paul coke aprj 699 an analysis of customer loyalty...

Paul Coke

APRJ 699

An Analysis of Customer Loyalty, Loyalty Programs and the Impact they have on Consumers

17,775 words

April 25, 2014

Tim Carroll

PAUL COKE – APRJ 699

2

Table of Contents

Abstract .............................................................................................................................. 4

Introduction ........................................................................................................................ 5

Research Purpose & Questions ...................................................................................... 6

Literature Review .............................................................................................................. 6

Websites ................................................................................................................................................ 7

White Papers.......................................................................................................................................... 8

Books ..................................................................................................................................................... 9

Research Design ............................................................................................................. 10

The Loyalty Landscape .................................................................................................. 11

Grocery ................................................................................................................................................ 11

Banking ................................................................................................................................................ 11

Petroleum............................................................................................................................................. 12

Credit Cards ......................................................................................................................................... 12

Canada – Leaders in Loyalty ............................................................................................................... 13

Outside of Canada ............................................................................................................................... 15

The Need For Loyalty ...................................................................................................... 16

The Privacy Issue ............................................................................................................ 18

PIPEDA ................................................................................................................................................. 18

Shopper Marketing .......................................................................................................... 20

RFM ................................................................................................................................... 21

Marketing’s Most Powerful Ally – Word Of Mouth ...................................................... 21

Reward, Recognition, and Relevance........................................................................... 23


3

Reward ................................................................................................................................................. 23

Recognition.......................................................................................................................................... 24

Relevance ............................................................................................................................................ 25

Data Analytics and CRM ................................................................................................. 25

The Case for Coalition .................................................................................................... 28

Breakage ........................................................................................................................... 29

The Case Against Loyalty .............................................................................................. 30

No Loyalty ............................................................................................................................................ 31

Inertia Loyalty ...................................................................................................................................... 31

Latent Loyalty ...................................................................................................................................... 32

Premium Loyalty.................................................................................................................................. 32

New Technology – AKA What All the Cool Kids Are Using....................................... 33

Analysis ............................................................................................................................ 34

Demographic ....................................................................................................................................... 34

Environmental ..................................................................................................................................... 35

Political ................................................................................................................................................ 35

Economic ............................................................................................................................................. 36

Social ................................................................................................................................................... 36

Technological ...................................................................................................................................... 36

Conclusions ..................................................................................................................... 37

Appendices ...................................................................................................................... 39

Appendix A .......................................................................................................................................... 39

Appendix B .......................................................................................................................................... 40

References ....................................................................................................................... 41


4

Abstract

Since the dawn of the internet in the 1980’s the business landscape has changed dramatically. Included in this massive global shift has been the way we as consumers

do business, whether we are buying goods, selling them, or distributing them. Amazon and Ebay have become as popular as Walmart and Costco for the everyday consumer. The savvy shopper has become more discriminant about what they spend their money

on, especially in the wake of the economic recession in 2008; and the speed with which we can obtain knowledge about a competitive product or a brand has shifted the power of consumerism into our hands. With all of this new found knowledge and power the

importance of gaining the trust and loyalty of consumers has heightened the impact on the success of a business. Customer loyalty is the new commodity for many retail based bricks and mortar businesses as they now compete for online loyalty and getting

customers in the door. The purpose of this paper is to critically review many of the aspects of customer loyalty

and how they are tied together to attract and retain customers. What will be evident throughout this paper is that loyalty programs can have a significant impact on a business when they are marketed and managed correctly. Too many programs today

do not fully engage consumers to the full extent that they create any type of loyalty, and the criticism behind loyalty programs is that they simply become a cost centre of the organization that does not provide any profitable value. There is little debate that loyalty

programs cost the organization time, money, and resources; however, the profound impact of a properly executed program that can create program champions for a business is immeasurable. This paper reviews many of the key areas of loyalty

including data analytics and CRM, new mobile technologies, customer privacy, and word of mouth advertising. As competition for customer loyalty becomes global, these key areas become more important to creating loyalty and building deep relationships

with consumers. Customer service, price, and product quality are still the cornerstones of a profitable business strategy, but loyalty has become an integral part of this strategic mix especially when the lines of differentiation become blurred.

The key findings in this paper show that successful loyalty programs must go beyond the simplicity of gift cards and rewards points. Loyalty programs have become a much

larger and more sophisticated part of an organization’s strategy and the importance of loyal dedicated customers have elevated the value of what loyalty brings to the organization. The value added benefits of truly loyal customers prove that they spend

more, spend more often, and are generally more profitable because they buy all the time rather than just those times when there are sales discounts. Companies who can recognize and evaluate who these customers are the fastest are those that will benefit

most from higher profits, and ultimately win the battle for consumer spending. The loyalty landscape in Canada is one of the most robust and highly engaged markets in the world, and those businesses with loyalty programs in place are at a significant

advantage to those who continue to discount the value of loyal customers.


5

Introduction

Loyalty is defined as, “the willing and practical thoroughgoing devotion of a person to a cause. A man is loyal when, first, he has some cause to which he is loyal; when,

secondly, he willingly and thoroughly devotes himself to this cause; and when, thirdly, he expresses his devotion in some sustained and practical way, by acting steadily in the services of his cause.”

Josiah Royce. The Philosophy of Loyalty (1908).

Man inherits the capacity for loyalty, but not the use to which he shall put it. The persons and causes (if any) to which he shall devote himself are suggested to him, often, indeed, imposed upon him by education and environment.

Arthur James Balfour, Theism and Humanism (1914).

What is the value of loyal customers in today’s business environment? Do loyalty programs really work and do they add value to a business? Why do some programs

succeed where others fail, and what makes a successful program? Loyalty is often defined and argued many different ways. In some cultures and religious affiliations it is believed to be one of several virtues of humanity. Christopher Peterson and Martin

Seligman, two leaders in the world of positive psychology identify loyalty as part of the category of justice and strengths that build communities in their description of Character Strengths and Virtues i. Loyalty is an important aspect of society and in everyday life.

Sports franchises like the Toronto Maple Leafs and the Boston Red Sox have benefitted by the devout loyalty of their fans with sold out attendance records for the past several

decades, regardless of their team’s performance on the field of play, while other franchises struggle with keeping fans engaged unless the team performs to expectations. There is also the famous story of Hachiko, the Japanese Akita dog whose

loyalty to his master was unwavering and unquestionable as he sat at the train station to wait for his owner every day for 9 years after the owner had died and not come home from his place of work.ii

Many consumer brands have spent millions and millions of dollars on building loyalty to their brand. Some of the most recognized symbols in the world are actually consumer

product brands like Coca-Cola, McDonald’s, and Apple. Loyalty is everywhere, and consumer loyalty to brands and retail businesses trying to hold on to customers is no exception. The retail landscape is changing every year. Over the past several years we

have seen the exit of major retail chains such as Simpsons, Eaton’s, and Zellers; and the entrance of Walmart, Target, Dollar Tree, and soon to be department store giants Sak’s Fifth Avenue and Nordstrom. Our strong loyalty to Tim Horton’s caused the brief

stay of US giant Krispy Kreme, and our dedication to Costco caused Walmart to rethink their growth plans for warehouse club Sam’s Club and close the last of its 11 warehouses in 2009. Sam’s Club still thrives as the second largest warehouse club in


6

the US with 612 locations, but our loyalty to select brands in Canada has challenged a number of US expansion plans over the years. Retail consolidation, scan data and

CRM systems, and the rising prominence of private label have shifted the power of the knowledge base of understanding the consumer squarely onto the shoulders of the retailers. With this shift however, comes the ongoing struggle by retail businesses to

strengthen customer loyalties and drive consumer spending behaviours using an ever changing mix of brand power, data analytics, and marketing savvy to convince the elusive consumer to shop with them.

Research Purpose & Questions

The key focus of this paper is on the strategy behind loyalty programs and taking a strategic direction on how loyalty programs and loyalty in general fits into to a corporate

business environment. There are a number of aspects of loyalty that go beyond a simple gift card or the accumulation of points. The purpose of this paper is to look at the loyalty business primarily in Canada, but with some analysis and comparisons to other

programs internationally such as Nectar, the largest loyalty program in the UK, as well as Tesco, one of the largest retail chains in the world with a strong loyalty program.

Some of the questions that will be researched and expanded upon include, why is loyalty important in the Canadian marketplace? What is the impact of loyal customers to a consumer facing business? What makes a loyalty program successful? Why do some

businesses embrace loyalty while others avoid this ongoing trend? As part of the analysis, it is interesting to note that while loyalty can be very much a part of the company’s strategy, loyalty in general terms divides consumers into categories or levels

of identified importance, and therefore there must be another strategy that puts all consumers on the same level regardless of loyalty.

Some of the areas that will be discussed throughout this paper include a brief review of the business of CRM or customer relationship management, a discussion around customer privacy and how much information and communication is too much, and a

look at some of the top programs by participation and what makes them successful. The paper will also address a number of concepts that relate to the business of loyalty including earn and burn, the importance of surprise and delight, the incredible power of

word of mouth advertising, coalition programs versus private label or closed loop programs, and the three pillars of reward, recognition, and relevance.

Literature Review

The loyalty landscape in Canada is one of the most advanced and mature in the world. Canada, unlike many other countries has a number of large national loyalty programs that embrace the entire population across the country and not just a small pocket of

regional banners, making it easier for retailers to market the program as well as drive


7

other factors such as word of mouth. This also allows the manufacturers scalability of their marketing spends when providing offers to customers. The literature behind loyalty

encompasses a wide variety of websites, white papers, journals, and books. As with many fast paced industries that continuously evolve and change, some of the literature becomes obsolete very quickly and the most up to date research and industry data is

found through up to date and ongoing papers and websites.

Websites

There are a number of websites that will be reviewed throughout this paper including loyaltymatters.com, colloquy.com, crmtrends.com, jdpower.com, thewisemarketer.com, and loyalty.com. Many of these websites offer up to date insights into the business of

loyalty and what works and what doesn’t. Colloquy is one of the industry leading research companies and is owned by Loyalty One who runs the Air Miles program. Colloquy frequently provides analysis and data on the loyalty industry across the US

and Canada and has done studies comparing the US and Canada and their respective more popular programs. Many of the insights in this paper will be referencing Colloquy as an industry leader and key researcher in the business of loyalty.

The website loyalty.com is owned and operated by Loyalty One who is one of the largest loyalty providers in the world. Loyalty One runs and operates the Air Miles

program in Canada which has the largest population penetration of any program in the world (http://en.wikipedia.org/wiki/Air_Miles). Loyalty One also owns Colloquy as their research division and Precima, a shopper analytics company that provides insights to

corporate retail businesses and manufacturers on the shopping habit of their customers. As all big fish in the sea, there is always a bigger fish, and Loyalty One is owned by Alliance Data Systems in the US. This paper will discuss the Air Miles program in more

detail, but currently this large coalition loyalty program is measured to be in two thirds of Canadian households and has over 10 million members across Canada (http://en.wikipedia.org/wiki/Air_Miles). There are only two major coalition programs in

Canada, Aeroplan is the second largest, and both of these juggernauts of the loyalty industry have multiple large national partners that allow consumers to earn miles in a variety of categories.

