Nearly everyone is testing some form of frequent-shopper program to cement customer loyalty. But few, if any, retailers can yet claim long-term or widespread success in this critical marketing arena.
pling with the core issues of database marketing and electronic loyalty programs.
The potential is huge, executives agree, but developing a road map for cashing in on an electronic marketing program and traveling the necessary distance to make it work can prove difficult.
Where are retailers today in implementing customer-loyalty programs? How much progress will the industry make in the next few years? What are the chief obstacles? Below are highlights on how five executives see the future of supermarket frequent-shopper programs.
SN: How would you rate the success of frequent-shopper programs overall in the industry?
Ed Oertli: I'm a big believer in electronic database marketing to stimulate sales, understand your shoppers, why they buy what they buy in your stores and how to stimulate them to stay your shoppers. But it's still early. There was a lot of experimentation in the late 1980s and early 1990s. It's coming along. I think it'll be part of everybody's arsenal down the road.
Dick Lester: They've not come anywhere near achieving their potential because, as an industry, we kind of got off on the wrong foot trying to create instant-reward programs such as electronic coupons. Those are valuable in their own right and have their place, but to mix them up with frequent-shopper programs is a mistake.
The successful programs are those geared toward sustaining a relationship with the consumer, not focusing on short-term instant-reward programs. You can't buy a consumer's business. You can, however, earn it with increased personal attention and service, which a frequent-shopper program can provide.
We have technology problems to solve and some significant marketing experimentation to do before we really understand how the consumer will react to this kind of thing.
David Reed: We're getting better each year. Some of my colleagues have made a big success of the targeted-marketing concept and we'll continue to see that. But we're going to have to make the quantum leap of looking into every market basket. When we begin to do that, that will help us determine the mix in our stores.
There are some small retailers kicking butt in the area of electronic marketing. One advantage small retailers have is they can be more effective at making decisions rapidly.
Don Reeve: Success will be dependent on a retailer's ability to effectively gather and transform customer-purchase data in customer-specific opportunities. It's a bit premature to say expectations have been met.
Many retailers, if they haven't already developed some sort of electronic marketing program, will be taking a much closer look at what will work for them in the near future. It's a pretty safe bet that there's a solid return on investment in this area.
Tom Dooner: I don't think there's a clear understanding yet of the degree of commitment required to implement and maintain a viable and exciting program. Right now it's all the buzz. People want to do it. But it's more than electronic discounts and points. There are very different programs on the market today and they can be designed to accomplish different objectives. It's very much a marketing strategy. It's a strategy that requires a retailer to evaluate its marketing, advertising and promotional programs.
SN: What more is needed to make these programs work?
Reed: Simply put, we've got to change the philosophy in our industry from making money on the buy to making money on the sell. I've heard it said that the supermarket industry is the best example of a fossilized dinosaur. The industry is so frugal and set in its ways from 25 years ago, we still believe we can exist earning a penny as our margins. In reality, we should probably be turning two or three pennies.
Dooner: The effectiveness of the programs and their long-term benefit will be a direct result of the value consumers receive from continuing to do business with that store. Probably the most significant issue still to be dealt with is the realization that the whole concept of database marketing is not a technology issue. It's a marketing issue.
Keeping it alive, keeping it fresh, new, interesting, making it important for customers to want to present their card, if that's the approach taken, to shop the store and maximize the purchases from that store, that's the essence of the challenge. Everything we read about today makes it clear that commitment to the program is probably the most important element of a marketing strategy and is fundamental to success.
Oertli: Some of the most effective programs look at customer profitability, the gross margins of those customers, and if they don't continue to shop with you, you have a way to pull them back into your store, via direct mail or some other method.
There needs to be a partnership between operations and marketing to make it work. They both have to have a strong will to make it succeed and then stand behind it. Decide what they want and then get the organization behind it to make it happen.
Dooner: There's no doubt that the concept of database electronic marketing, target-marketing, frequent-shopper, loyalty or affinity programs -- whatever we want to call them -- will continue to grow and that the number of consumers participating in them will continue to increase.
But much of the marketing strategy today is geared at acquiring new customers. I don't fault that concept. But I think the focus of a database marketing or loyalty program should be geared more toward customer retention and using that customer knowledge to differentiate your program and your store from what your competitors may be implementing.
SN: Are these programs proving cost effective yet?
Lester: It requires a significant capital investment to implement these programs and it's difficult to argue for making that capital investment for this "fuzzy" concept of a relationship with the consumer. It's easier to say, "We are going to make this investment so we can deliver an electronic coupon with funding from the manufacturer."
You've got much harder numbers if you look at the coupon or direct-reward programs. On the relationship-marketing side, the numbers are much fuzzier. But in the long term that's where the real value of those programs will end up being.
Dooner: It's not inexpensive to acquire, store, analyze and use data to conduct the type of target marketing that such systems could enable you to do. There's a definite cost associated with these programs.
There has to be a financial analysis done to clearly understand the total cost of these programs vs. more traditional approaches. It's very much a business decision, and it requires fully understanding the financial and operational impact of the program. In some cases there has been a pretty clear indication that marketing dollars are best spent on these programs rather than on more traditional approaches.
Oertli: Cost effectiveness is still an issue. For one thing, you have to plan for the maintenance work required to make sure files stay up-to-date. That's a major labor issue with all the customers supermarkets have.
SN: Could you talk a little about the role wholesalers can play in helping independents?
Dooner: That's a strategic question wholesalers have to come to grips with. Wholesalers have a vested interest in understanding how such programs can help retailers. Independents have every bit as much potential to use frequent-shopper programs and to personalize those programs to make them unique. They have a great deal of flexibility and may be in a position to be even more creative in administering these programs than a chain.
