Friday, 3 October 2014

The rise of the alternative (loyalty) currency


You can’t have failed in recent months to see the rise of alternative currencies like Bitcoin.

With SIBOS, one of the worlds premier financial services events dedicating a whole day to Bitcoin discussions and Paypal enabling Bitcoin support amongst it’s digital merchants, there is no doubt that this crypto-currency is heading mainstream.

Whilst there is a lot of focus on the fluctuating price of Bitcoin and the how the currency itself comes into existence, there really isn’t that much difference between it and a more traditional currency like Sterling.  In both cases, there is essentially a digital ledger that manages payments and deposits.  Within a traditional system, these ledgers are managed by a trusted 3rd party such as the users bank and these in turn are typically managed through some form of central bank such as the Bank of England.  The money itself is held as a digital record and we simply place trust in the centralised 3rd parties that this will be managed accurately.  With Bitcoin, this ledger is decentralised and essentially owned by all users (know as the block chain).  Trust is managed through sophisticated cryptography to ensure that changes are accurately represented and can be trusted.

As with any currency then, whether centralised or de-centralised, it really just comes down to whether the users of the currency place a value on it as a medium of exchange, a trust in it as a store of value over time and a unit of account that can be used to measure any particular transaction.

In this sense, you could argue that loyalty points are a currency.  They are a closed loop currency and you work to attain it by doing specific behaviours with the value issued directly in relation to your “effort”, be this purchase behaviour, frequency or other interactions such as social activity.  This makes it a medium of exchange which is normally measured based on the corresponding value to the issuer such as the retailer.  

The problem with this currency however is that in many cases, it's simply not that good.

It has relatively low liquidity - I can have lots of loyalty currency, points or miles from lots of programmes, but essentially they are all siloed.  I can’t move them, share them or aggregate them easily.  I can of course convert them to other assets such as rewards, gift vouchers or other loyalty program currencies, however the transaction costs for this can vary, making the exchange in many cases less attractive.

I’m also constrained by how much I can earn/attain based on other behaviours.  As these other behaviours are related to share of wallet activities like grocery shopping, it’s harder to increase my earning velocity past what I naturally need - so a change in pricing for example would not necessarily result in a significant change in demand and hence loyal behaviours recognised.  Sure I can centre my purchases with one retailer and possibly up-sell to higher value products - but there is essentially a ceiling to how much I can spend and hence earn.  Coalition programmes like Nectar help this to some degree by widening the opportunities to earn, but it’s still limited based on the amount I can actually spend.

It’s interesting however to look at a loyalty currency as an actually currency - a retailer issued, closed loop monetary supply.

As a retailer currency, why can’t I purchase currency upfront?  Why can’t I exchange the currency with friends?

Sure there are good reasons when you look at it as a reward mechanism.  

If it’s too portable, then does it lose it’s stickiness?  If I can simply give my points to someone else, am I less likely to try to build a balance?  If my points can be shared with others will this increase breakage and mean that high numbers of points will ultimately be redeemed?

The answer is likely yes to many of these questions.

However, if people can “pay” each other in loyalty points, will this increase the attractiveness of the currency (and hence the retailer)?  If customers could convert real money into a retailers closed currency upfront, how much is this “potential purchase value" worth? 1% discount? 5% discount?  If other, complementary retailers can issue the loyalty currency, does this increase the liquidity of the currency and create more customers and more purchases?

It has been reported that Starbucks now see 30% of their purchases being made with their loyalty currency, Starbucks Stars.  Of course, Starbucks could have just reduced their prices, but in doing this, the customer saving would have been in the most liquid asset - cash - and the chances of Starbucks seeing that cash being spent back with them would have been low.  However, with their loyalty currency, they’ve managed to both discount their product whilst keeping the value within their own closed loop currency.

Now at this point, that currency is no different to any other loyalty program we’ve been doing for the last 80 years, whether physical stamps or a digital record.