This paper will look at both programs in more detail, particularly as they compare with retail based, or closed loop programs such as Shopper’s Drug Mart Optimum, Canadian

Tire’s Money Advantage, and HBC Rewards. Both types of program are different in their loyalty exchange with the end consumer. Coalition rewards, or miles in the case of both Air Miles and Aeroplan, are earned at various partners across a broad spectrum of

categories. Once those rewards have been accumulated to some level they are often redeemed elsewhere, either for travel, merchandise, or donated to a special cause. In the case of closed loop rewards, points or rewards are earned at a retail location and

the subsequent rewards can only be used back at the same retail banner, typically for merchandise, cash back rewards, or gift cards.


8

Another useful website thewisemarketer.com, dedicated to loyalty marketing, also produces one of the most comprehensive journals in the market today entitled The

Loyalty Guide. The Loyalty Guide, now in its 6th edition, outlines the full scope of the loyalty industry around the world with a core focus in the US where it was written. The Loyalty Guide explains the many facets of loyalty including an overview of different

industries such as banking, supermarket and general retail, telecommunications, automotive, and travel. The guide explains how a number of the programs associated with these industries are able to either succeed or fail and what some of these programs

do to make them successful. An example of this is the Tesco ClubCard program, launched in the UK in 1995 that was a leader in the supermarket industry and has grown over the years to one of the world’s largest and most effective programs. Tesco

has grown the program to fully integrated status and regularly sends unique offers to customers and produces a coupon book that is relevant to the number of rewards that customer has earned over a 3 month or 13 week period

(http://www.tesco.com/clubcard/). JD Power is well known across North America as one of the leading marketing

information companies that provides clients with research and data analytics in order to make informed business decisions regarding how they market to their consumers. One of the most popular aspects of JD Power’s work is their annual ratings of the top

vehicles produced each year which not only gives consumers information but also provides the automotive brands a marketing platform with which to sell based on a well-respected research company.

White Papers

This is one of the more common and popular methods of reporting updated data

analytics and research on the loyalty industry, especially by organizations like Colloquy. This paper will reference a number of white papers that have been written over the past several years regarding the loyalty business in Canada and assessing the benefits of

loyalty plus answering the question of whether loyalty programs work. Aside from Colloquy, there are a number of white papers written by research companies

and independent researchers that will be referenced throughout this paper. One of these papers produced by Aberdeen Group, a research company in the US, who produced a paper entitled Cross Channel Customer Loyalty. This insightful paper looks

at the concept of using loyalty across channels within a retail business. With the tremendous growth of online and mobile technology in today’s retail landscape, businesses that are taking advantage of rewarding their customers across multiple

areas of their business will thrive and be better suited for future growth. Aberdeen’s research also looks at companies who have fully integrated loyalty programs and uses the term “best in class” to compare them with other programs with less integration and

also those who have only touched the surface of customer loyalty (Cunnane & Anand, 2010). As this paper looks at the loyalty industry and whether loyalty programs really are effective, Aberdeen’s research on fully integrated programs is useful as a

benchmark against less integrated and further against having no program at all. The


9

concept of cross-channel loyalty and having a fully integrated solution is a strong argument to suggest whether loyalty programs are effective in today’s marketplace.

An additional white paper that has been updated in recent years and outlines the latest figures for the Canadian marketplace in particular is Colloquy’s latest analysis of the Canadian loyalty landscape. As this paper will look at the overall effectiveness and

impact of loyalty programs in Canada and whether loyalty has an impact on business, this white paper actually discusses a slight decline in loyalty program memberships, despite the statistic that over 90% of Canada’s population belongs to a program. As the

business of loyalty is strongest here in Canada (only 74% in the US), this white paper discusses some of the challenges that today’s programs face and the overall impact of population growth factors, the growing concern over personal data usage, and the

ability of programs to properly and effectively communicate with customers. One of the key discussion points of this paper will be the use of customer data and the

balance between data and the relevancy of loyalty programs. A number of white papers and books will say that loyalty programs work best when businesses know their customers best and are able to communicate relevant offers to them. However, there is

a threshold by which consumers want to provide data to allow businesses to know them, but only at an arm’s length. There are a number of publications that address the issue of sharing personal data and other outside companies to access customer

information, and then not be bothered to personalize it. This simply creates noise, not only from irrelevant offers but also from other programs and from various communication channels.

Environics Analytics is a world renowned customer research and data analytics company recently conducted a study called Reframing the Conversation on Loyalty

Programs in Canada (2013). This research paper offers a different view on loyalty programs in general by looking at the variables surrounding time to reward as a concept. In this paper Environics looks at the idea that the most successful programs

should be based on the amount of time that elapses between earning a reward and redeeming the reward. The logic behind this is that the faster a loyalty reward is earned and redeemed, the more the customer is engaged. A program that takes too long to

reward is more easily forgotten and simply frustrates the long term loyalty of customers, according to the research.

Books

The Loyalty Effect is written by Frederick Reichheld and explains the impact of customer loyalty to a business. It is a comprehensive look at how businesses today

need to focus not only on the loyalty of their customers, but also on the loyalty of employees and investors. All of these are tied together and engaged employees can often lead to engaged customers. Reichheld points out that the average business loses

half of its customers every five years. Although this may not be true in every business there is a real argument for building relationships in every business sense that leads to higher profits and lower marketing costs. Reichheld also talks about good profit and

bad profits and how good profits come from your valuable customers. This comes back


10

to the earlier discussion around RFM analysis whereby your best customers are those who come in most recently, more often, and spend more with you.

Research Design

The research design of this paper will be focussed as a conceptual paper that looks at

many of the keys areas of loyalty programs that can either make or break the success of a program and a business. Colloquy’s recent research suggests there are 120 million loyalty cardholders in Canada, and 2.65 billion in the US (Colloquy Talk, July 2013), so

there must be something to this industry that attracts consumers and businesses to it. What works and what doesn’t work and what are the elements of an effective program are some of the ideas that will be discussed in this paper.

From a conceptual framework perspective this paper will review some of the major concepts associated with loyalty programs including CRM, data analytics and customer

information, RFM, communication channels, reward value and relevancy, and program impact of business profitability. As a strategy document there are a number of tools that can be used in assessing these concepts including a DEPEST analysis that will briefly

look at the overall loyalty industry in general to assess the political, economic, socio-cultural, and technological effects of loyalty on an organization. As an example, the technological impact of a data driven CRM system implementation can be significant for

an organization. One of the key arguments in favour of an effective loyalty program implementation is the

ability of the organization to use customer data to distinguish their loyal customers from those who are either infrequent customers or worse, customers who only make a purchase during a money losing sell off period. The challenge of course for the IT

department is properly capturing that data, however, the challenges don’t end there. An effective CRM system allows the data to be extracted in a usable format, but also allows the organization to analyze the data and then create some type of a strategic plan to

use the data to enhance their loyalty initiatives and communicate with their best customers.

In order to look at businesses that are running a loyalty program, this paper will also look at some large corporate businesses that don’t have a loyalty program and why loyalty is not part of their strategy. One example is the Four Seasons hotel chain which

is one of the few hotel chains without a loyalty rewards program. The key argument against loyalty programs here is that all customers should be treated equally, and some loyalty programs quite often by their nature actually segregate customers into different

classes of spending patterns. Communicating special offers to your best customers is a common practice of many rewards platforms, especially those related to hotel, travel, and banking programs. Other retail channel programs such as grocery or pharmacy are

more focussed on relevancy and providing offers to customers based on spending patterns and the products they buy, not always on spending thresholds.


11

The Loyalty Landscape

The S&H Green Stamps program is arguably one of the first loyalty programs created in the late 1800’s in the US (http://en.wikipedia.org/wiki/S&H_Green_Stamps). In Canada,

most would agree that Canada’s oldest program is the Canadian Tire Money program launched in 1958, although the program was created to combat some of the local competitive gas companies that were already offering rewards to their customers for

filling up their tanks. Today the loyalty landscape in Canada is much more diverse. The Canadian Tire program today struggles with its own identity, with a demographic base that is still devoted to the idea of paper money, and a new customer who loves virtual

points, mobile technology, and tracking accumulation. As diverse as Canadian Tire’s product portfolio is, so is its customer base and with locations both in major centres across the country as well as many rural towns, Canadian Tire has been challenged in

recent years to maintain the loyalty of Canadian consumers and the overall relevancy of its program. The essential element of Canadian Tire’s success is their ability to continually market themselves as a purely Canadian company with many Canadian

products which has given them a significant advantage over their American rivals entering the market such as Home Depot and Walmart.

Grocery

In the highly competitive grocery industry, the two largest chains in Canada compete for customer loyalty. Loblaw’s has their Presidents Choice program, while Sobeys

competes with their own Club Sobeys and an additional ongoing partnership with Aeroplan. Other regional players such as Safeway, Metro, and Overwaitea all have a loyalty rewards scheme to bring customers in and keep them shopping with them. The

grocery industry is highly competitive as it is very much a staple of consumer shopping and is not affected as much by new technology and innovation. However, the introduction of self-serve checkouts and mobile coupons have given consumers more

reasons to have a choice between certain grocery stores to shop at. Milk, bread, and cheese does not change that significantly in price from one store to another but the technology behind how a customer pays and what promotional loyalty rewards are tied

to these staple products can have an effect on the entire shopping experience.

Banking

The major banks are no strangers to looking for ways to keep loyal customers as all of the five largest banks in Canada offer their own version of credit card based loyalty programs. RBC pushes their own Avion program, while Bank of Montreal counters with

their BMO Rewards and World Elite Mastercard. Scotiabank has a rewards program but also partners with Scene, the Cineplex Rewards program that is one of the most popular in Canada, to offer multiple loyalty opportunities. CIBC is now pushing hard on

their Adventura program after a lengthy ten year relationship with Aeroplan that was, in many ways, swept away from them by TD Canada Trust just recently in 2013.


12

Banking rewards are an integral part of the bank’s ability to retain customers. CIBC, the smallest of the five banks had for many years the top credit card Visa program in

Canada on the strength of the Aeroplan membership base and the popularity of the Aerogold program. Today, they are hoping to keep those loyal customers with a new offer from Adventura as many of their Aeroplan customers who only had a bank account

with CIBC for the rewards program, flock over to TD. Travel rewards are a huge incentive for many of the bank programs. The idea that just by using your credit card as you normally would do, you have the potential to earn points, miles, or some type of

reward that will make that holiday vacation a little less expensive. For the consumer earning rewards that will help ease the pain of some of the most costly vacation expenses like flights, hotels, and car rentals, is often incentive enough to want to do

more business with the bank. For the banks who charge merchants for transaction fees every time a customer uses their card, it’s a relatively inexpensive way to retain customers and increase transaction volumes and revenue.

