The "L" Word

Let’s talk about loyalty: that elusive ideal many retailers seek to achieve. It is believed that building loyalty creates more profitable customers over time. [1] Loyal customers are associated with lower service costs, decreased price sensitivity and increased average spending compared to the costs of attracting and retaining new customers. [2] Gaining loyalty, therefore, is seen to be an attractive source of sustainable competitive advantage for retailers.

It is, however, becoming increasingly difficult for retailers to identify which customers to target with their loyalty programs. Generally, a small percentage of customers generate most of the company’s sales.[3] Yet, as we saw in our classroom discussion on private labels, the most loyal customers are not necessarily exclusively loyal. It is very likely that the most profitable customers of one store are their competitors’ most profitable customers as well.

Thus, the goal for most loyalty programs should not be exclusive loyalty but rather increased repeat business among current customers. This will maximize the benefits of a loyal customer base. In a fiercely competitive marketplace most loyalty programs targeting repeat business are easily replicated.[4] The benefits of loyalty programs become short-lived as consumers divide their business among retailers once again. It becomes increasingly important, therefore, to identify which loyalty programs are effective (and which ones are not).

We know that increased market share and customer loyalty are driven by customer satisfaction and the value shoppers place on the RVP of the retailer (Sears Elf case discussion). However, many customer loyalty programs are focused on rewards which do not enhance either one of these drivers. Let’s take the example of Air Miles at Shell[5]. The incentive rather than the product would drive consumers to choose Shell over a competitor. The program simply adds a reward to a regular purchase. While this can obviously encourage consumers to return to the retailer (Yay!) once the incentive is taken away, the prime reason for ‘loyalty’ disappears (Boo!). Furthermore, I doubt that loyalty would continue as competitors replicate the program and customers become divided once again. This type of loyalty program clearly does not build sustainable competitive advantage.

A more successful implementation of a rewards scheme is the GM card. Customers build up points with the card in order to eventually purchase a GM car. In this scenario, the product is the main focus of customer interaction and the incentive serves to enhance its value. This type of customer loyalty is directed towards the product and is vulnerable to competitive imitation only insofar as the product is itself. Therefore, it is a more stable form of competitive advantage.

I believe that the most successful customer loyalty programs (dependant on rewards schemes) are those that effectively support the value offered to customers by the retailer. Tying the loyalty program to customer satisfaction provides consistency and promotes desirable behavior. This type of loyalty program is also less vulnerable to copy-cat programs.

Just remember - it is always better to be a little more careful using the “L” word!

References:

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[1]http://www.ccc.agsm.edu.au/papers/researchBriefings/A03_Paper_RB002GDowling_CustLoyalty.pdf [An interesting discussion on Customer Loyalty]

[2]Ibid.

[3]Ibid.

[4] http://www.theretailbulletin.com/news/retailers_split_on_loyalty_20-02-08 - [An article describing the effects of this phenomenon among UK retailers]

[5] http://www.canadaloyalty.com/Programs/gas_bar_programs.html [A site that highlights most loyalty programs currently in place in Canada.]