers when they feel their custom is appreciated and rewarded and the profits on incremental sales is not so important. This advantage is lost as soon as the first mover advantage disappear when the main rivals also offer similar rebate/discounts schemes.

Direction of the advertising budget can be aimed precisely. Tesco uses now far more cost effective advertising campaigns using direct contact methods such as direct mail and outward bound telemarketing.

Analyse composition of a customer shopping basket Identifying a “golden moment”, the point in time at which a customer is particularly susceptible to an offer

for a particular product. (Tracking of a childless couple) Organisation of club card customer evenings concentrating on topics such as hair styling or wine tasting,

etc.

Benefits for Tesco

How Tesco uses the data

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Overview of Possible Loyalty Programmes (6/8) Some Examples of Point Collection/ Point Redemption Programmes

Company Target Customers Structure & Benefits

Redeeming Points Market Comms Lessons learned

Swissair

QualiflyerAll customers

Over 1.3 milion customers have enrolled to-date

No joining fee Miles collected for flights based upon length of destination and class flown Tiered benefit levels for frequent flyers Worldwide lounge access with partner airlines for elite members

Points redeemed for flights by completing form and sending to Qualiflyer or by claiming miles by reservation or check-in Other rewards available including fantasy awards

Quarterly point statement Newsletter Database-driven marketing to specific customer segments

A leading airline FFP

American Express

Membership Rewards (formerly Membership Miles)

All credit-worthy customers

Annual fee varies by card type - five different card types USD1 = 1 pt for AmEx Varying exchange rates with partners No expiry date

Points redeemed by telephoning freephone number or writing Points can also be carried over to airline partner FFPs

Welcome pack including glossy catalogue Monthly statement Regular promotions Freephone Internet web site

Renamed from Membership Miles in 1995 Has come under fire for sending to much junk mail Regularly voted to best Affinity Credit Card by Inside Flyer readers

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Overview of Possible Loyalty Programmes (7/8) Some Examples of Point Collection/ Point Redemption Programmes

Migros

M-CumulusAll customers

Penetration into 1.45 million households with 2.5 million cards

No joining fee 1% discount on all purchases, although often applied to minimum purchase volume Higher discount when more than 20 items purchased 10-100% discount on special offers

Points redeemed quarterly Redemption complicated and only for luxury goods

Customer magazine Database-driven marketing to specific customer segments Combines purchase data with external data

Seen as complicated and expensive Builds loyalty in customers although the redemption options are poor Problems with too much junk mail broadcasted to customers

Coop

CoopProfit

All customers

Issued 2 million cards to-date, although the number of customers not known

No joining fee Discount on 2-3 articles per week Discount on 3 articles from Coop partner firms every 2-3 weeks 20-50% discount on all offers

Points redeemed immediately and expire quickly Redemption complicated

Database-driven marketing through Coop daughters

Seen as simple, cheap and offering extendet discount Not enough offers to build long-term loyalty Big impact on sales of special offers (forward buying)

(large retail chain in Switzerland)

(large retail chain in Switzerland)

Company Target Customers Structure & Benefits

Redeeming Points Market Comms Lessons learned

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• Distrust of customers (to many schemes)• Changed purchase patterns based on schemes• Financial rewards arising• Rewards for all customers • Focus on core offer

• Distrust of customers (to many schemes)• Changed purchase patterns based on schemes• Financial rewards arising• Rewards for all customers • Focus on core offer

PwC supported the bank in setting up a redesigned scheme (option 2), that was based on:- Service based rewards for additional cross-selling (based on strategic partnerships with other programmes).- Leisure and travel based rewards for those not wanting to buy into services (based on flexible redemption

possibilities).

• Need for strategic programme consortia• Need for 25% cost reduction• Risk exposure due to unredeemed points• Profitable customers do not get enough attendance

• Need for strategic programme consortia• Need for 25% cost reduction• Risk exposure due to unredeemed points• Profitable customers do not get enough attendance

Possibilities for Strategic change

1. Develop a newly branded retailer rebate scheme 2. Redesign and relaunch a point based reward scheme3. Close the scheme

Possibilities for Strategic change

1. Develop a newly branded retailer rebate scheme 2. Redesign and relaunch a point based reward scheme3. Close the scheme

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Overview of Possible Loyalty Programmes (8/8)UK Bank Loyalty Programme Change - an Additional Example

PwC analyzed the current situation of a large loyalty programme in the banking industry with a loyalty programme assessment.

Three possibilities for strategic change were identified, based on the analysis of internal and external change drivers.

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Loyalty and Industry specific Situations (1/2)

Each industry has its specific drivers which influence a loyalty strategy

In each industry a loyalty programme and strategy will look differently based on the specific forces of competition (e.g. competitors, barriers of entry, barriers of exit, substitutes, liberalisation and deregulation). Considering the industry and their competitive forces is therefore crucial when defining an effective loyalty programme.