Petroleum

Another industry that has established rewards programs across all major entities is the

petroleum industry. Most major gas companies have some type of rewards program, and in an industry where price is everything, it is an interesting business case for loyalty. Esso has adopted a double rewards type program to try to capture more

customers by offering Aeroplan and Esso Extra. Although a customer cannot earn both rewards when they fill up, those drivers who are not one of the 4.6 million Aeroplan customers in Canada can easily earn Extra points instead which increases the overall

number of consumers who can earn a reward when they fill up at an Esso station. The other big player, Shell, counters with the Air Miles program, while Canadian Tire centres across Canada offer their own Money program. Husky, much like Esso has a 2-tier

structure in offering their customers My Husky Rewards as well as CAA dollars. In many cases when prices are so closely matched between two stations across the street from each other, consumers may often choose the one where they can earn points they can

use for future purchases.

Credit Cards

All of the major credit card companies have existing partnerships with major retail partners that offer rewards for using the card. For the credit card companies the value is in increased transactions and overall usage of the card. For the retailer the value is in

offering points to consumers who may choose to shop elsewhere, but choose them in order to earn valuable rewards that can redeemed. Retailers like Hudson Bay, Shoppers Drug Mart, and Canadian Tire have partnered with Master Card while Best

Buy, Esso, and Cineplex partnered with Visa. There is a valued benefit of customer loyalty for both retailer and credit issuer that has long term advantages for both.


13

Canada – Leaders in Loyalty

Many of the loyalty landscape studies that have been published in the past several years often put Canada at or near the top of the loyalty rewards industry. A couple of

recent studies by industry expert Colloquy estimates the penetration of loyalty programs in Canada to be in the range of 90%. Much of the reason for this is our strong loyalty to brands and to businesses across Canada. There is no question that Walmart’s entrance

into the Canadian marketplace in the early 90’s can be directly related to demise of many small businesses across the country as well as some very large ones such as Zellers most recently, and K-Mart. Consumer loyalties to Walmart have often been built

on a different strategy than having a loyalty program. EDLP, or the everyday low price strategy has given consumers a reason to shop at Walmart, knowing they will not see a better price elsewhere and Walmart will match the price if they do. Walmart’s strategy in

this has much to do with the peace of mind consumers have that they are getting the best price without having to shop around looking for it.

Without a loyalty program, Canadian’s in general have stuck with their beloved Tim Horton’s, despite the onslaught of Starbucks stores, and the less that planned short visit of doughnut giant Krispy Kreme in 2001. Krispy Kreme still operates a handful of stores

in Canada but Canadian loyalties to Tim Horton’s has squashed much of their expansion plans. Tim Horton’s has expanded their menu and made changes to its coffee cup sizing in recent years, but traditionally has used their Canadian roots and

strong community based programs like Timbits Hockey to build loyalty to their brand much the same as Canadian Tire has done. Brand loyalties aside, Canadian’s have also adopted a number of loyalty programs that have helped build relationships between

consumers and the places they shop. As not every retailer can implement an EDLP strategy or a Canadian born and raised campaign to create loyalty, rewards programs have become a staple in many businesses across the country to attract consumers by

offering more than simply a product at a price. As the Canadian Tire program continues to be one of the most popular programs across

the country and Hudson’s Bay Company continues its Rewards program without Zellers as one of the highest membership programs, many experts may consider the gold standard of loyalty programs in Canada to be Shopper’s Drug Mart’s Optimum program.

Its diligence to building a connection with its customers and understanding the needs, purchase behaviours, and dedication to personalizing offers and rewards accumulation have made it one of the most highly penetrated and customer engaging programs in

Canada. The Optimum program has over 9 million members, many of whom are active in the program, and has built a reputation in the industry for providing consumers with relevant and timely offers and a deeper connection with consumers than many of its

competitors. The concept of relevancy will be discussed further in this report. There is little debate, however, that a significant reason for the strong penetration of

loyalty in the Canadian marketplace is due to the adoption of coalition based programs like Air Miles and Aeroplan. Air Miles has over 11 million members across Canada which is over 30% of the entire adult population and it is estimated that over two-thirds

of the households in Canada has at least one Air Miles member. Aeroplan by


14

comparison has just over 5 million members and markets itself as a more premium member base than Air Miles. Both programs are based on the coalition model that

allows consumers to earn miles in multiple ways including flights, hotels, retail purchases, and credit card transactions. Both Air Miles and Aeroplan have built strong membership bases across Canada and despite having multiple members with both

cards, both programs do have many differences. Air Miles has its roots in coalition based rewards and has over 100 partners including

Bank of Montreal, American Express, Rona, Shell, Canada Safeway, and Metro. The program allows members to earn miles either with their associated credit card and/or with their Air Miles rewards card at participating retailers, and then redeem the miles

they earn for flights, hotels, entertainment, and many more options. Air Miles promotes flight redemption more often as it competes directly with many other rewards programs. Recently Air Miles introduced Air Miles cash which allows consumers to choose whether

to redeem miles for rewards or simply get cash back at a participating retailer. This cash back option is similar to the Shoppers Optimum program and offers consumers the easiest and most instant redemption option.

Aeroplan in contrast was originally a frequent flyer program, started by Air Canada in 1984. Today, Aeroplan is owned by one of the leading loyalty companies in the world,

Aimia Inc. who also own the rights to Air Miles in Europe as well as Nectar, the leading loyalty program in the UK. Although Air Canada is still a partner of Aeroplan, the program has expanded beyond simply flight rewards and Aeroplan is partnered with a

number of key competitors to Air Miles including TD Bank, Visa, Home Hardware, Sobeys, and Esso. The Aeroplan program promotes itself as having a higher penetration of medium to high income earners as its core member base, and this is

evident in its current advertising campaigns and its new Distinction program launched in 2013. Both coalition based programs allow consumers to earn miles at multiple partner locations and through their affiliated credit card bank programs, and then redeem those

miles for flights, hotels, gift cards, merchandise, or even donate to charity or environmental groups.

The strategic advantage of coalition rewards programs is that they allow consumers to earn multiple ways through multiple partners. With so many programs currently active in the market, keeping the interest of consumers is key to the success of any program and

coalition programs have the advantage of earning multiple times at multiple locations. This is especially helpful for merchants who have low frequency spending patterns such as furniture stores or automotive service centres. For a business such as Shoppers

Drug Mart, frequency is an extremely important aspect of their business as earning a greater “share of wallet” from their customers allows Shoppers to be more profitable and develop a higher degree of loyalty with their customer base.


15

Outside of Canada

The loyalty landscape in the United States looks a little different than in Canada. Both Air Miles and Aeroplan have made multiple attempts over the years to enter the

consumer rich US market but have failed in their efforts. Currently there are no real strong coalition loyalty players in the US which is often attributed to a much more fragmented regional market, and a less engaged consumer. Some of the largest

programs by memberships in the US include the many frequent flyer programs like American Airlines Advantage, Delta’s SkyMiles, and United Airlines Mileage Plus. Most of these large airline program memberships far exceed that of the Air Miles program in

Canada, however, many would challenge the program engagement and the ability for the average consumer who is not a business traveller to earn rewards on a regular basis, thereby discounting the notion of creating valued loyalty. Consumers who carry a

loyalty card for all of the major airline carriers would arguably not be more or less loyal to one or the other.

Similar to the Canadian market, most of the major grocery chains in the US have loyalty programs as do many of the hotel chains, banks, and gas station chains. Most of these programs are tied directly back to the issuing partner and not built on a coalition based

platform. The challenge with developing any type of coalition based program in the US is in combining partners with locations in the same states. As an example, a large grocery chain like Winn-Dixie which operates 485 stores only has a presence on five

states; Florida, Alabama, Mississippi, Georgia, and Louisiana. For Winn-Dixie to partner with a gas station or hotel chain to take advantage of consumer spending patterns and increased frequency, they would need to find one with locations in those same states in

order to take full advantage of the coalition partnerships. The largest supermarket chain in Britain, Tesco, launched their loyalty club card

program in the early 1990’s and now has a membership estimated to be 15 million members (http://en.wikipedia.org/wiki/Tesco_Clubcard). The program has evolved over the years and now includes fuel savings for Tesco’s gas stations, and its operations are

in the UK, Ireland, Hungary, and Poland. The Tesco program now also includes a mobile app for consumers to check their balance and notifications for special offers and bonuses.

In direct competition to Tesco’s program is the Nectar program which is the largest loyalty program in the UK and is partnered with Sainsbury’s grocery chain and BP fuel,

and has over 19 million members. Nectar operates primarily in the UK and has recently launched a separate program in Italy. The Nectar program allows consumers to earn rewards in store at a number of merchant partners, as well as a number of online

partners. Interestingly the program was originally started by Sir Keith Mills, the founder of Air Miles, but today is owned and operated by Aimia Inc., who also own the Aeroplan program in Canada (http://en.wikipedia.org/wiki/Nectar_loyalty_card).


16

The Need For Loyalty

The consumer landscape has changed significantly over the past several years as brands, manufacturers, and retail businesses look to secure their place in a country that

is the second largest in the world by geography, but only has the population roughly the size as the state of California. There is little debate that loyalty programs on their own will save a business or sustain it through an ever changing marketplace. This is naïve

thinking for a struggling business to assume that a rewards program will somehow mask other business inefficiencies and bring customers in. In the retail environment a number of other factors are constantly at play including customer service, product quality,

location, and the variety of brands available. In a study conducted by Colloquy, a leading loyalty research company owned and operated by Loyalty One (What Price Loyalty: Colloquy), researchers identify that the factors associated with business growth

and profitability have changed over the years and the importance and relevance of each have many retail businesses scrambling to keep up with the consumer demands. In the years leading up to the recession in 2008, the Colloquy study showed that the more

important factor in 2 of 3 major retail categories was customer service and the in-store experience.

Even in cases where another competitor’s products may be lower priced or even a better quality, good customer service and attention to providing an engaging experience was critical to the consumer’s loyalty and their desire to return. According to this study

one of the biggest beneficiaries of this was Costco the US and Canadian club chain. The idea of walking into Costco and discovering a deal brought customers in by the thousands. Even if you didn’t need the 5L bottle of ketchup, it looked like a great deal

and the price was better than buying 5, 1L bottles; never mind the subtle advantage of not having to remember to buy ketchup for the next 12 months.

