Rise in Promiscuity – How far will you stretch

So in this downturn we are all going to end up being much more promiscuous apparently.

Whilst we can’t blame this on the beer (consumption has gone down in the recession) and it is true in the narrowest sense of the word -with an estimated rise in adultery - I actually mean it in the broader sense in terms of the brands we are loyal to, not just partners.

A recent report from Experian suggests that consumers are now less loyal to brands, with an increasing number re-evaluating their choice of brand or company.

The report shows that on average, over 80% of consumers questioned indicated that they are increasingly aware of the price of goods and services and almost half of them stated they were less loyal to companies than previously. More worryingly, over 50% of people questioned stated that they had actually taken business away from companies in the past year due to bad customer service.

The report also shows a rise of almost 10% in consumers feeling that most companies are not fair to them – essentially an eroding of trust. This has been rising steadily over the last 2 decades, but has risen very quickly in the last year.

None of this is a surprise and indeed I discussed similar results from surveys by Forrester and Accenture back in February – what was interesting though is what they said about how customers are changing behaviour, stating:-

It is not just the cheapest items that are luring customers in the recession. We know that they are thinking twice about buying the cheapest item they can find (“Buy cheap, buy twice!”)

So this isn’t consumers necessarily trading down or cutting back, instead it’s a case of looking at overall value – price vs quality.

Looking at how consumers measure value and its increasing effect on customer attrition you could argue that there has been an increase in Value Elasticity.

Within economics, Price Elasticity of Demand relates to the relationship between price and demand – where the price rises and demand falls then this product/service is considered elastic – where the price rises but demand doesn’t fall then this is considered in-elastic.

Within customer retention we could use the same formula for Value. Where Value falls in the consumers mind (price rise/drop in product quality/bad service) and this results in customer churn then you could class the brand/company as Value Elastic. Where consumers suffer decreases in value but don’t defect, then this company/brand/sector could be consider Value In-Elastic.

As an example, I was talking to consumers a couple of weeks ago as part of some research and what was interesting was their reaction to different sectors. When discussing retail, there was no hesitation – if a brand fails then they will be cut loose – the consumer will walk away. However when discussing financial services, consumers seemed Value In-Elastic – not shedding their bank even when they had personally had a complaint or issue.

So whilst banks currently have some advantages with customers unwilling to move despite a drop in value, what seems to be changing for most industries – and this is in part due to the recession, but also due to increasing customer expectations and wider choice – is that consumers are becoming more Value Elastic – more willing to look around, more willing to give someone else a chance.

As their sensitivity to value (price vs quality) increases, so does their Value Elasticity and hence the re-evaluation of the companies they use.

We have been through the boom years where consumers were given ever increasing amounts of choice and options and as demand overall now falls, less and less companies have the luxury of Value Inelasticity – or customer inertia.

Consumers are looking to stretch their pounds and this means they will be stretching the value equation. The good news however is that Value does not not equal Price. It’s a more complex equation that includes product quality, availability, choice, customer service, brand affinity and benefits.

Price will always be important but you don’t need to have the lowest prices – you need to have the best Value.

If you’re in a Value Elastic sector (and this will be almost everyone), you need to make sure you’re not hit on the rebound when consumers flex their option of choice. Understanding what customers value and how they measure this will help make the right choices when a product or service is priced, positioned and promoted.

PS. Whilst banks may have Value In-Elasticity today, this does affect their ability to gain the consumers wider financial relationship – you really can’t have your cake and eat it.

Time for segmentation?

There was an interesting article on Wired.com the other week discussing some new research about email send times and how these can be used to derive useful information about individuals.

The article related to a paper by Yahoo Research and Northwestern University entitled “Characterizing Individual Communication Patterns”. They state within the introduction to the paper that:-

Whilst demographic details like gender, age, race, education and income are generally used to segment people, they can be expensive and time consuming to gather and more importantly, are often poor predictors of outcome.

Instead they argue that behavioural data – in the case of this paper email usage – can be a much better way of characterising individuals.

The paper goes on to describe two distinct groups they identified from email usage patterns - particularly time of day - and how these could be used to help in the fight against spam.

What interested me however was the thought of segmenting customers by usage, specifically date and time.

We would normally utilise behavioural data to segment customers, looking at pages browsed, items viewed, goods purchased, stores frequented – anything that indicates you did something. The issue is we typically look at the “something” – not the when or the where.

Web analysis has for a long time utilised time of day (site usage) to help segment people as for many sites - especially those without any formal member accounts - this can be some of the only data available.

A case study for Denmark’s most popular Internet portal Jubii showed that creating profiles based on when customers used the site helped to target online advertising and increase click-through rates by 30-50%.

Within loyalty programmes where we typically have an abundance of both demographic and transactional information – we sometimes discard seemingly less important information like time when creating customer segments.