The Banking industry is confronting price aggressive new competitors (e.g. discount brokers, phone banking). They are using the transparency in the banking products and services as an advantage. Loyalty programmes will have cross industry character (e.g. in combination with hotels, airlines or others / and including attractive combinations, e.g. with credit card options).

The insurance industry is considered as a one time involvement business (that means involvement is high when defining a contract). Loyalty can therefore be created with long-term contracts and active cross selling of insurance services.

In Telcos, the prices are coming down and defection of customers based on price hopping is very dangerous for the contribution margin. Loyalty programmes must have therefore a long-term benefit and enforce the economic advantages of having more than one service from the operator.

Banking - limited amount of services and high transparency

Insurance - long-term contracts and low involvement

Telecom - deregulation, cross selling potential and technology

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Loyalty and Industry specific Situations (2/2)

Aircraft maintenance - transparency, globalization, key account management and full service packages

The aircraft maintenance business because global and predictable. An established relationship with airline operators or even manufacturers is crucial for success. Smaller airlines focus more on total care packages of aircraft overhaul, engines and component maintenance. A key account management with personal professional services builds up loyalty and establishes the engineering capabilities in the operations mindset.

The retail industry is structured differently in each nation. Manufacturers often try to integrate forward and getting in direct contact with customers (e.g. factory outlet). On the other side, customers will get direct access to globally offered services by new media (e.g. internet). Retail companies must therefore focus on getting customers into their stores by knowing their buying behaviour better than competitors.

Retail - different structure, forward integration and new channels

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Pros and Cons of Loyalty Programmes (1/2)

Loyalty programmes might have a positive impact on profitability

Gathering customer data as well as the risk of being copied by other competitors are the most important cons of loyalty programmes

Pros of loyalty programmes: Marketing and sales cost advantage: Retaining customers is cheaper

than acquiring new ones. Revenue and turnover advantage: Loyal customer buy more due to cross

selling and up selling possibilities. In addition, not defecting customers will have their revenues for a longer period in the company.

Getting a better insight about customer behaviour and getting a better link between pre-sales, sales and after-sales.

Cons of loyalty programmes: Loyalty programmes are expensive and have a long-term perspective. It

often takes its time, until these investments show additional profitability. Loyalty programmes face the risk of being copied by other companies.

The sustainability of the advantages are at risk. The gathering of customer information in loyalty programmes can have

legal impacts.

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Will a loyalty programme help?

Or just add to your costs?

Pros and Cons of Loyalty Programmes (2/2)

Situations when a loyalty programme will help When loyalty programme directly supports the company’s value

proposition for target customers When the relationship increases the perceived value - in the mindset of

the customers When the target customer’s lifetime value is high When customer retention costs are less than acquisition costs When its possible rise barriers of exit for the customer

Situations when a loyalty programme will not help When target customers buy many brands in the category (no brand

loyalty) When brands imitate each other’s strategies - any moves will be quickly

neutralised by competitors When technology changes lead to better price or performance - better

value is the key

Remark: Some additional points, when loyalty programmes will help or not, are listed in the evaluate stage.

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Customer Perception of Loyalty Programmes - The Loyalty Paradox (1/3)

Most loyalty programmes are based upon a number of assumptions, which have very little documented proof for reality or relevance. Examples for assumptions which must be double checked when comparing pros and cons of possible loyalty programmes are listed below:

Are you making realistic assumptions about the programme, its members and your ability to influence them? Many customers want a two-way, interactive relationship with the loyalty

programme provider. A high proportion of these customers are exclusively loyal to a single

brand over extended periods of time. The core group of loyal buyers are the most profitable group because

there are many of them they are heavy and frequent buyers marketing costs are lower they are less price sensitive they provide the company with new customers the through

positive word of mouth It is possible to influence their behaviour and to persuade them to buy

more Database marketing can be used to communicate directly with these core

customers, to develop a dialogue and to influence their buying behaviour.

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Companies are attempting to engender loyalty, while consumers do not use the term ‘loyalty’ when describing their feelings for relationship with a company.