As the recession hit and money became tight those great customer experiences appeared to be less of a factor and were traded in with getting the lowest price. Lower prices quickly became the new face of loyalty but with chains like Walmart having their

everyday low price (EDLP) strategy, it became difficult to compete. The recent popularity and influx of dollar stores is a strong indication of the importance of price to consumers. Differentiation is key to building a loyalty following that goes beyond the

confines of EDLP. Everyone can’t have the lowest price, otherwise none of them would be in business or worse, that all important factor that fits in right behind the battle between low prices and customer service, product quality, quickly takes its toll on

consumer purchase behaviours. You can buy a frying pan at the dollar store, but how long do you think it will last?

Loyalty rewards programs are only part of the puzzle that is building customer loyalty. Other pieces of the puzzle include low prices, exceptional customer service, and product quality as a way of enhancing and building on customer engagement and

understanding the behaviours of every shopper. In an article written in the Harvard Business Review book Increasing Customer Loyalty, the author states that “we buy from a company because it delivers quality products, great value, or a compelling brand.


17

We leave one, more often than not, because it fails to deliver on customer service.” (Dixon, et.al. 2009. pg.5).

One of the key drivers for retail businesses taking over the reins of customer shopping habits from manufacturing brands was the introduction of consumer scan data which

provided real time data on the shopping habits of consumers instead of the old method of inventory management. What consumers bought, how many, how often, how much they spent, and eventually what other products they bought with it has increased the

overall effectiveness and importance of building loyalty. If you were a manufacturer of peanut butter, the retailer could tell you how much of your product consumers bought and when, and even tell you how many bought jam at the same time. The grocery store

knew when they were running low on peanut butter they had better also order more jam, and the manufacturer knew if they wanted to sell more peanut butter they should be close to the jam.

The profitability side of loyalty programs are also an important factor to consider for many organizations looking to implement one. Price Waterhouse Coopers published an

article in the US that exposes some of the costs and relevant revenues associated with loyalty programs and what marketing managers can expect from implementing one. The chart below shows some of the profitability revenues versus costs of program

implementation (PWC, pg.3)

Profitability of Loyalty Programs (Revenues - Costs) Incremental Revenues Incremental Costs

point sales, partner payments)

ption and accrued liability

recognition, member events)

advertising, mailings, email)

maintenance

centers)

payroll and benefits)

As will be discussed throughout this paper, loyalty programs can be very profitable for an organization that is willing to invest in a program that will drive loyalty in consumer

behaviour and invest in technology and infrastructure that will fully understand who their customers are. It can also cost an organization more to implement if the investments


18

are not made and the organization only wishes to execute the basics. The target of loyalty rewards programs is to get all of the information the retailer needs in order to

match it with the consumer’s behaviour patterns, in exchange for points, rewards, miles or whatever the retailer wanted to offer. By earning a reward and providing some basic personal information the retailer can then understand who that customer really is and

then cater to their needs specifically, thereby on some level having to avoid taking on an EDLP strategy. Loyalty rewards programs have become a powerful tool to help retailers combat EDLP as well as provide a point of difference providing the program is used to

its fullest. Consider a mother who comes to grocery store once a week to buy diapers for her

newborn twins. The store sends her an email with a triple point offer on diapers and a discount offer on coffee for those late nights and early mornings. The store actually saves money on the diapers as the points don’t cost them nearly as much as

discounting the diapers or trying to fight with the Walmart down the street. The coffee is an easy sell to get her into the store and she believes the store understands her needs better and may actually consider spending a little more than she normally would

because the experience is more personal. This personalization through the creation of loyalty and rewards has proliferated the hold that price has on the retail industry and created a new platform with which more businesses can compete.

The Privacy Issue

Customer privacy is a hot topic and always seems to appear at the forefront when yet another business with millions of lines of personal data gets hacked and an individual’s

information is released into the universe. With the explosion of social media in the past ten years since Facebook first launched in 2004, sharing personal information, stories, pictures, opinions, and amateur reviews has become the new channels of

communication. Before Facebook, if someone made a poor business deal or issued a personal attack on someone else, the options were limited as to how that information was disseminated out to the public. Similarly, if a restaurant meal was extraordinary, the

restaurant would have to rely on the public to talk about it at the next PTA meeting or their kids sporting event to help get customers to come in. Today, a good or bad experience can be broadcast to millions of people in a matter of seconds over a

multitude of social sites and a business can be an instant attraction or a discredited avoidance.

PIPEDA

In 2004, on the heels of Facebook’s arrival on the world stage, the Federal Government enacted the Personal Information Protection and Electronic Documents Act (PIPEDA) to

protect individuals from the personal collecting and sharing of information electronically. There are various parts of the act that deal with the use of electronic personal records in court documents, personal health information, and specific to this report, the sharing of

personal information for commercial use (PIPEDA, A Constitutional Analysis.pg322).


19

According to the Office of the Privacy Commissioner of Canada, “PIPEDA requires private-sector organizations to collect, use or disclose your personal information by fair

and lawful means, with your consent, and only for purposes that are stated and reasonable” (https://www.priv.gc.ca/information/02_05_d_08_e.asp). With the introduction of transactional scan data, the ability for a retail business to collect and

analyze their customer’s shopping habits and buying behaviours was a monumental shift in the retail landscape. Information privacy and the sharing of personal data is increasingly relevant in today’s market just as individuals share more and more of their

personal lives with their friends and friends of friends. Twitter and Facebook have opened a whole new world of instant updates and personal

information, yet consumers still want their transactional data to be protected and kept close to them. A study conducted in the UK by Aimia, one of the leading global loyalty companies that owns and operates the Aeroplan program in Canada, showed that

consumers are willing to provide their data to certain businesses such as banks or companies like Amazon more than they are to share with others like energy companies. Further to this study, consumers are more or less willing to have their data used in

different ways. Based on the study, 55% of consumers are willing to have their data used to provide product recommendations, 37% are willing to have targeted advertisements sent based on web browsing history, 70% are willing to have coupon

offers sent based on products they buy regularly, and 37% are willing to have product recommendations sent based on shopping history (Appendix A).

In Canada we are also protected by the Consumer Protection Act (CPA), and consumers are granted certain “cooling off periods” when buying certain products and signing contracts with Canadian companies (consumerinformation.ca). The task for

loyalty programs and data analytics is to understand what information is key to knowing enough about their customers to properly communicate to them in a way that doesn’t become intrusive. There is a fine line between knowing you customer’s shopping

behaviours and knowing too much about their personal lives that they become suspicious. What is worse however, is asking for basic personal information and then never using it to make customers feel special or that the company actually understands

who they are and what their likes and dislikes are. This type of apathy works against the company and actually makes customers disloyal and begin to further question issues of privacy and what is being done with the personal data that has been collected.

The challenge with privacy and the data that companies collect is the expectation from consumers that their needs will be met. Consumers in general are wary of providing

personal data to any company unless they know first, that information will not be shared with anyone else, second, that information cannot be stolen from anywhere, and third, in the case of rewards programs, that information will be used to personalize offers that

are relevant, rewarding, and will recognize their personal. Otherwise the company risks losing that customer to a competitor that will make more effort to understand them or worse, they will create a firestorm of negative social media backlash. Privacy laws like

PIPEDA protect consumers from having their information shared with other companies or individuals, but they also give consumers the expectation that when that information


20

is provided it will be used in way that ultimately benefits them. The irony of social media and the increase in speed to which information is shared is that it has increased the

focus on privacy and the protection of personal data in an era when personal data is so much more accessible.

Shopper Marketing

For decades manufacturers and retailers alike struggled to understand consumer buying habits. Much of what was known was based on running small focus groups and handing out surveys; and for manufacturers, inventory analysis was based on what was

produced, shipped out, sold, and left over at the end. With the introduction of data collecting Customer Relationship Management (CRM) systems in the late 1990’s, retail businesses started to collect some basic personal information on their customers such

as age, gender, average household income, and shopping preferences. CRM was something that every company needed to have and it seemed every month a new organization with a new CRM system, better than the others, was launching. The

challenge businesses discovered in the early stages of CRM systems was that all of these great data collection ideas could not explain how to use the data and ultimately what was really needed which included who their customers were, where they came

from, how much they spent, and how often they returned. Many of these new systems came crashing down to earth because they couldn’t do what the companies really needed them to do to provide a solution to the their changing needs. Collecting the

data was only a small portion of what was actually required. As the turnaround started to happen and CRM was entering back into the market with

stronger analytic capabilities and more robust reporting metrics, the need for shopper marketing was introduced. In an article published by Colloquy entitled True Romance, a reference to Deloitte Consulting’s 2008 Shopper Marketing Report, defines shopper

marketing as “the employment of any marketing stimuli, developed based on a deep understanding of shopper behavior, designed to build brand equity, engage the shopper and lead him/her to make a purchase” (Colloquy.pg12). This deep understanding of

shopper behaviour is often what is in question when businesses are offering loyalty rewards points in exchange for not only making purchases, but also sharing some personal data.

Most of the top programs such as Shoppers Optimum, Air Miles, and Aeroplan will not allow consumers to redeem any rewards earned without knowing something about you.

Part of the attraction of loyalty programs for the retailer is being able to collect all of this data on their consumers in exchange for a few points. The value of information on inventory management, supply chain, margin and profit analysis, and overall strategic

direction is invaluable to a company and loyalty programs are an effective means to an end for many businesses. Overall, a business can be more profitable and more strategic when it knows more about the customers who buy from it and peruse its aisles,

websites, and online catalogues (Appendix B).


21

RFM

Another topic of discussion and white paper research is the concept of RFM. RFM refers to recency, frequency, and monetary value. James Stafford, an independent

consultant and researcher with a Master of Economics degree, outlines the concept of RFM as one of the core foundations of data mining. The paper primarily outlines the basics of RFM analysis and talks about why companies would want to use this type of

analysis to categorize their customers and better market to those customers who have a higher perceived value as part of the RFM analysis. Many large packaged goods companies like Procter & Gamble, Nestle, and Unilever as well as many of the large

retail chains have taken data mining and analytics to an entirely new level, however, RFM serves as the basic premise behind customer analytics.

The idea behind RFM is that customers who have made a purchase most recently are more valuable, those who have made purchases more often are more valuable, and those who spend the most are more valuable. By looking at customer purchase data

and sorting customers into some number of recency, frequency, and monetary buckets and assigning a score or number, those customers at the highest level can be targeted a different way than those at the lowest level. Stafford’s example uses quintiles or 20%

buckets and uses a concept that starts with recency. The top 20% of customers who have made the most recent purchases are put into the first quintile. From that top tier, those 20% of customers who have made the most purchases, or frequent, are put into

another top quintile, and those top 20% who have the highest transaction values, or monetary value are sorted once again. By the end, the customers with a ranking in the top tier of each category are considered the most valuable customers. By doing this, the

retail business is able to focus and target their marketing efforts to those customers rather the “spray and pray” approach which is considerably more costly and less effective. As Stafford outlines, some companies may decide that recency, frequency,

and monetary value may not necessarily be the order in which their business operates the most effectively (Stafford, 2009). A furniture chain may decide that customer frequency is not as important to their business as monetary value and how much

customers have spent, so rearranging the three variables differently may be more suited to their business needs.

