One customer responsible for Ladbrokes profit drop?

Could a handful of customers be driving the majority of your profits?

It's well known that the pareto rule typically applies within customer value with around 20% of customers representing 80% of profits. However, even within this 20%, this can still skew to a smaller number of customers who contribute a large percentage of profits.

Ladbrokes apparently discovered this to their cost recently, with just one customer reportedly being responsible for the majority of the fall in high-roller profits from £66.9m to just £5m. This translated as a 20% drop in overall total profit from £235.4m to £207.3m.

The gaming industry typically suffers more from this skew in large revenues from a small number of customers with some areas of the online gaming side of the industry seeing upwards of 80% of revenues from a low single digit percentage of customers.

Knowing this, Ladbrokes introduced the OddsOn loyalty programme within their retail stores to get better visibility of their over the counter (OTC) and fixed odds betting terminal (FOBT) customers. This is something Ladbrokes is working hard to exploit, saying in their latest interim results:-

We have made good progress in 2010 in defining key customer segments and will shape marketing activity around them, using the valuable information on our customers that OddsOn! is providing. Trials adopting this approach are already beginning to show encouraging results. We have also introduced a dedicated service team aligned across all products, to manage high value customers.

Whilst this customer value segmentation might not be as severe in other industries, it's still just as important. Within speciality retail for example, one retailer sees 30% of customers representing almost 70% of sales revenue. This is the difference between an annual spend of around £60 for low loyal customers versus over £400 for high.

Importantly though, these customers not only spend more, they visit more - over 7 times more. This means if customers don't like changes to your prices, products or customer service, these high loyal customers will be the first to notice. Using the speciality retail example above, if just 10% of these customers defect, whilst they would only represent 3% of customers overall, it would result in a 7% drop in profits.

Not all business are impacted as much as Ladbrokes seems to have been by a small number of high value customers, but at least they know who these customers are. The picture could be much worse if high value customers were defecting, profits were falling and ultimately you had no idea why.

The real value of loyalty programmes is in the insight and visibility on customers they bring. High-rollers aside, this is something which Ladbrokes will increasingly be leveraging as their OddsOn programme expands and something which gives them first mover advantage over their competitors.

Low cost supermarkets put loyalty in doubt?

There was an interesting result for the second year running in the latest Which? supermarket customer survey. This wasn't about the winner which was Waitrose (again), or the runner-up in second place Marks & Spencer - you could almost have predicted both of those. Instead it was about the brands which took the next two top spots, Aldi and Lidl (coming third and fourth respectively) and the distinct lack of two of the biggest retailers in the UK from the top 5 altogether with Sainsbury's and Tesco at 6th and 8th place.

You could immediately argue that in this climate, price was a major factor in swaying customer opinion - but then discount brand Netto came bottom of the table with just 41% back in 2010. Plus the top two spots were taken by Waitrose and M&S - neither of which you would describe as every day low price retailers.

In fact, the top 5 retailers in the 2011 survey all managed to increase their customer satisfaction score with Morrisons overtaking Sainsbury's by moving into 5th place with a 3% lift in satisfaction and ASDA increasing by 4% to 53%.

Yet Tesco stayed static at 49% and Sainsbury's actually went down 1 percentage point in customers opinion to 57%.

Outside of customer satisfaction, the most recent Kantar WorldPanel Survey shows Tesco holding it's market share and Sainsbury's showing a marginal lift for 2011 - however both Aldi and Lidl have shown almost double the lift in sales growth at almost 10% - almost twice that of larger chains and the market overall which is growing at around 4%.

So what's going on?

• Why is it that the two biggest retailers in the UK are getting scored lower by customers than discount retailers?
• Why are these retailers actually going down in customers opinions when all other retailers are on the up?
• More interestingly, why are these retailers not seeing an effect to market share if customers have such a low opinion of them?

The answer is I think, in a word - loyalty.

Uniquely both Tesco and Sainsburys have a customer loyalty programme which recognises and rewards customers for all of their purchases. Whilst a loyalty programme in itself cannot mask customers opinions on other factors such as pricing or service, it does create a very "sticky" customer proposition. Through a combination of regular customer communications, relevant and targeted offers and the inherent reward value within the points currency, customers are minded to continue purchasing even when the overall experience may not be on a par with others.

There may be other factors driving the lower scores attributed to these retailers which are more to do with their size and coverage of the UK market than simply pricing and service. In trying to be a jack of all trades, they are essentially a master of none. Whereas Waitrose, M&S, Aldi and Lidl each have specific customer segments they serve, both Tesco and Sainsburys look to serve all segments within one single store. This naturally creates complexity in both range and choice (Finest / Taste the Difference / Basics) - something which is known to cause more customer angst.

Again though, the loyalty programme allows them to respond better to this in the long run by being able to target relevant messages and promotions to customers within specific segments. This is more easily done online (and both Tesco and Sainsbury's see their online scores matching/exceeding M&S offline), but will always be a problem within the offline store due to the scale and range.

Loyalty will only stretch so far however and as other retailers provide more breadth of locations, increased range and competitive pricing this will be continually pulling on customer loyalties.

For the moment though I think both Tesco and Sainsbury's are seeing the benefits of their respective loyalty programmes, allowing them to hold onto market-share in highly competitive and increasingly price orientated market.