What this research shows however is that time on its own can be a power profiler of customer behaviour.

It’s kind of obvious at a simple level that time of day would provide an element of segmentation. If comparing retail spend transactions - someone regularly shopping in DIY during the middle of the week is likely to be very different to someone purchasing DIY only at weekends. Both customers show an interest in home improvement but one is more likely to be retired and the other working full time. Of course there may be many other reasons, but this simple example shows how just adding the dimension of time can begin to elicit a wealth of undeclared information.

We have recently experienced this ourselves when doing some research and analysis on a frequent flyer programme. Whilst I can’t divulge the details of the research, what it did show was that rather than what you purchase, it was when and where you made a purchase that was highly predictive of the likelihood of taking out an additional service.

Running a loyalty programme and not using the information it provides, is akin to simply running a deferred discount – and you’d probably be better off just doing that.

However those that do use the data are sometimes in danger of gathering too much information in the hope that it will provide greater insight and I think what this research shows is that it can be a case of less is more.

Certainly early in a relationship, behavioural data will be sparse and declared information limited – using everything you have at this stage including information like time could provide a better way to predict likely future behaviour and fast track these customers to programme benefits earlier.

Huggies Lean Forward

Kimberly-Clark have launched a new loyalty programme for their Huggies brand called “Enjoy the Ride” which rewards consumers with points which they can exchange for rewards.

Nothing new about that I guess but what I think is really unique about this programme is that although it allows the member to collect points by entering codes, the codes themselves are not available on the products. Instead the member has to earn points by interacting with the brand or with friends.

Tim Abate, Senior Brand Manager for Huggies is quoted as saying “We want moms to be interacting with our brands as much as they can. They gain valuable information and offers and we can learn from their opinions, [The program is] one of the tools that lets us establish a deeper relationship with moms than we’ve had before.”

This is essentially a Lean Forward Loyalty programme.

I’ve spoken before about Lean Forward Loyalty and how this approach can totally transform a brands loyalty programme and it’s great to see Kimberly-Clark doing this with Huggies.

For those that have missed my previous posts the basics are that programmes now need to engage consumers more to get and keep their attention. They need to enable them to interact and provide reasons for them to do so – essentially to “lean forward” rather than sitting back passively.

This is achieved by creating buzz, creating reasons for people to discuss and interact and to then combine this into the longevity of a loyalty marketing programme that maintains this behaviour and deepens the relationship.

What really interests me about the Huggies programme is that whilst they have combined the interactivity of lean forward media with the longevity of a loyalty programme, they’ve done it without using on-pack codes.

It would seem that they feel that the more they can engage with consumers the more likely the consumer is to go on to buy Huggies.

Not using on-pack codes will obviously mean they cannot track actual purchases to consumers so they won’t necessarily know how many of their members love the brand and love the interaction – but then go on to buy someone else's brand. However what they will be able to track is any overall lift in purchases and the extent to which this campaign contributed to it.

The issue they may have though is maintaining the longevity of the programme once the initial flurry of activity has died down and the consumer has watched the videos, invited friends and scoured the magazines for the codes.

The advantage that on-pack codes bring to a programme like this is creating additional reasons to come back - to interact. On successful Lean Forward schemes like Coke Zone in the UK, this combination of interaction combined with on-pack codes creating reasons to visit is what really makes it work.

They may find it difficult to maintain the interaction without also recognising the transaction

Whilst they have included a daily prize draw for a years supply of nappies, experience would suggest that consumers quickly tune out of prize draws if these don’t change regularly, so this in itself will probably not create that longevity.

However it may not need as much longevity to achieve its results. As Jeff Dawson, VP of the Huggies Brand said “[the] programme is designed to establish a strong relationship with moms as they begin their journey through motherhood – ultimately creating Huggies advocates, and thus loyalty users of Huggies branded products.”

It could well be that this initial interaction with the brand, although short-lived, may be deep enough to develop that relationship and ultimately that trust.

This will really depend on whether in their chase to collect the points, the consumers actually stop and take in the content that they are attached to.

I think it will be interesting to see how this scheme works out as its essentially rewarding the interaction, not the transaction. It’s also working further up the chain in terms of consumer purchases, looking to change behaviours at the interest/desire stage rather than the action stage.

While I think this is a really great idea, ideally they’d be doing both -recognising consumers for getting involved as well as rewarding them for making a purchase – either way, it’s good to see they are trying something different.

Carrot Squared

I’ve come across quite a few altruistic loyalty schemes of late – schemes which are looking to use commercial principles of consumer loyalty to change peoples behaviour.

The thought pattern is, if loyalty works for retailers or airlines, why couldn’t it work to encourage recycling or a healthy lifestyle?