Marketing’s Most Powerful Ally – Word Of Mouth

As discussed earlier, the tidal wave of social media that has engulfed us in the last decade has created the entirely new line of business of shopper marketing and the science behind understanding customer needs and shopping habits. Businesses have

figured out that the closer they are to their customers the harder it will be for them to leave, and hence be more loyal to their business. On the heels of this is the incredible power that consumers now have in recommending a business or pointing out its flaws to

the world, and a renewed focus for businesses on word of mouth advertising. Some may recall the famous 1980’s Faberge Organics commercial where a very young Heather Locklear launched her career by saying she would tell two friends about the


22

Faberge shampoo she used, and they would tell two friends, and so on and so on. The essence of this commercial is what word-of-mouth is all about. Many consumers would

likely agree they would trust the product advice or recommendation of a friend or colleague before they trusted an advertisement. If that same commercial was played today, a great shampoo could easily be “Tweeted” out to millions of consumers in

seconds. In 1995, Robert Metcalfe, an electrical engineer and the founder of 3COM, developed

Metcalfe’s Law which states that “the value of a telecommunications network is proportional to the square of the number of connected users of the system” (http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Metcalfe_s_law.html). The

theory behind this concept is that if you buy a cell phone, the value of your phone increases as the number of others buying a cell phone increases. From a loyalty perspective, the more customers you have that are part of your loyalty program the

better your program has the potential to be. Metcalfe’s Law is also referenced in a report by Colloquy entitled “The New Champion

Customers” which conducted a study of word of mouth advertising and found that the general population is 59.3% more likely to recommend a retailer if they are part of the retailer’s loyalty program (Ferguson & Hlavinka. 2009). The study further looked only at

members of loyalty programs and their overall propensity to tell their friends, splitting them into 3 categories based on a questionnaire; advocates, champions, and connectors. Advocates by definition, are promoters of a brand who are willing to tell

others where they earned rewards or recommend a business. Connectors are described as influencers who have the ability to recommend but may not always do so, while champions are a combination of advocate and connector and actively recommend often

and actually go out of their way to champion the brand. The study found that 55% of loyalty program users are considered champions meaning that a strong loyalty program and strong membership base can have a significant impact on a company’s business.

The study goes on to explain and identify various demographic segments as well as compare word of mouth champions of loyalty programs to non-members. The findings show that non-members are only 32% likely to be word of mouth champions, which is

70% less than those who are members. The chart below shows the effects of loyalty rewards on word of mouth champions. Members of a loyalty program who redeem for rewards are three times more likely to be word of mouth champions.


23

The argument for word of mouth advocacy, especially when tied to a loyalty program is unquestionable. A strong program that engages with its consumers can reap the

benefits through various forms of social media outlets when those members talk about the program and become advocates of the business; where they earned, how much they saved, and what they bought with their rewards. The issues facing many programs

today is in building that advocacy with relevant offers and rewards that push those members to be champions. There is much at stake here, especially with the new age of word of mouth that is now global in scale, and a misstep in service or unengaged

customer can similarly create an army of haters for a business to deal with. For as much as word of mouth champions and reward members can be a company’s

own promotional army, there are also naysayers and groups that are just as ready to pull their support and recommendations. In Colloquy’s white paper on Urban Myths (2011) the authors use the term “Madvocates” to describe that group who advocate for

everything that is wrong with a brand. This bad press is usually caused by a product or poor service and is typically less about the rewards, although bad rewards can certainly contribute. What is interesting about this Colloquy study is that there is overlap and the

study claims that 39% of Madvocates are also word of mouth champions (Colloquy pg.4). There is still a percentage of the population that goes out of their way to find things wrong with a business, and we can assume that if a customer has taken the time

to join a rewards program and actively participate over a period of time, sometimes those little slips in customer service can be overlooked providing they are not reoccurring. Where loyalty programs become the focus of madvocates is when the

program gets stale or offers no value for the work the customer puts into it, or as stated earlier, when the personalization and sharing of information is one-sided.

Reward, Recognition, and Relevance

In grade school there are the three “R’s”; reading, writing, and arithmetic as the key components of a good education. Besides the obvious fact that only one of them actually starts with the letter “R” and this is coming from an education based doctrine,

there are arguably also three “R’s” in the loyalty business that all actually start with “R”. Bryan Pearson, the current CEO of Loyalty One and parent company of the Air Miles program, uses reward, recognition, and relevance as the building blocks of a strong

loyalty program (http://pearson4loyalty.com/2012/01/the-three-rs-of-loyalty-a-life-lesson-from-the-classroom-to-the-boardroom/). These three R’s can be looked at in many of the top programs in Canada to get strong view of what each of them mean and how

they are part of making a loyalty program successful.

Reward

The reward side of the three “R’s” is often referred to as the tangible benefit. The actual reward itself is as important to consumers as anything else the program offers. It is often the trade for providing your valuable personal data and spending the time you do

collecting and tracking your reward progress. It is what the program gives you for


24

changing your behaviour from shopping with one retailer to another. It is what the consumer looks at to compare the value of what they buy to the value of what they get.

Many businesses have taken to offering a variety of reward types in order to meet the demands of their consumers and loyalty program members. Whether the reward is instant cash back on purchases, gift cards, merchandise, or the opportunity to buy

flights or hotels, the reward offering is one of the most important aspects of the loyalty component. Both Air Miles and Aeroplan have taken these tangible benefits to a new level, not only offering flights and hotels, but now reward members can redeem for

merchandise, gift cards and donations to charitable organizations. Many of the bank programs have followed suit with their own variety of rewards options.

Recognition

Recognition in combination with the reward are part of those small intangibles that are almost equally as important as the reward itself. When various programs offer similar

rewards like instant cash back or gift cards, the recognition aspect is what can set a program apart from other programs. Recognition is what it says it is; recognizing customers by saying “we know you bought with us and made a choice to buy with us, so

here’s a small thank you”. It can often be in the form of special upgrades on flights, preferred or “front of the line” status on new product launches or what is often referred to in the industry as “surprise and delight” offers that recognize and personalize a

customer purchase behaviour. The best loyalty programs create loyalty not only by recognizing customers for what they buy, but also for who they are and why they buy, and recognition is an important aspect that unfortunately often gets overlooked because

it’s an added cost to the reward component. Recognition is also overlooked because it is personal and requires that additional step

in the data analytics component to pull those customers that should be recognized possibly more than others. Similar to the RFM example discussed earlier, a customer who shops once a month may not get a special recognition bonus but a customer who

visits once a week may get a special “surprise and delight” benefit as a best customer. Recognition often comes with an expectation on behalf of the customer as well as those customers may go out of their way or make sacrifices to participate in the loyalty

program. Sacrifices may include actually spending a little more on products they know they could find cheaper if they went elsewhere. There is something of value for customers to reduce the amount of retail locations they have to visit to get everything

they need. Canadian retail giants like Loblaws and Shoppers Drug Mart have gone out of their comfort zone and area of expertise over the past several years to become a one stop shop for consumers. Loblaws has moved into selling health and beauty aids

(HABA) as well as clothing, furniture, and small kitchen appliances in some of their larger stores. Shoppers Drug Mart has crossed over into selling a limited amount of grocery products and electronics to keep consumers in the store and buying more from

them.


25

Relevance

Relevance is often referred to as the sustainability side of a loyalty program. As social media takes a grip on the world and mobile communication becomes the everyday

means of talking to consumers the relevance of a loyalty program is equally as important as any other factor. Program relevance is important as loyalty program membership increases. Today, the average Canadian participates in over six programs

at once so a program must engage customers and have meaningful rewards tied to spending patterns and be weighted in the customers favour. Relevance also becomes a key component of customer engagement and data analytics. Simply providing a card to

a customer and asking them to join your program is the easy part. When that same customer has to sort through their wallet to decide which program cards to purge because they have too many, the cards they value the most and the programs that

speak to them and engage them in their participation will be the ones they stay with. Many loyalty programs fail because they fail to engage with consumers. The challenge for many programs that are created today is that the concept of customer

engagement and what customers are looking for is changing at a rapid pace. Additionally there is an increase is what is important beyond the typical ideas of price, product selection, and promotional opportunities. The ability of a program to be mobile

and recognize mobile technologies is important especially with so many cards in a customer’s wallet competing for space.

Environmental sustainability and a focus on protecting the planet is also important. As more and more plastic cards are produced and companies offer rewards that may have an impact on the environment, this becomes a key area of customer engagement

strategies for an organization. Social consciousness becomes a very relevant part of the loyalty landscape and companies that are considering launching a program, or reinventing the program they have must consider what is on the minds of their

consumers, not simply what they purchase. Unfortunately the challenge of course is that you can’t analyze what customers are thinking, but you can look at where you can gain an advantage and make customers think more about where and what they spend

their money on. Restaurant burger chain A&W recently created the website awbetterbeef.ca that is entirely focused on providing customers information on why their burgers are better, how the cattle are raised without antibiotics, and what innovations

are being accomplished by the farmers who raise their cattle. As there is not data yet on whether this new focus has impacted overall sales, it is a very relevant part of this competitive industry and can only make a positive impact on the minds and thoughts of

consumers (awbetterbeef.ca).

Data Analytics and CRM

Loyalty programs in general come with the expectation that the more a customer

spends and the more often they visit the more they will be rewarded for choosing one retail business over another. In order to accomplish this, the retailer needs to understand who their customers are, what their purchase behaviours are, how much


26

they spend, and why they choose one business over another. Much of this understanding comes from analyzing the shopper transactional data that flows through

the point of sale systems every day in mass quantities. For the small independent home town business, sometimes simply seeing the same faces every week or the same people at church, at the gas station, at school, or at the grocery store is method enough

for understanding who customers are and what their behaviours are. When you are the only one around for miles, loyalty is almost a given. However, for mid-size and larger businesses in most urban markets who compete every day for consumer’s “share of

wallet”, the one who understands and speaks to the consumer the best is usually the one who wins.