Current company practice concentrates on rewards eg. discounts, points, coupons, etc. but our research suggests the importance of core products and service benefits and the emotional components of trust and confidence to consumers

Communications with companies are welcomed by the majority yet customers do not perceive that they have a relationship with a company despite the fact that companies have been advocating relationship marketing and its benefits

Some information about the perception of customer loyalty is listed below (next page)

The Loyalty Paradox -Companies and Customers have different understanding about Loyalty

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71

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Agreed Neither Disagreed Letter Face to face Cash bonus Phone call Other

% Little things mean a lot*% saying if they would like to be thanked for being a loyal customer and how 33

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9

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0

5

10

15

20

25

30

35

Value for money Trust the company Confidence Enjoy buying Loyal/obliged Relationship

% ‘Trust’ and ‘confidence’ are more appropriate feelings*Reasons for revisiting retailers

41

25

21

1211 11

87

4

0

5

10

15

20

25

30

35

40

45

High quality ofstaff

Flexible openinghours

High qualityproducts

Low prices Account range ofproducts

Large range ofproducts

Easy transportaccess

Good reputationfor environmental

ethical policies

Loyalty cardbasic points

scheme

% Loyalty cards in financial services do not promote loyalty*Factors that are important in persuading respondents to be loyal to a

company providing financial services

Today’s consumer is pragmatic about ‘dataculture’ and is prepared to give away more than you’d think*

Question: What personal detail are you prepared to give to a company if requested?

% %Name 89 Household composition 63

Postcode 86 Household tenure 59Address 85 Weight 56

Maritial Status 79 Telephone number (H) 53TV viewing 78 Politics 40Occupation 77 House value 31

Newspaper magazine 77 Telephone number (w) 30Hobbies interest 76 Financial details 18

Age 75 Personal income 16Car ownership 72 Household income 13

Religion 67 Personal savings 11and investments

Education 67 None of these 6

* Source: The Henley Centre, 1997

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British Airways - Executive Club provides £ 300 million revenue and supports a further £ 2 billion in revenue; costs £ 50 million per annum employing 100 people

Wells Fargo Bank - saved US$ 84 millions through offering online banking services to target customers; sales rate went up from 1.8 to 2.4 services per customer; aggregated customer information and personalised information has allowed to develop close customer relationships

NOP research - supermarket cards have failed to have a significant effect on shopping behaviour.

Boots Advantage - trials with 94,000 customers produced an increase of 3% in sales; official target set to 4% for launch.

Safeway measures success not in response to promotions but in influence on buying behaviour of a wider circle of buyers (friends and family).

American Express Membership Rewards - introduction of programme increased card spend by 40%.

JD Power - loyal buyers of cars spend in average US$ 1,200 more per vehicle than buyers who have switched from other brands.

Some Benchmark Figures (1/3)

Benchmarks for increased sales volume due to loyalty programmes

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Jones Intercable, Fla, USA - offers seasonal rates and bulk billing for condo and homeowners associations; churn rates fallen from 4.4% in April 96 to 2.2% in April 97.

Tominaga M, ‘Die Kundenfeindliche Gesellschaft’ - customers defect because of failures in service (68%), failures in products (14%), wrong pricing (9%), changing buying requirements (5%), change of address (3%), death (1%).

Telecommunications, Nov 1996 - mobile customers defect because of price (40.9%), geographic coverage and network problems (19.3%), customer service problems (10.2%), voice quality (5.7%), incorrect billing (5.7%) and other.


Benchmarks for reduced customer defection rate due to loyalty programmes

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PricewaterhouseCoopers has knowledge about several customer loyalty programmes. Out of these programmes, the following benchmarks are collected:

Airline in Europe: 72% of the loyalty members spend club products

and services instead of services of the competitors. The share of wallet is rising.

Keebler (US; Food): After launching a loyalty programme for a kids

club, the turnover in this segment rose 100% and the market share rose from 21 to 29%.

Burger Kids Club (US; Food): The turnover tripled after launching a loyalty

programme in the youth segment.

Marks and Spencer (Retail Shops): The turnover of loyalty club members is three

times higher than for non-club members.

Nieman Marcus direct: After launching the In Circle Programme, the

average turnover of a club member rose 25%.

Amexco: After launching a loyalty programme, the average

turnover of a club member rose 55%.

European Bank: Loyalty programme members use the basic bank

products and services between 100-400% more than non-club members.

European Telco: The planned cross selling effect after launching a

loyalty programme is between 5-15% per year.

Higher average customer turnover due to cross-selling/ up-selling

Members in loyalty programmes defect less often than non- members

Swiss Bank: The normal defection rate is 5% in the private

market. The defection rate of members in the loyalty programme is 2%. The reduction therefore is 60%.

European Telco: The expected rate of not churning/ defecting due to

a customer retention programme is 50% (mass market)

Amexco: The defection rate of non-members is 15%. The

defection rate of Amexco Club members is 2%. The improvement due to the loyalty programme is 87%.

MCI (US; Telco; Gannett News April 98): MCI could rise its market share in international

telephony with high spending customers from 19 to 40% by combining its loyalty programme with the ones of Airlines.

Due to more loyal customers, win-back costs don’t arise

Swiss Bank: The set-up of a new bank account costs about 400

Swiss Francs.

France Telecom (Source: Datamonitor): The costs for customer win-back in mobile

communications business is between 1’500 and 2’200 French Francs.

