Scoring Points

How Tesco Continues to Win Customer Loyalty

Clive Humby, Terry Hunt, Tim Phillips

• Publisher: Kogan Page
• Year: 2008
• Print ISBN:
  9780749453381
• Edition: 2
• eBook ISBN:
  9780749460129
• Topic: Business
• Subtopic: Advertising
• Index: Business

Scoring Points is the compelling and dramatic inside story, told from a project point of view, of how the Tesco Clubcard was conceived, launched and developed. It explains in detail how Tesco collected, analysed and used customer data to become a retail giant, making customer loyalty marketing work when almost every other programme failed. By pairing its loyalty scheme with sophisticated information technology, Tesco set a new standard for knowing your customer.

Scoring Points is one of the seminal marketing books of the last decade. A fascinating tale of what can be achieved through vision, a strong team ethic and a company-wide commitment to customer satisfaction, it is an inspirational read for anyone in business, from junior marketers or salespersons working in an FMCG environment, to any practitioner looking to better analyse their customer base.

1

Questions of loyalty

• In the beginning
• What is loyalty?
• The secrets of success
• Is customer loyalty genuine?

IN THE BEGINNING

Tesco Clubcard was by no means the first supermarket loyalty scheme. For that, we have to look back more than a century to the British Cooperative movement and the Dividend or ‘divi’ it paid its members.

The Rochdale Equitable Pioneers’ Society was founded in 1844 by 28 weavers. It was not the first co-operative, but it is the origin of today’s Co-op supermarket chain. Run by working people for working people, the Society had eight principles, the most important of which decreed that any surplus should be distributed back to the members, in proportion to their contribution.

So this was a retailer that considered its customers as members, where their regular custom, their loyalty, was rewarded in cash, and where the more they shopped, the more they got back. Fundamentally, this is exactly what Clubcard, and every other modern loyalty scheme, provides.

It is hard to imagine now, but from the time of World War I right up until the 1970s, Co-ops managed by this principle formed the largest grocery chain in the UK. The long-term success of the ‘divi’ makes Clubcard’s decade-long story so far seem like a flash in the pan. As Andrew Seth and Geoffrey Randall point out in their book, The Grocers:

Membership blossomed… bolstered by the unchanging appeal of the dividend, and by democratic ideals and a reputation for honest dealing. Two million members grew to… a staggering 11 million – more than today subscribe to the famous Tesco loyalty card – at its apogee by the Second World War. By 1950, market share was at least 25 per cent, and on some measures the Co-op had achieved one-third of the entire market, greater than all the multiples combined.

Yet although Tesco is a public company rather than a mutual organization, with a loyalty to its shareholders as well as to its customers, some of the principles that created the first mass-loyalty programme 150 years ago have been applied to its Clubcard customer membership programme. As Lord MacLaurin, the chairman of Tesco when the scheme was launched, explained in his autobiography:

It was a direct result of comments from our customer panels that Tesco launched its Clubcard scheme… ‘OK,’ they said, ‘so we’re loyal to Tesco, why not show us a bit of loyalty in return?… And they were right, which was why, after examining the idea, Tesco launched its Clubcard.

The principle is also enshrined in the Tesco corporate mission statement. In the reception of the company headquarters in Cheshunt, on a plaque on the wall, it literally stares you in the face. The company’s core purpose is to ‘Create value for customers to earn their lifetime loyalty’. Not, in the first instance, value for shareholders. The list of company values starts with the goal to ‘understand customers better than anyone’. (It also contains the promise to ‘share knowledge so that it can be used’.)

If the Co-op dividend was the historical precedent for Clubcard, there were other schemes that demonstrated the efficacy of loyalty marketing for mass brands. Prior to Clubcard’s introduction, Air Miles had been launched in 1988, and was a runaway success: a success fuelled by being adopted as the reward currency for the British Airways Executive Club. Air Miles had for its inspiration the predominantly US-based, single-airline brand frequent-flyer schemes.

When Tesco was looking to test Clubcard in a few stores in 1993, it also had many retailer precedents throughout the world to look at. In the United States there were many local loyalty schemes that had grown up with the regional supermarket chains and retail outlets. In Europe, several Scandinavian grocery chains were particularly advanced. Some offered preferential pricing to customers who joined their membership scheme. Some offered rewards only to their most valuable customers, or most regular customers.

So Clubcard did not invent the concept of retail loyalty marketing. What Tesco did do was take the thinking to a new level of business sophistication and effectiveness. Yet that effectiveness has often been questioned, so it is worth looking at loyalty more closely.

WHAT IS LOYALTY?

‘Loyalty’, in day-to-day life, implies an unselfish belief in institutions, or unswerving fidelity in marriage, or emotional commitment to friends. Loyalty also suggests monogamy: one choice above all others.