The early adopters of extensive Customer Relationship Management (CRM) systems will tell you that their first run didn’t go the way as planned. CRM website CRM Trends (crmtrends.com) estimates the early years of CRM data analytics systems failed in 70-

75% of their initiatives. One of the key reasons for this is that businesses paid huge dollars for sophisticated systems that tracked and compiled data but did nothing to provide the “so what factor”. Additionally, many organizations did not plan for who was

going to comb through thousands of lines of transactional data to produce something of value that a category manager or brand manager could use to reduce costs, speak directly to the consumers who were buying their products, or improve overall supply

chain efficiencies and save the company money. According to CRM Trends, loyalty programs are integral to a company’s business and

understanding who those customers are equally as important. As the authors state, “in general, loyalty programs are often developed with good intentions but unclear objectives. While retail loyalty programs have many purposes, the greatest value that is

created for retailers is the ability to identify individual customers and to measure and understand their individual behaviors. This consumer behavior data far outweighs the "currency" value of providing consumers the opportunity to build a reward opportunity by

shopping at one particular retail banner. This opportunity is often misunderstood by retailers and consumers alike” (crmtrends.com). The bottom line is that CRM is about building relationships and understanding customers, which also happens to be the

premise for a strong loyalty program. In many consumer facing businesses there are 3-4 key areas that every owner wants to achieve on a regular basis. One is often referred to as Shift or acquiring new customers

by shifting them over to your business. New customer acquisition is one of the important aspects of retail that exists primarily due to the competitive nature of how consumers

shop. Consider the automobile industry and how many thousands of dollars are spent every week on newspaper advertising, radio and television commercials from individual dealerships to get customers in the door. And then the real pressure starts for the sales

team to engage and get those customers to buy a car from them versus going to a competitor. The grocery industry is equally as competitive, especially in larger cities where the choice of places to go is high. Today, the automotive industry is further

challenged to make a profit as consumers shop and research online before they step foot in a dealership.


27

The second key area is often referred to as Lift or getting existing customers to spend

more money than they normally would. In retail this is referred to as share of wallet.

Consider again the auto industry where a consumer may choose to have their tires rotated at the local garage, their oil change done at a quick lube service, and their brakes done at a brake specialist or at the dealership. If one of those service providers

had a loyalty program in place that offered special rewards for customers who would have all this work done in one location, they would benefit from increased spends, higher margins, and an opportunity to build a stronger relationship with the customer.

The third area is retention, which can often be the most difficult to achieve as many

businesses are competing for the same customers. Customer retention can be elusive

when so many businesses spend so much of their efforts on the first key area, obtaining new customers. Retaining existing customers means that as a business you have done your homework and figured out who you customers are and have provided the best

experience you can possibly provide so there is little margin for error as to whether they will return for their next visit. If you are lucky, your word of mouth champions will also sing you praises and not only will you be able to retain your existing customers but you

may gain new ones in the process. In select cases, retention is easily achieved, but in most cases it needs to be worked on and nurtured. If you own the only gas station within 100kms, your need for loyalty retention is less than if you are surrounded by your

competitors. The fourth component for many businesses is often overlooked as it involves more

rigorous data analysis. Increasing the overall profit mix of existing customers is an important area especially for loyalty program providers to help offset the costs of the program itself. For many retail businesses certain product categories or even individual

products provide better profit margins to the organization. For marketers, enticing customers to buy one product in the same category as a product they may already buy that has a lower profit margin for the company is a difficult task. The easiest way to

accomplish this from a loyalty rewards perspective is to make the reward more enticing for those higher margin products. Think of the auto business again in the purchase of a new vehicle. Dealerships and brands make more money on the fully loaded model than

they do on a base model. By offering more of a reward on more options, dealership can move that customer into a higher profit bracket and make more money on vehicles with more options. Of course the more vehicles on the road with more options means the

more that can go wrong with them, so it’s also good news for the service and parts department.

Data analytics is an integral part of understanding customers shopping habits and needs. With the new vision of CRM being one of integrating the loyalty rewards program into the overall strategy of the company to ensure customers who spend more, spend

more often, and spend on higher margin products are taken the best care of, CRM and data analytics are as important to an organization’s survival as the traditional ideas such as product mix, pricing, customer service, and promotional spending on advertising and

marketing. For many organizations today with a loyalty rewards program the data analytics and CRM is often the most complicated and difficult to manage and utilize to


28

its full potential and many businesses simply try to get by with simply providing consumers with rewards and gift cards they think will be enough to win their affection

and their business. The stark reality for many programs and for the companies that implement them is that

strong rewards do not always equal strong loyalty. Loyalty and rewards can be very different and mean many different things to different companies. A company that hands out gift cards to all of their customers who spend a certain threshold amount may not

necessarily be creating any loyalty. In fact, what they are accomplishing is a gift card mentality that their customers will come to expect that uses those gift cards only when products are on sale and at their money losing worst levels. Many retail businesses,

including McDonald’s use one of the most simplistic of loyalty rewards programs called the frequent buyer program. Once a customer buys a certain number of items, usually a high frequency item like coffee, they get their next one for free. This basic program

doesn’t collect data and doesn’t personalize offers to consumers, but on every tenth visit when that customer has the option to get a free or coffee or pay for one somewhere else, McDonald’s is counting on the customer to choose free which will increase their

overall visit frequency. Consider a company like Southwest Airlines who, with or without a loyalty rewards program, has created a mindset in their employees and their customers that customer service is the key ingredient to a successful business. The

customer reward in this case is often the incredible means by which Southwest goes out of their way to satisfy a customer, and even with a loyalty program in place Southwest has built a reputation of quality service that has a loyal following

(http://en.wikipedia.org/wiki/Southwest_Airlines). Measuring loyalty by implementing data analytics and CRM best practices is an integral

part of an organization’s success and overall profitability. As discussed earlier th is is especially important in Canada where retail consolidation is abundant and more Canadian companies are becoming national in scale. Using data analytics to

understand consumer behaviours and buying habits is a key to this consolidation, and as Michael Porter, a leading competitive strategist, explains, "It's incredibly arrogant for a company to believe it can deliver the same sort of product that its rivals do and

actually do better for very long. That's especially true today, when the flow of information and capital is incredibly fast" (crmtrends.com). A loyalty program today that does not use data analytics to assess and understand who their customers are is at a

significant strategic disadvantage to programs that are fully integrated with a system that measures and rewards their most profitable customers.

The Case for Coalition

With the consolidation of many businesses that have allowed so many organizations to be fully national in scale, the 2 largest coalition programs in Canada have become giants in the loyalty industry. Both the Air Miles and Aeroplan programs combined have

members in over half the Canadian population, and the Air Miles program itself is estimated to have at least one members in two thirds of Canadian households. The idea


29

behind coalition programs is that consumers can earn rewards, or miles as they are termed in both programs, that can then be used or burned in a variety of ways. Both

programs rely on a variety of reward partners, both on the earn and the burn sides, to entice their members to participate in the program. On the earn side, coalition partners use their strong membership base and brand recognition to encourage their partners to

market and sell the program to their customers. The advantages of coalition programs becomes the partnerships themselves and the

cross marketing opportunities and ability to strengthen the loyalty of consumers across the partnership portfolio. If one partner is stronger than another in keeping their customers loyal, they will actually help the less loyalty focused partners by being part of

the coalition and encouraging members to remain loyal as part of the coalition. Coalition programs also work well with businesses where purchase frequency may not be as high as with grocery and gas chains. A furniture store has a much lower frequency of

customers than a grocery store does so the advantage to the furniture store is that if a customer who may be an Air Miles collector who shops regularly at Metro stores, is that if they are also an Air Miles partner those 11 million estimated members may look to

buy their next sofa at a participating partner first before looking elsewhere. On the burn side of the business, both Air Miles and Aeroplan give their members plenty

of options for using their miles once they have accumulated and saved up enough to buy something. Whether it is flights, hotel stays, car rentals, merchandise, or gift cards, both programs have given their members and their coalition partners a number of

options, which in turn creates a stronger breadth of members who remain loyal to the programs. The other key advantage, as discussed earlier, is with so many programs that are competing for space in consumer wallets having one card that can allow a

consumer to earn rewards at a number of top retail chains is a significant advantage.

Breakage

Breakage as part of a loyalty program is more of a financial task and has more financial

implications on the organization than on the marketing department. This is a key component of most loyalty program schemes as is the amount of points, miles, or rewards and the relative value of what has been distributed versus what has yet to be

redeemed. In relatively simple terms breakage is the number of points issued minus the number of points redeemed. This equation will tell a company what is still left to be redeemed and then it is the company’s responsibility to determine what to do with all of

those unredeemed rewards. Breakage, if not monitored properly, can become a huge liability for an organization as there is a cost to those rewards before they are even given out.

One of the challenges with breakage if often the unknown. Why customers are not redeeming their hard-earned rewards can be attributed to any number of reasons. The

customer may have lost their loyalty card and forgotten they even had it, they may have decided a better program works for their needs, they may be saving up for something


30

significant and simply don’t use the card that often, or in the case of a retail program they may have had a poor in-store experience and decided the program was no longer

worth the poor service they received. As mentioned, a loyalty program cannot fix all of a company’s problems.

Expired rewards has become one of the most contentious issues around breakage, and has sparked a number of heated debates and customer dissention over the past several years. Both Air Miles and Aeroplan with so many members and partner earning and

redeeming opportunities have tested the waters with expiration dates on their rewards earned. For the rewarding partner, the advantage is being able to predict when and approximately how many rewards will expire in any given fiscal year. The disadvantage

of course is having to explain to customers that the rewards they have earned by spending more and giving their business have suddenly gone away. Breakage actually becomes a tremendous source of revenue for the company since all of the rewards that

have been previously paid for and not redeemed become an immediate source of profit. The interesting idea behind breakage as a revenue generator is that by definition,

breakage is very much anti-loyalty. When a loyalty issuer makes money on breakage, it mean the company has lost the loyalty of its customers, they have forgotten about the program, or their purchases are so infrequent that the program is no longer relevant.

The website crmtrends.com, describes several ways in which breakage can be affected by changes in a loyalty program’s overall structure. Changes to loyalty components such as levels of accumulating points, pricing strategies, redemption thresholds and the

number of reward points required to redeem, changes in the way the program is marketed, additional added fees, and marketing costs all contribute to breakage levels and the value of unused rewards.

The Case Against Loyalty

A recent study by leading loyalty research company Colloquy in 2013, estimated the number of loyalty program memberships in Canada to be 120 million (Canadian

Consensus 2013). This is also in line with the estimated 90% of Canadians who belong to at least one loyalty program, which is surprisingly a decline from its 94% peak in 2009. In the US, Colloquy also estimates the US loyalty memberships at 2.65 billion

(Colloquy. 2013). With the obvious popularity and proliferation of programs across North America, some rather large companies still don’t want to play in the loyalty sandbox. In the hotel category, most major hotel chains either have their own program such as

Marriott Rewards or are part of a larger loyalty coalition such as those partnering with Air Miles or Aeroplan. Despite this, hotel chain Four Seasons which owns 92 hotels in 38 countries has no loyalty program that brings customers back or rewards them for

staying with them. Ikea, a large furniture and home furnishings chain with over 300 stores in 26 countries doesn’t believe in loyalty programs for their customers as they believe all customers should be treated equally, regardless of how often they shop or

how much they spend.


