Paying Off on Loyalty Marketing

Retailers who take the lead in loyalty marketing will gain the greatest sustainable competitive advantage in the years to come. This involves two principal shifts in retail thinking: completing a transition to a marketing perspective, and making the leveraging of frequent shopper databases a top priority.

Segmenting shoppers according to their frequency and spending levels, then turning over names and addresses to a letter shop for direct mailings, does not capture the full potential of loyalty marketing. In many cases, people who have moved or died are mailed offers and the chain has no way of identifying and reaching out to the consumers who represent the best strategic opportunities for growth.

The better you understand your consumer, the more effectively you can execute. Naturally, many retailers have sought to identify and cultivate the top one-third of their databases?consumers who appear to shop most frequently and ring up the greatest consistent volume. And indeed, it is useful to classify shoppers on this limited basis to understand their importance to the chain from a fundamental volume standpoint.

But using the spending/frequency formula doesn't provide a way to see consumers' overall shopping patterns? specifically the degree to which they shop, and what they buy, in competing stores. By factoring in consumers' total spending, it's possible to classify and prioritize shoppers for a more strategic outreach program.

To illustrate the more sophisticated approach, George Wishert, executive vice president, general manager of retail operations at Spectra, built a model of shoppers at a fictitious chain using the Spectra Advantage system. This chain has eight distinct groups of shoppers, characterized as prime, potential, perimeter, basic, loyal light, convenience, scavengers, and uninvolved. Prime and light loyal shoppers are somewhat equally loyal, but primes have more money to spend. Potential shoppers spend substantially on infrequent visits, while perimeter shoppers avoid the center aisles. The convenience, scavenger, and uninvolved shoppers can be immediately omitted from a loyalty marketing program; at best, they're driven by periodic price features and small-item needs.



Look at Loyalty

The potential and perimeter shoppers spend roughly the same amounts; so do the basic and loyal light shoppers. On the surface, they should get the same priority treatment. The critical next step is to reclassify the groups on the basis of loyalty?how much is each group shopping your stores relative to all competing options? Examined in this light, it's clear that potential and loyal light shoppers are giving a larger percentage of their total business to the chain.

The potential shoppers represent the largest upside opportunity, and therefore cultivating them is the top strategic priority. Simply directing offers to this group will help business. A more complete approach?which we'll examine next month?includes in-depth determination of these consumers' buying and lifestyle habits and a corresponding targeted outreach program.

"The key to loyalty marketing is fully understanding a chain's shoppers before setting a strategy," Wishert says. "Then retailers can prioritize marketing issues, clean frequent shopper lists accordingly, and reach out in the right ways to the right people."