Retail loyalty isn’t like that. There isn’t a customer alive who will consider using one shop for every need. When retailers look at winning and keeping the loyalty of their customers they are looking to achieve a little extra goodwill, a slight margin of preference, an incremental shift in buying behaviour. This can add up to a massive contribution to the financial success of the business.

Types of loyalty

When the Nectar Loyalty programme was launched in the UK by Air Miles inventor Keith Mills in September 2002, backed by Sainsbury’s, BP, Debenhams and Barclaycard, among others, the third in the UK’s ‘big three’ supermarkets was unconvinced. Asda, a long-time opponent of loyalty programmes, responded by commissioning a public opinion survey from NOP. It stated that 93 per cent of shoppers would prefer lower prices to loyalty cards. ‘On Monday, Asda will do what it’s done virtually every week since it abandoned its own loyalty card pilot in 1999 – chip away at prices,’ the company said.

‘Customers aren’t fooled by marketing gimmicks,’ said Asda’s deputy chief operating officer Richard Baker, ‘Shoppers’ real loyalty only comes from offering the lowest prices on the right range of products.’

Leaving aside the question as to whether ‘everyday low prices’ and loyalty rewards are mutually exclusive (Asda and Nectar’s founder insists they are; Tesco’s management begs to differ, and has an internal process by which it monitors its prices to match or better Asda prices), it is important to define what we mean by a loyalty programme – and what it can deliver to both parties.

There is an argument that Asda’s discounting strategy is a loyalty programme of sorts: a clear public commitment to discounting that supports the claim that there is no point going anywhere else to shop. It is a technique most obviously used by US-based Wal-Mart, the world’s largest supermarket – also the parent company of Asda.

We will concentrate on the results of explicit rather than implicit loyalty programmes: programmes that seek to create an active relationship with customers in which value is given in more ways than just price discounting, and that build a relationship between retailer and customer that extends beyond the immediate shopping experience. In 2000, a report from management consultancy McKinsey came down heavily in favour of loyalty cards as a technique to do this:

McKinsey research found that about half of the ten largest US retailers in each of seven sectors have launched such programs, and the rate is similar among top UK retailers… Moreover, loyalty programs are popular with customers: in the United States, 53 per cent of grocery customers are enrolled in them, to say nothing of 21 per cent of the customers of casual-apparel retailers. Of those who join grocery programs, McKinsey research indicates that 48 per cent spend more than they would otherwise, though the figure is only 18 per cent in casual-apparel programs. Yet even 18 per cent represents a sizable number. If anything, we expect interest in loyalty programs to intensify. Faced with slowing revenue growth in many categories and the emergence of competing internet start-ups, retailers are eager to deepen their relationships with existing customers and to increase their share of wallet.

Management consultant KPMG calls simple Wal-Mart style discounting ‘purge’ loyalty. It has defined three other ways in which loyalty retail strategy can work:

1. ‘Pure’ loyalty means strengthening the existing bond between the customer and the retailer, so the retailer can find out what the customer wants, and give that customer more of it. If customers would prefer a larger range of goods, or to have their shopping bags packed for them, or freshly-baked bread alongside the sliced loaves, ‘pure’ loyalty schemes aim to establish a two-way dialogue so that the retailer can act to improve the basic offer.
2. ‘Pull’ loyalty means attracting customers by augmenting a retail offer, so customers will find that buying one product means they get an offer on another, linked product. This might mean being able to receive discounts at another retailer – or it might mean being incentivized to try new products from the same retailer. At a simple level, ‘buy one, get one free’ is ‘pull’ loyalty. Effectively, it is an inducement to create more sales by encouraging customers to buy something new.
3. ‘Push’ loyalty means creating a scheme to encourage us to use a way of shopping that we would not have done before – pushing customers through new channels, or trying to create new types of behaviour. That might mean offering a combined credit card and loyalty card, or making prices cheaper on a website. Users get a discount, and so more of their spend is directed through that channel. It is a technique used by low-cost airlines to encourage customers to book online, or it can be used by a retailer expanding into non-core businesses to draw customers with it.

As we shall see, Clubcard’s activity combines all three techniques – and when it has chosen to cut prices (KPMG’s ‘purge’ strategy), those price cuts have also been guided by customer data. But whatever the combination of techniques used, there is still argument over whether these techniques genuinely create different customer behaviour.