31

There are a number of other businesses that do not have a loyalty program component which may challenge the idea of why so many of them do. Loyalty programs by

definition are intended to build the loyalty of customers beyond their everyday purchases, and as in well-known marketing terms, gain a better “share of wallet.” However, for many companies the advantages of identifying loyal customers doesn’t

stop there. If there is an opportunity to give more for more loyal customers or those who spend more, there is a definite advantage and an expected greater impact on profitability. As discussed throughout this paper the benefits of true loyalty programs on

gaining better knowledge into customer behaviours and shopping habits is enormous. So if there are so many benefits why would any company resist participating? To understand this we need to understand the different levels of loyalty and what true

loyalty is. In her book Customer Loyalty: How to Earn It, How to Keep It, Jill Griffin cross-compares 4 different categories based on the level of repeat purchase and the relative

attachment to the loyalty program. The image below shows how these categories fit together.

No Loyalty

The No Loyalty customer is one who shows no loyalty to any product or service and on

some levels may not even care how they are treated. A business traveller with a

particular budget for meal expenses may choose a restaurant close to his/her hotel that is within the travel budget and meets some basic requirements. This is not a customer the restaurant likely wants to pursue or will offer any future extended value.

Inertia Loyalty

Griffin explains Inertia Loyalty as loyalty that requires a high degree of repeat

purchases, but no real attachment to the company. The loyalty is more for convenience and to save time than it is for loyalty to the business. Consider filling up for gas when one gas station is one kilometer away and the other is 5kms. It is possible for the stat ion

farther away to attract those customers but it requires a strong commitment and in the case of gas it is often determined by price.

http://www.loyaltysolutions.com/

http://www.drivingretention.com/wp-content/uploads/2011/03/loyalty_types.gif


32

Latent Loyalty

Latent Loyalty customers are those who have a strong attachment to a brand or

company product, however their repeat purchase behaviour is extremely low. A furniture

store may fall into this category, and unless the customer is an interior designer the frequency of purchase may be very low, even if the customer swears by the products and the company. An expensive restaurant is another example of latent loyalty where

customers can only afford to treat themselves every so often but there is only place they will go to do so.

Premium Loyalty

Finally, Premium Loyalty customers are what every business would love to have and

strive for. High repeat purchase frequency and a highly engaged customer base.

Premium loyalty followers fit into the category of brand champions discussed earlier, where they are not only the biggest brand buyers but also serve as champions and sellers of a company’s products and services.

With these various types of loyal or non-loyal customers, businesses that do not participate in a loyalty program have made a conscious choice not to implement one. It

is unlikely that most organizations who sell products and have customers have not at least considered or discussed loyalty at some point in their strategy discussions. From a financial perspective one of the key arguments against loyalty is the cost to implement a

truly effective program. If a company decides to simply give out rewards or points to their customers without any ability to measure the impact of those additional rewards, then the program simply becomes a cost centre. Of course, in order to measure you

need the right tools and many organizations, especially those that may be franchise based may not have a sophisticated enough transaction point-of-sale system to track customer data and transaction history.

The other financial consideration is the added costs to market the program, the costs to purchase and distribute loyalty cards, the relative costs of the redemption itself and what is to be redeemed. Whether it is a cash-back based program, a merchandise or

reward based program where customers can use points to make other purchases, there is a direct cost to issuing those rewards. Other marketing costs include management of the program and its rewards, data analytics and business intelligence capabilities, and

the overall implantation of the loyalty program into the company’s sales strategy. Aside from a number of financial implications, there is also the challenge with classifying

customers. As mentioned earlier, RFM analysis is a simplistic method of measuring the overall importance of customers by dividing them into various categories based on spending patterns such as how often they spend and how much they spend. By

focusing on those in the top tier brackets of spending volume and frequency, successful loyalty companies may prove to save on marketing to customers who fit into the no loyalty or latent loyalty categories and spend their marketing funds directing their

promotions to loyalty champions. So why is this bad? For organizations like Ikea who want all of their customers to be treated as equals regardless of spending patterns, this goes against their corporate strategy. For a hotel like the Four Seasons, their loyalty is


33

built on exceptional customer service and the cost those goes with that service. The affordability of a room at a Four Seasons hotel is limited to a select group of customers

who are loyal to what Four Seasons offers. Ikea wants their customer who buys the $10 bag of tea lights to feel the same customer service experience as the customer who buys a $20,000 kitchen.

If both of these company’s positions are true and not speculation, then why does a company like Southwest Airlines, whose customer service is world renowned, have a

loyalty program as well? Why does Fairmont Hotels and Resorts, one of the leading high end hotels in the world and a direct competitor to Four Seasons, have their President’s Club loyalty program? Further to this, why would all of the major petroleum

companies in Canada have a loyalty program when their customers are inertia loyalty customers and primarily shop on price more than any other factor? The assumption and conclusion in this is that companies without a loyalty program either don’t see the true

value of loyalty and its benefits or they don’t believe they can manage and market a program to the degree that it requires to offer the full value to the organization. Loyalty takes effort to build on over time and as a loyalty program is only a part of building

loyalty within the organization, many organizations are engaged and satisfied with providing exceptional customer service, a premium product, and/or a brand that is so exceptional that customers cannot help but be loyal to.

New Technology – AKA What All the Cool Kids Are Using

With the ongoing proliferation of plastic cards and the increase in loyalty programs every year, something has to give at some point. According to a Colloquy article entitled

“Transformers”, (Colloquy 2009), the smartphone industry began roughly around 2007 when Apple launched the iPhone. Since then the smartphone industry has increased consumer consumption, likely more than any other part of the electronics industry and

with it has launched the world of apps. There is no question that smartphones and social networking have become the new communication platform for the world and for an entire generation of consumers, and apps have creating a new era of gaming, helpful

tools, social media, and educational assistance. For the loyalty industry this is good news as the digital wallet is almost limitless by comparison to the real thing. The other good news for the loyalty industry is that a mobile card is open to a new group of users

and collectors who, in the past, may have been resistant to join a program for the sole reason of having to carry a card around with them.

In 2011 Starbucks launched their mobile payment application for iPhone and Android users that allowed consumers to download an app that contained a two-dimensional bar code they could use to pay for their coffee or treat using their phone. According to

Market Watch online magazine (www.marketwatch.com), mobile payments have increased to 14% of Starbuck’s total transactions in the US, and the coffee giant sees over 5 million mobile transactions per week in its US stores alone. The mobile payment

app is of course also linked to the customer loyalty program so users can earn rewards


34

each time they pay. The only limitation to this growth is the limitation on the number of mobile smartphone users which is increasing rapidly each year.

The real challenge for businesses is implementing these new technologies and integrating them into their current point of sale systems, and then deciding if the new

technology will add more profits to the bottom line and how quickly. New technology is constantly changing and if the cost to implement outweighs the time to recuperate those costs then the company needs to consider the alternatives. The reality is that while the

Starbuck’s mobile payment is a cool alternative to carrying a card, there also has to be a significant profit upside to implementing this technology into thousands of locations. The other challenge is that the ultimate loyalty solution may not even be invented yet,

and really what matters from a loyalty program perspective is that whatever device becomes the leader it still needs to provide the basics of a strong loyalty program and develop customer engagement and personalization.

Analysis

In looking at the loyalty industry, specifically in Canada, and how a loyalty program can be successful in a market that is continuously evolving with new products, new attitudes

towards rewards and value, and a changing retail landscape, certain analytical tools can help to understand how a program is to be successful. This changing business environment requires a careful analysis of how a loyalty program can affect a business

and to what extend the program needs to be executed in order to prove value to the organization. A DEPEST analysis will assist in answering some of these questions.

Demographic

Demographic factors that can affect loyalty rewards programs and their success include program values, the perceived monetary value of rewards, reward member status, and the gender gap between male and female reward members. As fuel prices continue to

rise in Canada the value of using earned points to purchase gift cards for gas or simply receiving a gift card for gas as a thank you has increased significantly. Member status in rewards programs, particularly with frequent flyer programs and some coalition

programs like Aeroplan continually change as the gap between those with a few rewards and those with many increases. Additionally, Colloquy studies indicate that female rewards members are more engaged with programs than male rewards

members. If you consider some of the most engaged programs such as Shoppers Optimum, HBC Rewards, and select grocery programs such as President’ Choice, these tend to have a higher level of female shoppers than males and those businesses

in turn tend to market to a higher female demographic. Businesses that are seeking to launch a loyalty program should definitely consider the

power of the female shopper and the value of the rewards they are using. Many automotive service centres are starting to implement programs such as Ask Patty (askpatty.com) which focuses on educating employees and engaging female customers


35

on automotive advice. Integrating a loyalty program into this program and providing rewards to female customers would be a significant benefit to the company.

Environmental

From an environmental perspective, the challenge for loyalty programs is primarily

focused on card production and the plastic used to produce them. As discussed earlier, the future of loyalty programs may be moving away from the common plastic card to mobile devises and the environmental impact of lost cards and continually producing

new plastic may start to slow in the coming years. However, as loyalty programs start to go more mobile the significant increase in the gift card business, a lesser version of loyalty, is increasing significantly. As loyalty programs start to introduce a more

environmentally friendly mobile program, the gift card industry will need to follow suit in order to remain relevant.

The positive side of the environmental factors affecting loyalty programs is that some programs such as Aeroplan and Air Miles have started allowing members to use or burn their miles to donate to environmental causes. This provides the issuing program with a

positive offset to the thousands of plastic cards they are producing each year but also helps attract new members to the program who are concerned with the environment, as well as wanting a more mobile technology friendly program to belong to.

Political

The privacy laws in Canada are put in place obviously to protect the rights and privacy

of consumers. Government regulations in Canada and changing political powers will likely not change the privacy laws without a lengthy debate and it seems more likely that laws will become increasingly stringent rather than slack. One of the most impactful

changes in recent years was the Conservative government’s decision in 2011 to abolish the mandatory long form census survey. The long form survey which provides a much more detailed account of demographic information for use by many statistical

organizations such as Environics Analytics and even by Statistics Canada, was changed to a voluntary form. The short form survey is still mandatory, but many critics believe it does not have the relevant information required, and the long form is less

likely to be filled in by certain demographic groups that could be assisted more by providing this information.

For the loyalty industry, detailed demographic information is less important in most cases, however, a company that is looking to implement a program should consider the capabilities and advantages of collecting some insights into their consumers shopping

habits, how far they come to shop, how large their family is, how many cars they drive, household spending patterns, and other factors that could potentially help to engage with their consumers, providing this information is always kept confidential within the

business.


