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BW Businessworld

The Reincarnation Of Loyalty

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A joke doing the rounds is that there are more loyalty points floating around in the world today than money. And that cash has no memory, but points have. Though what is the worth of those points, nobody knows!

Of course, all this is an exaggeration — but behind these jokes is a half-truth. Just peep into your email inbox, where every hour the PAYBACKS, the StanCharts, the Myntras, the British Airways, the Hiltons, the Westsides, the Big Bazaars and the Vodafones of the world are flinging emails at you, either urging you to earn more points or burn (redeem) them.  From the amount of emails flying around  (one Indian retailer sends out emails everyday to 11 million unique IDs, while one Indian private bank sends out emails daily to eight million unique IDs),  it looks like loyalty programmes are the most worked marketing tool in the business today.

According to Rahul Rana, chief operating officer at PAYBACK, India’s biggest coalition loyalty programme, “A customer today can get rewarded for every four out of five rupees that he or she spends.” 
Ajay Kelkar, co-founder and COO at Hansa Cequity, a marketing services provider, calls loyalty programmes the most “hardworking tool” in a CMO’s armoury, and rues that most of the marketing budget is still spent on mass advertising. But, if you go by the sheer number of new rewards programmes launching every day, and the way global loyalty consulting firms are rushing into India, as well as the number of loyalty conferences taking place, things are changing for sure. Global loyalty and customer relationship management (CRM) speciality firm ICLP estimates the size of the loyalty solutions business in India at anywhere between Rs 5,000 crore and Rs 8,000 crore.

At a time when customers have become quite fickle and customer loyalty is practically dead, “loyalty” programmes (somebody with a sense of humour named them thus) are gaining huge traction. Ironic, isn’t it?
SPG members get special invites for golfing events and other soirees

Managing a loyalty programme is complex. Especially, for a hotel management company which has to take care of the interests of the customer and the hotel owner while ensuring that it does not burn a hole in its pocket. Let’s look at how Starwood, which spends millions on its loyalty programme Starwood Preferred Guest (SPG), runs it. When Starwood signs a management contract with a hotel, SPG is part of the contract. The hotel pays a small fee to SPG — a fund in the US managed by Starwood —for every guest. Each time a customer earns points for staying at Starwood properties, those points are credited to his unique account. These points also go and sit in the fund in the US, along with all the fees that the hotels in the Starwood network pay. If a customer who has earned points staying at a Gurgaon hotel wants to redeem them in a Singapore hotel, he just shows his SPG points to the hotel. For the customer, the stay is free. For the hotel, there is no loss as it gets paid by the fund. The rate that the hotel gets paid is determined by its occupancy, and is pre-fixed. It is a tricky proposition however for Starwood as it has to balance the fund very carefully, especially as it has pioneered ‘no blackout’ days. Says Dilip Puri, MD, India, Starwood: “Often loyalty funding is also used for loyalty promotions.” The returns: 50 per cent of Startwood guests are SPG members.

A recent TNS report ‘Why Simply The Best Isn’t Right’, which surveyed over 40,000 customers across 20 countries, shows customer relationships have eroded even in traditionally ‘sticky’ sectors such as auto, finance and telecom. Half the US consumers now replace their car with a different brand; 70 per cent of Russians opt for a different company when replacing their TV; 12 per cent of Germans have cancelled an insurance policy in the last one year; 9 per cent of Spaniards have chosen a different fixed line telecom operator. The story is no different in India. There is a greater willingness to move — even in retail banking where customer churn is traditionally the lowest.

While more options, awareness, empowerment and a sense of entitlement are reasons why customers are less loyal to a brand, Anand Halve, co-founder of chlorophyll, a brand consultancy, blames companies too. “Loyalty is reciprocal. When companies begin chasing quarterly results, there is bound to be less stickiness,” he says.  He also relates diminishing customer loyalty in India to easy availability of finance to purchase goods.

In short, retaining customers has become a huge task for companies. But, can you buy loyalty?

Since 1 May 1981, the day American Airlines started its frequent-flyer programme AAdvantage to counter competition from low-cost airlines People Express, companies have been showering customers with free miles, free points, free services, discounts, deals and more. Hotels, airlines, petrol companies, credit card companies, telcos, restaurants, e-commerce players and now even the neighbourhood mom and pop store reward you for spending. Each time you shop, you get a discount on your next purchase, incentivising you to return. 

All of us love freebies, deals and discounts. But when they come with strings attached, are pushed insensitively, mis-sold and mis-communicated, then they actually end up infuriating and alienating the customer. Even seasoned brands go wrong. Just take a look at the reactions pouring in to Delta Airlines’ New SkyMiles policy that will kick in from January 2015. Instead of the usual distance-based earning programme, Delta has put in place a revenue-based earning programme. In the earlier programme, you earned miles based on distance flown, now it is going to be based on the cost of the ticket. Irate customers are posting comments about Delta taking them for “gullible rubes”.

