An imperative tool for Customer Retention

Retail loyalty programs are common place today. From Mom & Pop stores to large super markets, almost every other retailer has some form of loyalty program. Some offer instant gratification with upfront discount, some offer threshold vouchers, some are currency based etc. However, the success of retail loyalty programs, regardless of their structure, remains indistinct to business. Despite significant investments, most retailers are still unsure about the real value creation by their loyalty programs. They tend to think loyalty programs are just a line item between their Gross and Net profit and an attribution of economic impact of any form (to the loyalty program), is highly disputable. There are potentially two scenarios that emerge in the context of retail loyalty. In the first, the program is integral to the brand and often program loyalty is inseparable from brand loyalty. But in the second scenario, where the loyalty program services many brands (for eg: a retail conglomerate which has many retail brands), it is especially challenging for the program to be considered as an effective mechanism for value creation.

Why? Research suggests that the answer to this lies in both retail loyalty strategy and its execution. In many instances, great strategic blue-prints not being adequately supported with the right execution while in other cases, strategy itself was flawed. Based on the results it is visible that lack of Fitness for program purpose and inability to achieve goal congruence within internal actors as strategic issues and an ineffective management control and suboptimal accounting framework as key execution failures. This paper discusses each of these issues in detail. Strategic Issues 1. Most retail loyalty programs claim to exist to increase customer retention. However, most firms don’t have a clear basis to identify if their customer loyalty is transactional, functional or attitudinal. Brands often claim that they do not require any loyalty program for inducing the first two forms of loyalty and quite rightly so. The acid test of a program is to be able to become a force multiplier on the top of the retail brand and induce the third form of loyalty. Today, programs just can’t compete based on direct value payout or functional features and functionalities alone, as these are highly replicable. It has to create experiential differentiators which would work as a perceptual exit barrier for customers. It should make customers immune to either some tactical play of competition or acceptable price increase by the firm. To this effect, the first step is actually to agree on a whole set of economic and non economic activities which can be attributed to the loyalty program without much dispute. The second step is to create a robust measurement framework around these agreed activities. 2. The objectives are determined, it is to establish goal congruence between various internal actors through a robust performance management model. This is the key to foster collaborations within the organization. Cross functional KPIs need to be agreed upon between the program and the various functions. It is good to start by identifying how loyalty can potentially impact the whole retail value chain, after base-lining the performance. While the impact of loyalty is usually felt on the down-stream part of the value chain, programs often struggle to establish its impact on the up-stream part. Execution Related Issues 1. Mostly, retail loyalty programs are configured either as an independent cost centre or as a part of larger shared services. They usually do not enjoy the structural empowerment to decide their own budgets. Even the direct payout to the consumers is decided primarily by the brands, where program managers have very little to no say at all. While some retailers did experiment with some innovative structures like placing the entity at an arm’s length and transfer pricing relationship with the brands, none saw much success. Instead they ended up alienating the categories. Management empowerment of the loyalty function should be progressively done based on the ability of the program to achieve certain performance thresholds for a given maturity. While an absolute lack of empowerment may deem the program ineffective, disproportionate and untimely empowerment may end up dividing the organization. The balancing act is in drawing the control boundary, in a manner that awards the program enough discretion, to execute its agenda, without alienating the brands or the categories. The boundary needs to shift outward as the program matures and the value creation through loyalty program becomes increasingly less disputable. 2. Retailers all over the world tend to treat points as cost upon issuance. However, this cost is often recognized as marketing cost and is expensed below Gross Margin; making redemption or breakage as a mere recovery of that cost. The problem tends to worsen, especially in the case of retail conglomerate, where many retail brands participate to form a mini coalition within the same program. Typically the brands which experience higher accrual than redemption are the ones who clamour the most. Success Imperatives While strategic challenges tend to cast a long shadow over program’s effectiveness, most programs’ incapability to harness the power of analytics to prove their worth is also to be blamed. Most of the retailers we interacted with had concurred saying, they would not hesitate to allocate more management resources to the program; if it can prove that doing so has a value. This is exactly where most of the programs fail. They fail at many levels – from target setting to measurement. Retail programs are plagued with lack of clarity and consensus. While most retailers continue to struggle with excess operational challenges ranging from stock availability, excessive mark-downs, growing reverse logistics spend or vendor negotiation, loyalty comes far down in the pecking order. Loyalty program should view all of these as their opportunities. If the program really wants to grow in prominence, it needs to share the responsibility of alleviating each of these issues with the various actors and leverage data to prove their contribution. Broader changes would fall in place, subsequently. BY SUBHRA PRAKASH NASKAR VGSOM, IIT KHARAGPUR