Why loyalty programs really matter
Several years ago, Shell Canada decided to reduce its network of gas stations by 20 per cent, and to renovate some of the remaining locations. But there was a risk — Shell stood to lose customers during the disruption. The company used data from the Air Miles loyalty program to determine which locations should be closed permanently and which should be renovated. They reached out to Air Miles collectors who used locations slated for closure, telling them where the next nearest stations were, and offering double reward points for using them. After the renovations were complete, customers were lured back with double and triple reward miles offers. It worked.
Shell retained about 75 per cent of its customer volume during the renovations, up from the industry standard of 25 per cent. The renovated locations regained their former volumes in half the projected time and customers actually increased their overall spending by an average of 7 per cent. “We know that customers will drive right past three gas stations in their neighbourhood to get to a Shell station and collect their Air Miles,” says Dave Burns, EMBA ’98, Senior Vice President and COO, LoyaltyOne Inc. “This shows that loyalty programs really do change behaviour.”
Loyalty programs trace their roots back to the stamps that were handed out in grocery stores in the 1950s and 1960s to reward regular shoppers. Canadian Tire money was introduced in the same era.
But the real starting point came in 1981 when American Airlines and United Airlines established frequent flyer programs. Before long, every airline had one.
Frequent flyer programs were simply that — a way of encouraging frequent travellers to choose one airline over another in return for free travel. But as Professor Mark Vandenbosch, HBA ’84, points out, it’s now clear that the real value for companies lies elsewhere. “The advantage of loyalty programs is the data,” he says. “Loyalty programs help retailers understand who their customers are and what they want. They can then offer a better shopping experience and more relevant offers, so that in turn customers consolidate their shopping.” Vince Timpano, EMBA ’08, President and CEO of Aimia Inc., agrees, adding, “We believe that loyalty is the one true path to being able to increase share of wallet, tenure and advocacy.”
Customers seem to feel that the exchange — points for data — is a fair one. Canadian households belong to 8.2 loyalty programs on average, and Americans have even more plastic cards and key fobs. Air Miles and Shoppers Optimum each have more than 10 million accounts. In the month of May 2013, 61 per cent of Canadians used Air Miles cards, 40 per cent used Shoppers Optimum, 24 per cent Canadian Tire rewards, 21 per cent Aeroplan, and 20 per cent HBC rewards.
Loyalty programs take many forms, from stand-alone programs operated by a single company like Optimum, to coalition programs that bring together several retailers in different categories, like Aeroplan and Air Miles. Among the diverse loyalty offerings now on the Canadian market is Scene, an innovative partnership between Scotiabank and Cineplex with rewards in the form of movie passes.
Loyalty programs are clearly here to stay. “If you do them effectively,” says Vandenbosch, “they totally re-organize your business. Historically, marketing was about building and selling a brand. Now the goal is to build, grow and ‘farm’ a customer base.”
Carolyn Hynds, MBA ’10, Director of the Shoppers Optimum Program, agrees, adding that the very successful program has become a key competitive advantage. “Optimum allows us to better understand our customers and offer them value that keeps them coming back to the stores,” she says. “We know that Optimum cardholders spend almost 60 per cent more than non-members per basket, and that 2/3 of our non-prescription sales are generated by cardholders.”
So what makes the best loyalty programs work? Intouch asked some Ivey alumni for their insights.
Carolyn Hynds, MBA ’10
Director, Shoppers Optimum Program
“Free feels good.” That’s the simple but powerful tagline for Canada’s most successful stand-alone loyalty program, introduced by drugstore chain Shoppers Drug Mart in 2000. Says Carolyn Hynds, “It’s very powerful — the first time a customer redeems points, it drives engagement with the program and Shoppers.”
Shoppers customers earn points on virtually all purchases, and total points are tallied on each receipt. In addition to regular point accumulation, the company offers accelerated programs, including popular “20X points” events, special offers around specific brands and a branded credit card. “The program is easy to understand and has mass appeal,” says Hynds. “We have such a broad assortment of products within our stores that people can earn on everyday needs and then redeem for something that pampers.”