How schemes create value

Defenders of loyalty schemes argue that they create a positive result in six ways:

1. More purchases more often. When they sign up to become members of your loyalty programme customers have made a conscious choice to commit to your brand in exchange for some sort of reward. You offer them an incentive to come back to your shop or airline or internet site, and they have an additional valued reason to choose you over your competition. Put simply: you sell more.
2. Loyalty programmes give the ability to mass customize marketing communication: to identify and talk to individual customers on a massive scale. Over the past decade or more there has been much talk of one-to-one marketing. For retailers, particularly supermarkets running a loyalty programme, it becomes a reality. The richness of customer transactional data created and collected as a by-product of running the scheme lets the marketers devise communications and offers that are individually targeted or at least designed for a clearly defined customer segment. Loyalty schemes provide a two-way flow of information to and from the majority of a store’s customers, something that self-service mass retailers could not normally achieve. If you know the names and addresses of customers, you can perform the most basic one-to-one marketing function: thank them if they spend more, and find out why if they spend less.
3. The asset value of the data. The transactional information produced by a loyalty scheme is enormously valuable if it is analysed and used well. As we’ve already said, these data are exact: they are not based on a small-scale study, a focus group or instinct – they’re actually what is happening. And, as we discuss in this book, a torrential flow of live transactional data offers the possibility to transform how retailers manage their business. In itself the data can become a high-value asset, as Tesco has proved.
4. Loyalty programmes let companies track trends. Large organizations are particularly vulnerable to changes in taste or behaviour: it’s difficult to change overnight. So it’s important to have early warning of significant changes in how customers are shopping, what they are choosing, what they are not doing. Loyalty data provide that information.
5. Loyalty programmes minimize waste. Conventional sales promotions are pretty indiscriminate, offering discounts or dreams to every customer, whether the offer is relevant or not. Most direct mail is inadequately targeted, so only the minority are expected to respond. In-store price promotions are available to everyone whether they are regular buyers of the brand or have never tried it before, so brands often expensively subsidize established behaviour. With the insight gained through a long-term loyalty programme marketers can target offers better than before (either by direct media or at the till) and reduce wasted spend. The result: companies waste less in communicating with people who don’t want to know. Customers get less junk communications.
6. Loyalty programmes help promote trust. Who do customers trust? Their bank? The government? Their grocer? Results – for example the success of Tesco Personal Finance (TPF) and Sainsbury’s Bank – suggest the unlikely fact that grocers may be winning the trust war. And when a supermarket makes the effort to connect with customers in a more personal way, gets to know more about what each customer wants or dislikes, and cares about providing it for them, then that generally gives them more right to provide other services, and earn more of their loyalty and respect.

How schemes destroy value

Those who object to loyalty schemes argue that:

1. Loyalty schemes are just a bribe. Customers don’t really care who they shop with. If they carry more than one card how can they be loyal?
2. Customers just want lower prices. In NOP’s September 2002 survey, 55 per cent of supermarket shoppers believed that their supermarket raised prices to pay for its loyalty scheme.
3. It’s a ‘zero sum game’ for the retailer. If everyone produces a loyalty scheme, how can there be any overall effect on loyalty? Profit margins are squeezed to run the scheme and to offer the rewards and discounts.
4. Handling the data is like drinking from a fire hose. Millions of shopping baskets a day, tens of millions of items scanned – the volume of data must be too big to make sense of it. So ultimately, they learn little of value about their customers that they could not already see.
5. They encourage a ‘Big Brother’ culture. We value our privacy. Loyalty cards erode that. How can you love a retailer who is spying on you? The relationship isn’t trust, it is bullying on behalf of corporate giants who won’t give discounts unless you give up your right to privacy.
6. Where are the incremental sales to pay for it all? A year after launch, how does the company know if the loyalty ‘bump’, the incremental sales effect of issuing the cards, is still there? Even if there is an effect on sales, the ongoing cost of a scheme may be better spent elsewhere.

Both fans and detractors are correct. A loyalty programme won’t work if it is uncompelling, poorly conceived or inadequately managed. Asking, ‘do loyalty programmes work’ is like asking, ‘does advertising work’, or ‘does direct mail work?’ A programme will fail if customers do not value it or feel their interests are not being respected.

There have been more loyalty programmes that have failed than succeeded. This does not mean the objections are more important than the benefits of a loyalty programme. It merely means that many marketers have failed to think through their strategy well enough.

THE SECRETS OF SUCCESS

Love the programme

There is not one single design for a loyalty programme that will achieve all t...

Table of contents

• Cover Page
• Title Page
• Contents
• Foreword
• Introduction
• 1. Questions of loyalty
• 2. Making loyalty pay
• 3. Clubcard on trial
• 4. Because we can
• 5. Every little helped
• 6. Data, lovely data
• 7. Four Christmases a year
• 8. You are what you eat
• 9. Lifestyles become habits
• 10. Launching a bank
• 11. Babies, beauty and wine
• 12. A bigger deal
• 13. From mouse to house
• 14. Back to basics
• 15. Clubcard overseas
• 16. ‘Tesco’s most potent weapon’
• Color Insert
• Acknowledgements
• Index
• Copyright