36

Economic

Loyalty Rewards programs have increased significantly both in Canada and the US in the past several years, especially on the heels of the economic crash that happened in

2008. What emerged from this period was the price savvy consumer who was always looking for deals, and the opportunity to earn points when making a purchase or a potential cash back reward, was often reason enough to change consumer behaviours

and spending patterns. As retail business scrambled to attract consumers with low prices, many could not compete with chains like Walmart so rewards programs became the alternative and offering higher rewards for increased spends was a significant factor

in attracting new customers. The overall costs of running programs including marketing and breakage management,

as well as the perceived valuation or devaluation of rewards is always an economic concern for businesses with loyalty programs. However, most programs that implement strong rewards platforms and data analytics capabilities will admit that the cost of loyalty

is far outweighed by the benefits of loyal champions and dedicated customers. The economic factors behind loyalty programs are based on finding ways to encourage consumers to spend their hard-earned money with one business more than another and

just like selling a product, the value and revenue generated always has to outweigh the costs.

Social

Many loyalty programs are heavily tied to the businesses they serve beyond that of loyalty including demand for the company’s product that may slow the value of the

loyalty engagement as well as age factors, social consciousness, and changing behaviours towards shopping to earn rewards. It is unlikely we will see a retail business ever offer extra rewards to consumers who buy cigarettes. Businesses who cater to

certain demographics may have a more difficult time attracting consumers simply because of who their key consumer is. Much of the success of the Shopper’s Drug Optimum program can be attributed to its complete dedication to rewards offers,

promotions, and data analytics capabilities that speak to consumers regularly. Additionally, Shoppers Drug Mart’s primary market focus is on selling to women which also happens to be the highest loyalty engagement category so both are a great fit.

Technological

The technology factors associated with loyalty programs can arguably have the greatest

impact on the success or failure of a program. Data analytics and the technology that goes into to tracking shopping behaviours is an integral part of what makes a program successful. As the retail landscape changes at a rapid pace technology is imperative to

making a program work, especially as consumers become more tech savvy and want their rewards program to be simply and easy to use. The less consumers have to think about what they earn and how they use the program the more successful the program

will be and likely the more loyal consumers will be to the brand. Technology can be the


37

most costly part of a loyalty program implementation but can also have the greatest impact on the success of a program. Whether it is the use of mobile cards versus plastic

cards, or the technology of integrating the program into the point of sale transaction system in order to track customer transaction behaviours, the investment in technology is a requirement that is directly tied to success or failure of any loyalty business.

Conclusions

There is little debate that the loyalty industry is alive and well in Canada and around the world. Many of the top tier membership programs like Air Miles, Tesco, Nectar, and

many of the US frequent flyer carriers continue to evolve their programs to meet the needs of changing economic times as well as changing consumer behaviours. As discussed throughout this document, loyalty in general has many different layers, and

programs meant to attract and retain customers have many similarities but also can vary in their overall effectiveness.

The unfortunate reality for many businesses looking to start a loyalty program or wanting to jumpstart an existing program that is not working, is that loyalty comes with a cost. That cost can be significant especially if it outweighs the overall value. No retail

business would ever sell a product in its stores for less than the cost to buy the product and get it into the store. The true value of loyalty is immeasurable, however, it’s the journey to get there that companies often don’t want to invest in. Any business would

love to have customers who are dedicated shoppers and would never even consider going anywhere else. Those loyalty champions are hard to find and cost money to keep. So why do so many businesses simply try to get by with the basics and then wonder

why the program is not driving up their profits and increasing customer advocacy? The answer is that building loyalty has become a complicated business and for many large scale organizations like HBC and Shoppers Drug Mart, entire departments dedicated to

the loyalty program spend their time combing through data and managing the program. Smaller businesses cannot afford this luxury so the program is often “passed off” to another area of the company where individuals are already have other responsibilities.

Building loyalty is similar in ways to planting seeds in a garden. You will not see the value in paying for the package of seeds but when the flowers grow the true value

becomes obvious. In order to make the flowers grow, however, you need good soil, water, fertilizer, sunshine, and most of all patience. Strong loyalty champions need to be grown carefully and rewards programs are one of the key ingredients. As discussed,

customer service, price, and quality products can be equally important as part of that growth in fertilizing brand champions.

Where loyalty programs can distinguish one company from another is when those other intangibles like price and customer service are relatively equal. Most grocery stores will compete equally on price, especially for the everyday high volume products such as

milk and bread, but if one is offering rewards or special offers on buying some of those items, it may just convince a customer to shop there and possible pick up a few more


38

items. Strong rewards programs spend the time and effort to figure out who their top customers are and who buys with them the most.

The marketing costs associated with advertising and marketing to a mass audience is significantly higher than targeting customers who shop with you regularly regardless of

sales discounts. Many loyalty program schemes cost the company less than 5% on every dollar and is only for customers who have made the effort to sign up for the program, whereby many discounts and sales typically start at 10% and is available to

everyone. Customers who only come to the store when there are discounts actually cost the company money because they never pay full price and will leave to go somewhere else where there is another deal. Customers who are rewarded each time they shop

cost less because the rewards cost less and the customer is more loyal because of the opportunity to earn points.

Loyalty is not free, but loyalty can be much more cost effective than continuously trying to acquire new customers and marketing to audiences that may never need your service. Loyalty programs can make a business more profitable when the company

invests in the technology, infrastructure, and marketing to attract and build relationships with its most profitable customers. Customers in general want the company to understand their needs and build relationships that recognize their unique shopping

habits and willingness to commit. Most customers don’t want to shop at multiple places for the same products but they do because the price is better or the customer service is better, or there is a discount. And if the customer doesn’t feel the need to reward the

company for their business there is no relationship and therefore, no loyalty. In order for a loyalty program to be effective, the company needs to fully embrace the

value proposition and recognize that loyalty is cultivated over time. Many large organizations have started to think of the consumer over a much longer period of time than just a couple of visits. Customer Lifetime Value (CLV) takes the loyalty and

relationship of consumers through the entire present and future value they are worth and then looks at how to keep those customers and build on that relationship. For a loyalty program to be fully effective from a CLV standpoint, it needs to become more

than simple gift cards or points exchanges. It needs to show consumers they are needed, valued, and important to the success of the business they spend their time and hard earned money with.


39

Appendices

Appendix A


40

Appendix B


41

References

Balfour, A.J. Theism and Humanism (1914. Pg.103). New York, Hodder & Stoughton.

Berry, J. (2013). Colloquy Talk. Lonely at the Top: The 2013 COLLOQUY Loyalty Census Growth and Trends in Canadian Loyalty Program Activity

Cunnane, C. & Anand, S. (2010) Cross Channel Customer Loyalty. Rewards, Promotions, and the Battle for ROI. Aberdeen Group – A Harte-Hanks Company.

Cunningham, S (2011). Consumer Loyalty: Increasing Opportunities for Customers. Colloquy.

Davies, K. & Daniels, R (2012). Maritz Insights. The Loyalty Report. Mississauga, Ontario.

Dixon, M et.al (2011). Stop Trying to Delight Your Customers. Increasing Customer Loyalty. Harvard Business Review. Boston, Mass.

Environics Analytics. Reframing the Conversation on Loyalty Programs in Canada. Shifting the way in which loyalty programs are compared – from dividend analysis to ‘time to reward.

Furgeson, R. & Goldman, S (2009). True Romance. Colloquy. Volume 17 Issue 5.

Furgeson, R. & Hlavinka, K (2009). Colloquy Talk. The New Champion Customers Measuring Word-of-Mouth Activity Among Reward Program Members. Millford, Ohio.

Furgeson, R. & Hlavinka, K (2007). Colloquy Talk. The Canadian Difference. A Comparison of Loyalty Marketing Perceptions Among Canadian Specific Consumer Segments. Millford, Ohio.

Goldman, S.M (2010). Transformers. Colloquy. Volume 18 Issue 1. Transformers.

Griffin, J. (2002). Customer Loyalty: How to Earn It, How to Keep It. Jossey-Bass, San Francisco.

Hlavinka, K (2010). Colloquy Talk. What Price Loyalty? The 2010 COLLOQUY Retail Loyalty Index. Millford, Ohio.

Hlavinka, K (2010). Colloquy Talk. Wind Chill Factor. The 2010 COLLOQUY Canadian Retail Loyalty Index. Millford, Ohio.

King, L. (2013). Keep Your Customers by Understanding New Loyalty. Raconteur Media.


42

Loyalty Talks: The Customer is Here, Where are You? (2013).

Ostrowski, A. (2011). Redemption, Redux. Colloquy. Volume 19 Issue 2. The Devise Race.

Royce, J. The Philosophy of Loyalty (1908. Pg. 16-17). New York, MacMillan Stafford, James R. RFM: A Precursor to Data Mining. Stafford SBSG 2009

Sharp, B and Sharp, A. (1997). Loyalty Programs and their Impact on Repeat-Purchase Loyalty Patterns. University of South Austrailia.

Sullivan, J. & Hlavinka, K (2011). Colloquy Talk. Urban Legends: Word-of-Mouth Myths, Madvocates and Champions Debunking Myths About Brand Conversations and Word-

of-Mouth in Social Media. Millford, Ohio. Sullivan, J. & Hlavinka, K (2011). Colloquy Talk. The Rules of Engagement Loyalty in

the U.S. and Canada. Millford, Ohio. The Wise Marketer. The Loyalty Guide (2004).

http://www.crmtrends.com

http://www.loyaltymatters.com http://www.jdpower.com

http://www.forbes.com/sites/hbsworkingknowledge/2014/02/24/six-myths-about-customer-loyalty-programs/#

http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Metcalfe_s_law.html

http://pearson4loyalty.com/2012/01/the-three-rs-of-loyalty-a-life-lesson-from-the-classroom-to-the-boardroom/

http://awbetterbeef.ca/ http://www.consumerinformation.ca/eic/site/032.nsf/eng/01173.html

i http://en.wikipedia.org/wiki/Character_Strengths_and_Virtues ii http://en.wikipedia.org/wiki/Hachik%C5%8D

http://www.crmtrends.com/

http://www.loyaltymatters.com/

http://www.jdpower.com/

http://www.forbes.com/sites/hbsworkingknowledge/2014/02/24/six-myths-about-customer-loyalty-programs/

http://www.forbes.com/sites/hbsworkingknowledge/2014/02/24/six-myths-about-customer-loyalty-programs/

http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Metcalfe_s_law.html



http://awbetterbeef.ca/

http://www.consumerinformation.ca/eic/site/032.nsf/eng/01173.html

http://en.wikipedia.org/wiki/Character_Strengths_and_Virtues

http://en.wikipedia.org/wiki/Hachik%C5%8D