Whether it’s wellness programmes, green programmes or recycling programmes, there are many schemes out there looking to use the principles of loyalty marketing to change consumer, employee or citizens behaviour.

Indeed, back in 2004 the UK government advisor Ed Mayo of the National Consumer Council said “The problem is that people's efforts are not rewarded in any way. What people want is carrots, not sticks”

The Carrot and Stick is the standard line when discussing the use of these types of schemes. Using fees or taxes to punish bad behaviour whilst rewarding with cash, tax breaks or points for good behaviour.

The problem though in many cases is that the stick part of the equation is in the wrong place. Take recycling for example - why am I as a consumer getting taxed for the amount of rubbish I create when this is simply a result of how manufactures choose to package things. If manufacturers of goods and services were forced to internalise the costs of their products, recognising for example the true cost of creating, using and disposing of the item and its packaging then the item would either be more expensive, limiting it's purchase or more likely would create less waste thus helping to reduce the problem.

Take the laptop I’m using now, it is estimated that counting everything in, a 10lb laptop uses over 40,000 lbs of raw materials – many of which are finite when extracted and polluting when disposed off. If all of this was accounted for within the price, you can bet it wouldn’t be as cheap as it is.

Even with the “stick” aligned however by the internalisation of costs, as a consumer I can still choose how to consume and this is where the carrot comes in, with incentives for doing the right thing.

However, this isn’t an environmental blog, and whilst these issues are important, I'm interested in how the mechanics of commercial consumer loyalty programmes can be used to help change the behaviours that people can control.

Within a commercial loyalty programme, your best customers are typically the most frequent, most recent customers spending the most money. Once you have transactional data these customers are easy to identify and once found the approach is typically “protect and retain”. For the worst customers, those potentially draining marketing resources, there may be an attempt to on-board these, but very quickly they will be marginalised with marketing spend being focused where it has the most impact.

The approach within altruistic programmes is the inverse of consumer loyalty – your “best customers” are those from which you have the most to gain; not those from which you are already gaining.

Whilst participants that are doing what you want - whether it’s recycling, quitting smoking or reducing their weight – are important, its actually the ones who aren’t which need the motivation and hence the marketing spend. The danger can be to focus where there is the greatest impact – changing behaviour – rather than appearing to spend money that isn’t needed on maintaining behaviour.

A good example of this is the UK government announcement last year that it was to spend £4.5m sending excluded students to “community cohesion” camps – simply put, a week long adventure holiday that includes abseiling, quad biking and water skiing. Whether this will ultimately help these students change their behaviour is not the point – it immediately raises questions about how the good students are to be recognised and rewarded?

This is not unlike the issues with focusing on acquisition vs retention. As I’ve discussed previously, a sole focus on acquisition means that you’ll lose customers you already have who you then have to re-acquire – the leaky bucket syndrome. Within these altruistic programmes, there is potential for the same effect .

A single focus on the behaviour you can change means you ignore “retaining” those who have already changed and risk them coming back full circle.

This means essentially you need two approaches. You need a programme which recognises and rewards change – whether it's a reduction in waste or a reduction in your waist – and then continues to recognise and reward the maintenance of this.

For example, within a wellness programme you may need to reward someone for simply walking to work – possibly a small distance but a great change in behaviour – whilst also recognising someone else who chooses to jog 10 miles a day and is already healthy and maintaining their fitness. There needs to be two approaches to these very different stages to ensure one doesn’t outstrip the resources for the other whilst also ensuring that both are recognised and rewarded.

Many consumer loyalty programmes have some mechanisms to address recognising different customers groups – elements such as tiering that provide increased benefits, earnings and rewards for increased value – but they typically still fit within a single programme approach.

For a behaviour changing programme I think there needs to be two approaches within a single programme – one which rewards the change and one which rewards the maintenance of this.

Neither approach should be more or less rewarding – it is the behaviours required to unlock the reward value which are important rather than the value itself.

PruHealth have a great commercial example of this with Vitality Points, rewarding you for making healthy choices such as using the gym by lowering both your gym membership fee and health insurance premium. For example they reward members with 150 points per year for remaining a non-smoker as well as rewarding other members with 150 points for joining a quit smoking programme – in essence providing the same value for different behaviours. Contrast this with a programme in Dundee which looks to reward people who stop smoking for a week with £12.50 off their shopping – but nothing for those who already have.

The requirement to recognise the change separately to the maintenance of behaviour is in essence two different carrots or Carrott².

I think we will see more of these kind of programmes being trialled and rolled out and may even begin to see the emergence of coalition style programmes which reward all aspects of being a good citizen.

However, for these programmes to ultimately work we need to remember that the rules are different to consumer loyalty and that when designing the programme, the reward and recognition needs to be aligned to both changing and maintaining behaviours.