On the other hand, if companies reward too much, they end up hurting their balance sheet. “A lot of people who launched loyalty programmes started looking at P&L (profit and loss) value, and how they could cut costs on it. So, they started shifting goal posts for earning miles or rewarding,” says Sandeep Mittal, managing director, Cartesian Consulting. This proved to be a self-goal.

Launching a loyalty programme is easy, but maintaining and sustaining it is difficult, says Mark Spicer, general manager, India, ICLP.

So why are companies betting so much on loyalty programmes? Well, while the risks of alienating customers are huge, the returns from a well-executed loyalty programme can be substantial. The ROMI (return on marketing investment) is big if you look at it from how many repeat customers you get, says Kelkar. “Fifty per cent of the occupancy at Starwood hotels comes from our loyalty programme members,” says Dilip Puri, managing director, India, Starwood Hotels and Resorts. Deepa Misra Harris, senior VP, Global Sales and Marketing, Taj Hotels Resorts and Palaces, says nearly 47 per cent of revenues of the group come from loyalty programme guests. And it is growing at 10 per cent every year. 

According to a study by IdeaWorks, a consultancy, the sale of frequent- flyer miles accounted for 44 per cent of total global revenues of airlines in 2013. Also, loyalty programmes saved two airlines that were on the brink of going bust. According to a report on frequent-flyer programmes from aviation advisory CAPA, the dollar-surrogate points that move between credit card companies and airlines can become real cash as happened with United Airlines’s and Delta’s bankruptcies, when Chase and American Express, respectively, helped them with financial support. Closer home, in Kingfisher’s case, it could not save the airline, though if you look at the Jet Airways-Etihad deal, the loyalty component alone fetched Jet a good price. Etihad bought 50.1 per cent stake in Jet Privilege, one of India’s earliest loyalty programmes, for Rs 900 crore.

As Cartesian’s Mittal points out, without the loyalty programme, the deal would not make sense for Etihad. “I would only know how many tickets Jet sold, but I wouldn’t know who it sold to, the behaviour of the individual flying — details like does he or she book one-way or return, does he travel business or economy, how often does he or she go to a non-business location.”  In that data resides the value of the deal. 

Change in Loyalty Philosophy
Indeed, data — Big Data and analytics — has been the game changer for the loyalty industry. And the rise of digital platforms. Together, data and digital have helped companies put science and art into designing their loyalty programmes, and deliver in real time.

Companies have now realised that there is more value in the data and insights they capture from loyalty programmes. Akash Sahai, managing director, Aimia, a global loyalty management company that handles the Tata group’s programmes, says certain industries like banking, for instance, have huge data on their customers. But others like retail struggle to get data on their shoppers. “Loyalty programmes help them get data on their customers,” he says.  Companies now use this data to modify behaviour. Thus, the whole transactional approach of loyalty programmes has changed.

Taj group’s Misra Harris says that the whole design of loyalty programmes today has moved away from rewards to recognition and relevance. Agrees Starwood’s Puri. “Gone are the days when you looked at what kind of rewards you got. Today’s travellers are seeking recognition. Am I getting free wi-fi, free airport transfers, invitations for that cocktail hour in the evening...?”

According to Misra Harris, Taj has identified four types of customers — the evangelists, who swear by the products they are using and rarely change; the deal seekers, who keep looking for offers they can leverage; the value-difference seekers, who seek comfort and recognition, and are ‘high touch and feel’ people; and, finally, the simple samaritans, who are happy if they get peace, convenience, and are process driven. “A brand has to cater to all these diverse sets of customers, and meet all their articulated and inarticulated needs to command loyalty,” she says. To do so, a brand has to start with data.

Loyalty & Big Data
Mittal defines today’s loyalty programmes thus: “Capturing data to drive behaviour and then having a consistent way of giving an offer to people.” The offer may be rewards, but more often than not, it is a more intangible thing — recognition, or even a thoughtful gesture that nudges the customer towards “good behaviour”. 

Does this new approach work? Does it ensure stickiness? Marketers think it does. Says Uma Talreja, head, Marketing, Westside: “Today, 72 per cent of Westside’s sales comes from Clubwest members, with a low cost of 0.85 per cent. It is a very healthy ROI. We get a return on redemption which is 10 times the value of points redeemed. And, we have a large base of multiple-time redeemers who keep their earn-and-burn relationship with the programme alive.”