However, what if Starbucks allows the currency to be exchanged between people - what if they increased it’s liquidity?

Could I pay for a taxi ride with Stars?  Could I pay for a haircut with Stars?  Could the barber issue my change in Stars?

How much is a Star worth to me if I have all the coffee I need - would I trade it for less than it’s value at Starbucks to someone who values it more?

This may sound a little farfetched, but it’s happening today.  The Economist reported last year that in many markets in Africa, mobile airtime is becoming a defacto currency, with retailers issuing small amounts of change in mobile airtime rather than cash.  People are settling personal debts through the transfer of airtime and with the ability to move airtime credit globally, it’s not just a local phenomenon, it crosses borders and continents.

It’s even more interesting when you look at this through the lense of the new crypto-currencies like Bitcoin.

Rather than being “earned” based on behaviours, these crypto-currencies are typically mined - in a virtual sense.  Based on a complex algorithm which takes (ever increasing) computer power to work through, the algorithm rewards the computer user with coins every so often.  For a currency like Bitcoin, there is a finite number of coins to be found and as more are found, the remaining ones get even harder to find, taking longer and taking more processing power.  In this way, the Bitcoin market is essentially constrained, making a Bitcoin value flexible depending on what the market will pay.

Back in 2011, Stan Stalnaker, founding member of the Ven currency wrote an article entitled Bitcoin, Ven and the End of Currency built on this theme saying:-

“To be traded, [a digital currency] must be assigned a value.  And if it can be assigned a value, it can be interchanged with anything else of assigned value.  The Internet is enabling exchange of all types of value, and helps us to measure and publish these values. [..] How many Likes is a Facebook Credit worth? How many Credits make a Ven? How many Ven make a lasagna at the Olive Garden? How much do you have to Like the Olive Garden to get a lasagna? We’ll know soon."

As alternative currencies rise in popularity, we’re going to see more examples of people exchanging products, services, time, attention and share of voice for something other than the national currency.  I think loyalty currencies have a positive role to play in this new and emerging economy and it will be interesting to see how they change and are transformed to become more flexible and possibly decentralised.


Image credit

Saturday, 13 September 2014

Challenge for CPG: Focus on the basket, not the trolley


I have to admit I love Shreddies.

Little woven parcels of wholegrain goodness which, if you listen to the marketing blurb from Nestle, are lovingly hand knitted by a nana called Pearl and her friends.  They have their own Facebook page and Twitter account.  Part of British life since 1953, over 3m people in the UK seem to agree that its a tasty start to the day.

When we go shopping, I ask the kids to go grab a box of Shreddies and they quickly grab it and drop it into the trolley.

The problem is, they didn’t grab a box of Shreddies.

Instead, they grabbed a box of Harvest Morn Malted Wheaties because I’m shopping in Aldi, now just about the 6th largest grocery chain in the UK.  In fact, Alid and Lidl between them have attracted over 50% of households to shop with them - thats 13m people.  With sales for Aldi up 30 percent on the previous period and an aim to double UK stores by 2021, it’s a trend that doesn’t look like it’s set to stop any time soon.

You only need to look at Germany, the heartland of the so called hard discounters to see the effect this could have where they dominate with 44% of the market.

The reason is obvious - consumers are saving a tonne of cash!

For example, I get around 625g of Malted Wheaties for 1/3 the price of 500g of Shreddies.  The price today for 500g of Shreddies is £2.49 (49.8p/100g), for Aldi Malted Wheaties its 99p (15.8p/100g).  Overall, these types of savings have translated to pretty much a 50% cut in my household food bill.  Great for me, not so great for Tesco who used to have my loyalty and my purchases.

However, whilst we hear a lot about the woes of Tesco et al., we don’t hear too much in the press about the packaged goods brands and the impact it’s having on them.  I buy Malted Wheaties not just because they are cheap, but also because thats the only choice I have - almost everything in Aldi is own-label which means the more market share they get, the less market share the consumer brands will have.