US Telco (Quelle: Telecom Magazine): The costs for customer win back in mobile

communications business is between 300 and 600 US Dollars. The costs for customer retention is between 50 and 100 Dollar.

60% of the customer defection is within the first three months. By focusing to the customers, the churn in the US mobile communications market could be reduced from 50 to 30%.

Customer Retention Costs (Gartner): To win back a new customer is 4-10 times more

expensive, than to hold an existing customer.

MCI (US Telecommunication): MCI gives 2‘000 points for new customers as a win

back or acquisition present. If a customer uses these points for miles in

frequent flyer programmes, the value is about 400 US $.

Programmeobjectives:

Benchmarks:

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PwC Citations in the Area of Loyalty Programmes (1/3)

Large European Telecom Provider– PricewaterhouseCoopers delivered a customer retention strategy for the residential customer market. The introduction of a

loyalty programme was the core for this retention strategy.– During the evaluation and envisioning of the loyalty programme, PricewaterhouseCoopers delivered the following: Loyalty

programme structure, loyalty card evaluation and defining the card functionalities, processes and evaluation of a customer loyalty software, defining call center capacity and backoffice strategy, loyalty programme content including targeting, positioning, offering and third party cooperations, financial business plan for the loyalty programme and much more.

– In addition to the loyalty programme, PricewaterhouseCoopers developed a to be data warehouse structure, that enables the company to structure and use the customer information effectively.

Leading European Airline– Based on an existing loyalty programme of this airline, PricewaterhouseCoopers supported the client with the clarification of

the objectives and goal as well as with the more efficient use of the customer informations for target campaigns and programme edefinition.

– The knowledge in topic as customer lifetimne value and customer profitability supported PricewaterhouseCoopers in defining current customer profiles and future customer potentials.

– On the technical side, PricewaterhouseCoopers developed not only recommendations for database improvements, but implemented also the data warehouse itself.

Leading Financial Institute in Europe– PricewaterhouseCoopers conducted for a large UK Bank an assessment of their current loyalty card strategy. Based on

some of the topics in the evaluation stage, PricewaterhouseCoopers could give detailled recommendations for future improvements.

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Large Credit Card Provider– PricewaterhouseCoopers has helped a large credit card company to target their customers in the retail segment more

efficiently. The output of this assignment was the development of a transaction cost model which analysed the financial impact of accepting American Express on store profitability.

– In another project for the same customer, PricewaterhouseCoopers implemented a program to support the corporate services reorganisation underway. This involves tracking and monitoring the progress of nine strategic initiatives and helping them to align their efforts with the reorganisation. Detailed activities involve tracking existing change initiatives, diagnosing areas needing most help and implementing plans for moving the change effort forward.

Credit Card Company World-wide– For this client, PricewaterhouseCoopers developed not only a data warehouse strategy, but conducted also their travel

agency strategy for international travellers, who need more support in emergencies. The customer seeks to counter this perception by identifying travel related services partners to team with in providing a global travel support network that surpasses the level of service offered by competitors.

Credit Card Company World-wide– PricewaterhouseCoopers was engaged to evaluate the company‘s current co-branding strategy with retailers, provide an

overview of retailers' current credit operations, suggest additional retail targets for co-branding.– After that, the customer was able to more effectively target the retail market with their co-branded card product,

concentrating on retail lines of trade and specific retailers who could provide the biggest "bang for the buck." In addition, they were able to focus their sales efforts on target retailers' "hot buttons," notably an increase in information regarding customer purchases at their own and competitor stores.

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Japanese Credit Card Issuer– PricewaterhouseCoopers conducted an overview of the U.S. credit card industry for a large Japanese credit card issuer.

The client was interested in expanding its presence in the United States as well as improving its back-office processes in Japan. PwC was contracted to provide best practices in cardholder and merchant servicing including transaction processing, sales and customer service and management. Also, PwC provided an overview of technology trends in the U.S. card industry as well as industry statistics and recent developments.

– Research scope includes the largest firms in the U.S. card industry including bank card issuers, T&E card issuers, cardholder processors, merchant acquirers, merchant processors and independent sales organisations (ISOs). Sources of card industry information included internal sources such as work products produced by the FSIP Card Services group.

Additional Citations in the Loyalty Marketing Area– PricewaterhouseCoopers has a vast experience in benchmarking and best practice analysis. The experience, we also have

in the loyalty card area. Developing a best practice study about Cardholder sales and marketing builds up a basic knowledge in this industry.

– This study, PricewaterhouseCoopers developed with the support from 15 worlds known companies in the cardholder industry. The result was not only a detailed analysis of these programmes and strategies, but also a detailed understanding about scoring the clients behaviour and needs based on these schemes.

Documents

Market and Customer Management - Customer Loyalty 1 OVERVIEW