Loyalty Basics: Loyalty programmes work best when customers are already loyal to the brand. The programmes are a way of thanking customers for being sticky, and not trying to acquire customers or buy stickiness. If implemented well, a good loyalty programme can induce a customer to make three instead of one purchase
What Works
  • Regular relevant communication and engagement: Customers like to be aware of how many points they have, and how they can redeem them. They like to hear about offers that are relevant
  • Ease of use: The simpler to use, the higher the chances of success. Customers (women, especially) hate to carry cards, so programmes where a mobile number is enough works better n Relevant rewards/ego boost of membership: Free valet parking at its retail outlets for its loyalty programme customers by Shoppers’ Stop has been a hit. Also, experiential benefits such as invites to a concert work
  • Mix of instant gratification and variety in redemptions: Cashbacks, free fuel and instant discounts at points of sale are popular with customers

What Doesn’t
  • Lack of communication: Post-enrolment, several brands go into eclipse
  • Redemption hassles: Points that expire, too many conditions are all no-nos
  • Membership fees: Some programmes charge a membership fee. Some banks also charge for couriering vouchers. All this goes down badly with customers
  • Lack of accessibility: If you are having problems with redeeming promises on a card (eg. airline lounge usage) and can’t reach the company, alienation is high
  • High thresholds: Companies that set very high ‘minimums’ to redeem points

Talreja takes the question of “buying loyalty” head on. “The points are a reward mechanism in an undifferentiated product or service environment and can incentivise customers to transact , but the real value of loyalty is in delivering what your customer wants,” she says.

In her view, Loyalty is not a measure of customer loyalty to the brand, but an indicator of the brand’s loyalty to the customer. “In today’s competitive environment, the way brands can gain customer share is by being relevant, being current, being meaningful. The loyalty programme’s objective is to enable better customer satisfaction through better customer understanding,” she says. Talreja cites Westside’s example: “We recently learnt that women don’t complement their handbags with their apparel as much as with footwear by analysing the purchase pattern of loyal members. This prompted us to look at our handbag designs as well as display strategies in order to support the behaviour exhibited by customers.”

Says Kelkar of Hansa Cequity, “The emphasis has shifted from human intuition to Big Data/analytics. With data, brands can get to know what kind of a shopper you are.” Mala Raj, practice head, Loyalty, Cartesian Consulting, adds: “If a customer shops in an apparel store during the heaviest day of a sale, and picks up a few non-sale items, buying an expensive ‘new arrival’, ignoring all the heavily discounted pieces, it tells the store that this is a valuable customer.” The store can then change its communication towards this customer and not bombard her with “sale, sale, sale” messages. On the other hand, the customer who only buys the item that is on sale can be a safe target for “sale” notifications.

Thanks to Big Data, brands now have exhaustive behavioural information on customers. For instance, pizza chain Domino’s has grouped its customers into 12 categories based on their pizza-eating habits (the ones who order the same pizza every single time, the ones who order party-size, the ones who order only during weekends). It now sends them tailormade offers based on their eating preferences.“From being push-based marketing, loyalty programmes have today become a service,” says Kelkar. That’s the change in philosophy we are seeing today.

But it is not as easy as it sounds. Currently, most loyalty programmes are opt-in. How do you get customers to opt in? For banks, this is not much of a challenge. Hotels too manage to draw their guests to loyalty programmes while checking them in. But, retail stores have a problem. The time-starved customer does not often want to opt in. Privacy and the fear of email and text spam are other concerns. Many refuse to opt in citing their limited shopping in these stores, according to a Colloquy study on loyalty.

Even when companies manage to gather a wealth of data, they trip up at the execution stage. Poor communication — irrelevant emails pushed like spam — turns off people. There are also infrastructural issues. Servers are often down at stores, petrol outlets, etc., and points don’t get captured, leaving the customer irritated. Only a few programmes communicate how many points you have accrued and how you can redeem them. Even if they have systems to do so, it rarely happens in practice.

For instance, at Big Bazaar outlets, the cashier at the point of sale is supposed to inform customers about the points on their PAYBACK card and how they can be used. But given the long queues at cash counters, the cashier often skips this step. Rana of PAYBACK describes how high attrition levels at retail stores are also to blame. “The entire cash staff changes every 10 months. We are grappling with those issues, as well as connectivity issues, RBI regulations issues, and infrastructural issues,” he says.

Given such bottlenecks, there are many who feel CRM is enough and there is no need to risk getting into the loyalty space. Hrush Bhatt, founder and director, Product Strategy, Cleartrip, is one such person.