This isn’t something that might happen in the future - it’s happening now.  

A recent report from IRi showed that the UK saw the biggest decline in grocery sales since the second world war.  Compared to the first half of 2013, there was a decline in sales of CPG products across all UK supermarkets by 1.2% in value and 3.2% in volume.  This at a time when brand promotions themselves are at an all time high.

A report by McKinsey back in 2010 entitled "Trends that will shape consumer goods industry" forewarned of this when it highlighted one of the top 5 trends to be that of “The shift to value”, with consumers looking for ways to save money and to trade down.  The report suggested that CPG brands were looking to address the issue head on with more competitive pricing through the use of scale, product sizing and finding ways to work with or displace private label products.

The problem with fighting on price alone though is that this simply erodes category value over the long-term.  

Speaking about this issue last year, P&G UK Managing Director Irwin Lee indicated that 5 years ago, brands excluding P&G sold about two-thirds of their volume at an average of 33% off - this had now risen to 80% of volume with an average deal size of over 40%.  To address this, Lee set out the P&G strategy, saying:-

“Our focus is on value creation to complement, if not offset, the over-reliance on unsustainable value give away. There is nothing proprietary in price promotions. We believe promotions win quarters, but true innovation wins decades.”

As Lee points out, consumers need more reasons to buy the product than price alone. Innovation is part of the equation, however all products can be copied as private label shows and with the emergence of the hard discounter “private label only” stores such as Aldi, this battle just got harder.  Brands are no longer fighting for premium shelf space but instead are fighting for customer head space.  

Consumers are now shopping in both hard discounters and traditional stores - buying the bulk of their weekly shop at a low price and the little extras at the one of the big 4.   Those little extras are also increasingly being done via an online trip from established e-commerce brands like Amazon or dedicated online grocers like Peapod or Ocado.  Some brands are even experimenting with their own dedicated online solutions such as P&G with its P&G e-store.

This is leading to the relationship between the brand and the consumer to become more fragmented.  No longer able to simply pay for in-store promotions and positioning to reach consumers, brands now need to look to build direct relationships with consumers.

The challenge for brands then is not how to get into the trolley - thats where the discounters win - but how to get into the basket; how to convince customers to make that extra trip just for them.  This is heart vs mind; emotion vs rational.

There are many tactics to achieve this such as advertising, digital couponing, receipt scanning or on-pack codes, but what is really needed is a co-ordinated and long-term customer relationship strategy.  Some might call this loyalty marketing - I’d call it the future of CPG marketing. 

Tuesday, 29 July 2014

Changing the choice context can change the game

I saw a number of presentations from various UK startups in the last few weeks and one really caught my attention.

Playmob is a startup focused on linking charitable giving to the purchase of game items/actions.  When CEO/Founder Jude Ower presented she described the positive effect that linking a charity donation to the purchase of a virtual item had.  In one example she detailed how 80% of people who purchased the virtual item had never purchased one before and of those, over 30% went on to purchase more virtual items.

I found these stats pretty amazing.

The 80% alone would be a good result - getting people who hadn’t previously purchased virtual goods to buy them.  You could argue that they weren’t really buying the goods and instead just used the opportunity to be charitable - however, with 30% going on to purchase again, this suggests a change of decision.  

The introduction of the charity element had somehow changed the decision context and caused them to purchase an item they had apparently previously ruled out.

Obviously, as marketers, influencing customer choice is something we do all the time - this is the basis of sales promotions and loyalty programmes.  What intrigued me though was the sheer number of people influenced who had never purchased virtual goods before.  It seems they simply need a little push to flip their decision.