The data derived from Optimum were initially used to shape promotions and to understand shopping behaviour. Over the years the analytics behind the program have been enhanced. Last year customers began receiving personalized emails with offers tailored to their shopping habits. During the pilot, Shoppers saw a clear uptick in redemption rates, trip frequency and basket size. The next step, recently launched in some Ontario markets, is the mobile Optimum card. An alternative to carrying yet another physical loyalty card, the mobile card allows Optimum members to receive special offers on their Smartphone devices.
Hynds says a successful loyalty program can help companies compete in the new retail environment. “Today customers have so much information at their fingertips and buying power that competing on price alone is difficult. The Optimum program is so successful because it builds and maintains relationships with our customers and provides them with value that goes beyond discounting.”
Dave Burns, EMBA ’98
Senior Vice President and COO, LoyaltyOne Inc.
LoyaltyOne grew out of Air Miles, one of the first “coalition” loyalty programs in the world. Over time, the organization expanded to provide a full suite of “customer-centric” solutions including analytics, tools to optimize marketing and merchandising decisions, loyalty strategy consulting and custom loyalty program development, and marketing strategy. “We’ve been doing this for more than 20 years,” says Dave Burns.
“The goal for our business partners is simple — to help companies build their brands and increase sales and profitability. The value proposition from the consumer’s perspective is that we will use information about your buying behaviour and preferences to provide you with a more relevant experience, including offers that are valuable to you.”
Burns says coalition programs offer consumers a wider range of earning and redeeming options. Sponsoring companies like the fact that marketing costs are shared and the data derived is broader. “At the end of the day, sponsors are looking for sales growth,” says Burns. “That comes in three ways — by increasing frequency and basket size, and by identifying and targeting new customers.”
The loyalty industry is becoming highly competitive, Burns says. The retail landscape has changed dramatically with the advent of social media. Loyalty programs can help companies compete in the new world but only if they practice the “Three rs”— relevance, recognition and rewards. “There is no doubt that customers love loyalty programs and they can be a significant competitive advantage, if they are run well.”
Vince Timpano, EMBA ’08
President and CEO, Aimia Inc.
The average company loses between 10 and 30 per cent of its customers every year, and it costs seven times more to acquire a new customer than to keep an existing one. “There are tangible benefits that can be realized by focusing on your existing core customers,” says Vince Timpano. “They purchase more than the average customer, they visit your store more frequently, and they are advocates of your brand.”
Aimia had its genesis in 1984, when Air Canada established Aeroplan as its frequent flyer program. Aeroplan was spun off as a separate company in 2002, and went public in 2005. It acquired Loyal Management Group, which included Nectar, the largest coalition loyalty program in the U.K., in 2007 and Carlson Marketing, a loyalty pioneer, in 2009. The company was renamed Aimia in 2011.
Timpano believes the ultimate goal is to create a “customer-centric” approach to doing business — one that puts the customer first to drive competitive advantage. Loyalty is the way to do that. “Marrying everything you know about your customers — the data science — with everything you can offer them — the essence of your brand — enables you to offer a truly distinct value proposition,” he says. “Empowering your people to bring this proposition to life and react to your customers’ needs in real time, enables you to connect in a more personal and relevant way.”
T.J. Flood, HBA ’95, MBA ’98
Senior Vice President Marketing, Canadian Tire
Canadian Tire money was introduced in 1958, inspired by Muriel Billes, the wife of the company’s co-founder and first president, as a response to the promotional giveaways offered by many gas companies. Extended to retail stores in 1961, the “funny money” quickly became a beloved Canadian icon. “As a kid I used to try and put it in the collection plate, and I got my hand slapped a few times,” says T.J. Flood with a grin. Today Canadian Tire money is still handed out when customers pay cash or debit and the program has evolved to provide Canadian Tire “money” when they use a Canadian Tire MasterCard. “It’s been an interesting way to differentiate us and keep people coming back to our stores,” Flood says. “Now we need to evolve the program to be able to understand a lot more about our customers.”
A pilot project under way in Nova Scotia replaces Canadian Tire money with a more conventional loyalty card. Flood says the data collected has already provided some valuable insights into customer needs and behaviours. The data derived from the program will drive everything from more targeted weekly flyers to better organized stores always stocked with the items customers buy most. Says Flood, “We’re also learning about the value of a loyal customer and what the return on investment is for keeping and growing them. It’s all part of evolving to become a truly customer-centric retailer."
Photos: Nation Wong
Art Direction: Greg Salmela, Aegis