I am however looking forward to the challenge of driving customer behaviour for the benefit of the individual, not just the corporate.

The Myth of Loyalty?

The above headline grabbed my attention in the latest Marketing Week (30/04/09). It was the title of a letter from Hamish Pringle, Director General of the IPA in which he stated that contrary to popular opinion, it is far more profitable to have a new customer acquisition strategy than it is to have a “loyalty” one.

This basis of this as he describes it is “There are really only two ways in which marketing might affect volume sales: more consumers might buy the brand (penetration growth), or the existing buyers might buy the brand more often (loyalty growth)”. Referring to research from the 70’s and 80’s by Professor Andrew Ehrenberg around FMCG brands that indicated that category consumption is pretty much fixed, Hamish reasons that attempts to increase consumption are futile and hence a loyalty strategy which focuses are trying to get customers to buy more is also futile.

Hamish’s comments were made in response to a previous letter (MW 23/04/09) that stated that within the current climate brands should not be spending money on acquiring new customers and instead should be investing only in existing customers.

Both of these views are poles apart but it’s not lost on me that the Director General of the Institute of Practitioners in Advertising is stressing that going after new customers - which is typically ATL - is a better strategy than loyalty – which is typically below the line; and the phrase that comes to mind is “If the only tool you have is a hammer, you tend to see every problem as a nail”.

I have to say though that I don’t actually disagree with Hamish on the point about increasing consumption being futile – but only for certain customer segments, and the beauty of a customer loyalty programme is actually knowing WHICH customer segments to target.

Whether its clothing retail, online gambling or credit card spend, every programme I’ve ever looked at has between 70-80% of revenue tracked to just 20-30% of people – and these are the ones where increasing consumption is hardest and as Hamish says, potentially futile. However, within a loyalty programme the strategy for these customers is “protect and retain” - it’s not about getting more from them, it’s all about keeping them longer.

Within a restaurant loyalty programme we operate, we have divided customers into 3 groups based on frequency of visit. The “high loyal” customers were visiting once a week or more, sometimes daily, and so increasing usage for this group would be hard. However the next segment, the “medium loyal” were visiting on average 4 times per year and so this group showed a high affinity to the brand and could be encouraged to make 1 or 2 extra visits per year. The scheme was designed around this with the reward threshold set to trigger at visit number 4 based on average purchase value, with the reward encouraging an extra visit.

Even outside of retention marketing, the now famous “Got Milk?®” campaign for the California milk marketing board managed the stem the 2-3% annual decline in milk sales – technically not increasing consumption, but certainly maintaining it. This is not unusual, I’ve seen this same behaviour within other FMCG brands, with on-pack loyalty schemes actively increasing sales or maintaining sales in the face of a category decline – and this isn’t based on subjective data, this is based on comparing actual baskets from real customers.

I’m not however trying to say that marketing spend is better on customer retention than it is on customer acquisition – this is too simplistic. You actually need to spend on both, adjusting the mix a little as required.

A sole focus on customer retention misses the point that customer lifetime value doesn’t mean the “three score and 10” and that customers will change, mature, move on – even in a highly loyal customer base, you may still lose 3-5% of customers per year and if these aren’t replaced through acquisition efforts then you’ll have an ever dwindling customer base.

Likewise, a sole focus on customer acquisition misses the point that it costs a lot of money to raise customer awareness, generate a sale, on-board customers and educate them on your products/services. Not focusing on retaining these customers just means you’ll have to spend even more money filling in the hole they left – running faster and faster simply to stand still.

You also can’t lose sight of the fact that customers are a finite resource, as pointed out in Return on Customerby Don Peppers and Martha Rogers. In highly concentrated markets, all brands will be fighting for customers and growth for one brand will typically be coming at the expense of another. In this scenario, focusing only on customer acquisition will simply mean that your existing customers will defect to your competitor who is providing a compelling acquisition offer – and is largely where we have been in the insurance and mobile industries.

In the essay by Chris Stephenson for the recent IPA Excellence Diploma he makes an interesting point saying "I believe brands should only invest in marketing communications through existing users of their brand". Arguing that providing the tools/knowledge to existing customers to advocate your brand whilst at the same time creating advertising which is seen to be targeting existing customers will creating a desire from prospects to ask and an ability for customers tell - essentially seeding word of mouth.

Whilst this is a great idea it is simply one way and combining acquisition and retenton marketing and in reality loyalty marketing is actually just this - a combination of both acquisition and retention marketing.

In order to retain customers you have to make sure you recruit the right kind to begin with.

Rather than a “holy war” between ATL and BTL line marketers, what would be more profitable for our clients all round is if we simply joined up these efforts.

We've been calling this approach “Acquisition for Retention” or “Loyalty” for short.