In another charitable example, there was a study by Karlan and List called "Does Price Matter in Charitable Giving?” and they identified that match funding for charitable donations - whereby every $1 the donor gives is matched by another $1 - increases the amount given per donation (by 19%) as well as increasing the number of donations (up by 22%).  What’s really interesting here though is that the amount matched doesn’t actually impact these numbers - whether it’s 1:1 match of a 3:1 match (e.g. $3 matched to every $1 donated), the resulting uplift is the same.

This suggests that when it comes to decisions to do something, it is not just a black and white binary decision - there are lots more variables at play.  

Sure, there will be a segment who will always say yes and a segment that will always say no.  But in the middle, there is a floating segment who just need a little extra nudge to flip a no to a yes.  It also suggests that people don’t commit as much as they could - with the match funding lifting the actual amount donated it suggests that people had a little more headroom but that this only went so far.  The promise of even more match funding would not influence them to go past their personal headroom target.

The decisions people make  - such as whether to buy a virtual item or not - depends on them making a number of decisions that lead up to the final choice.  In doing this, people tend to make compromises and tradeoffs to compare the likely outcome.  Evaluating the cost vs the benefit and looking at the different options in terms of the value they add.  What’s interesting here though is that it’s possible to change the choices people make by introducing additional options, even if they don’t actually go for that option.

This seems to be what Playmob had tapped into.  The game producers already had a model for getting some players to purchase items (typical less than 3%), but they needed something to change the context to influence others.

The decisions people make however really depends on the context of the choices available.

Using the example of a circle, that same circle appears large when surrounded by small circles and small when surrounded by large ones.  In the same way, a purchase choice such as a virtual reward may appear to be unattractive in context of the value it adds to the game, but becomes more attractive when combined with another, real-world benefit such as a charitable gift.  Likewise, in charitable giving - whether to give and how much to give can be manipulated by the introduction of an additional variable or choice such as match funding or gift aid.

Placing more variables into the mix can ultimately change a persons choices in more complex ways.  A good example of this was published in the research report entitled “Choice in Context - Tradeoff Contrast and Extremeness Aversion” by Simonson and Tversky.  

It had a study which provided two groups with two different sets of choices for the purchase of a new microwave oven.  In the first group they had 2 product choices which varied by price and quality, but with the same discount.  The second group had the same choice but with one additional product added with better quality, better price but less discount.  See table below:-


Microwave Choice Group 1 Group 2
Emerson (0.5cu. ft. / $109.99 / 35% off 57% 27%
Panasonic I (0.8cu. ft. / $179.99 / 35% off 43% 60%
Emerson (1.1cu. ft. / $199.99 / 10% off n/a 13%


What’s intriguing here is that in the first group, the lowest quality product won out with 57% of purchases.  In the second group however, this same product only attracted 27% of purchases because a potentially better product was introduced into the mix.  Participants were forced to make choices using a different context and with different tradeoffs and so in this case, the 2nd product won out overall with 60% of purchases.

Simply by adding in another product - albeit one more expensive - the researchers were able to increase the overall sales revenues by encouraging a greater number to select the higher priced item.

This also worked in reverse.  In a similar study, they introduced a lower quality choice into the mix and demonstrated how this encouraged the participants to then increasingly select the higher value/cost option.

So choice is not a static context - just because your products and offers have influenced some customers doesn’t mean thats the best it can be.  Changing the choice context can shake things up a little and create an additional nudge for customers - whether that’s making their first purchase or increasing/uplifting their planned purchase.

This isn’t just a one-off benefit though as can be seen by the Playmob example.  Having given users a reason to purchase by changing the choice context, they then went on to continue purchasing as this initial choice had broken down the barriers to future purchases, possibly through the forming of a cognitive bias such as the commitment bias.

In the context of loyalty marketing, using the reward currency to provide additional options and to change the choice context can be an excellent way of encouraging consumer trial or repeat purchase - simply by sprinkling a small number of points on different product options.  Also, like the match-funding example, the value of the points given isn’t directly related to the change of behaviour.

Changing the choices changes the context and ultimately can allow you to change the rules of the game.