CRM Versus Loyalty
Competitor MakeMyTrip has ventured into a PAYBACK loyalty programme, but Bhatt is clear that he is not getting into it. “We researched it more than once within the company to see if we could structure it. You end up with a rewards programme that is extremely complicated because the person who structures it doesn’t want the customer to earn it. There are so many strings attached. It’s just too expensive for everyone,” says Bhatt.

At loyalty marketing forums, Apple and IndiGo Airlines are often brought up as case studies. They have no loyalty programmes and yet have the stickiest customer base. But Mittal feels it is a matter of time before they bow to the inevitable. Rana of PAYBACK argues that there is practically no difference, fare-wise, between IndiGo and Air India (AI), and AI’s on-time performance is now on a par with IndiGo (89 per cent against IndiGo’s 91 per cent). So, customers might start migrating to AI, which has a rewards programme. Incidentally, PAYBACK is in talks with two of the three low-cost airlines in India.
Social media penetration is only going to increase customer needs,” says Sri Rajan, MD, Bain & Company India. With the coming of social networks, loyalty programmes have come in for extreme scrutiny and comparison and created a sense of entitlement. But, on the other hand, social media has also given brands an opportunity to leverage their loyalty programmes better and create more engagement. For instance, take e-commerce player Fashionara’s ‘Clique Circle’, a programme that not only rewards customers for shopping, but also for engaging with the brand on social media. If you refer a friend, ‘like’ a product, comment, share what you bought over social media, then you bag extra points. A host of companies are now following this model. The idea is to not only reward ‘loyal customers’ but also ‘loyal endorsers’. Harshil Karia, co-founder, FoxyMoron, a digital marketing agency, says that social media allows brands to track customers and their ability to generate word-of-mouth publicity.

There is no end to engagement. The Marriott chain allows its loyalty programme guests to check in and check out using the Marriott Mobile app. A social element to this is that in some of its hotels, guests will be able to text service requests and chat with the staff in real time.

Misra Harris feels that while loyalty might just be a heightened form of CRM, very few brands can actually deliver those levels of CRM. “Loyalty adds a very good layer onto CRM. It is, after all, in human nature to want to be rewarded. And if you can deliver on inarticulated needs, and reward and recognise people, why not?”

Sri Rajan, MD, Bain & Company India, has a different take on customer loyalty. He feels loyalty should be moved out of the CMO’s office and be part of the CEO’s agenda. Every company needs a top-down approach to loyalty rather than bottom-up. “My concern is that when you look at everything from the analytics area, it doesn’t let you drive change,” he says.

Bain, which works with some automotive companies, has a seven-step model of customer loyalty that relies less on rewards and more on capturing customer needs and driving change internally — in products and in employee attitudes towards customers.

The Future of Loyalty
A lot of mistakes have been made by brands in the battle for customer loyalty. But the good news is they are learning and changing. Clubwest, for instance, had a card that expired. This annoyed the non-frequent shopper. It has now introduced a no-expiry card. Several hotels have done away with blackouts — a real sore point with loyalty card holders. Misra Harris says Taj still has blackout days, but is now re-engineering its programme so that its platinum customers face no blackout dates. “Loyalty programmes are reaching an unconditional level, but it has to be a two-way process,” she says by way of justification.

Companies are also addressing another sore point — communication. Digital is the way forward in communicating and engaging with customers, says ICLP’s Spicer.  He describes how spas, salons, cafes and F&B outlets are using mobile-based technology to connect with consumers and inform them about the newest offers. Rana says PAYBACK is introducing an analytics platform that will allow it to send SMSs to customers, alerting them on the points they have accrued and how they can use them. Using social is another trend (see box). Mittal describes how you can now download an app that stores all your loyalty information across diverse programmes.

Coalitions could also help prop up loyalty programmes. India has largely been a standalone programme country with PAYBACK and a few other exceptions. But the salt-to-software Tata group is now drawing up an ambitious plan to put together a coalition programme on loyalty that will encompass all its standalone programmes — from Clubwest to Taj Privileges to Starbucks to the new airline venture. “Coalitions help mitigate costs while expanding rewards in an accelerated environment,” says Rajat Sethi, managing partner, Strategic Caravan International, a loyalty solutions firm. He predicts that we are going to see more solutions that bundle the points earned from different loyalty programmes and which can be traded for larger rewards.

However, there is also a flip side to coalitions. Says Sethi, “The debate is whether we are denigrating individual brands, their identity and their perceived value by bundling points. My belief is that this will work very well for the middle- to low-value segments where members have too few points to generate a meaningful redemption. But, for high-value customers, it will be better to focus on ‘mini-coalitions’ where partners are carefully selected to be complimentary.”

As companies lay out the loyalty spread, can the customer finally get to be king? 

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(This story was published in BW | Businessworld Issue Dated 02-06-2014)