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.

Divide and Conquer

Coupons.  Despite their long history - first appearing in the early to mid 1800’s and being used to great effect by Coca-Cola in 1887 - they are however strange beasts.

Every brand seems to want to give them – research suggests almost all of us use them – yet no consumer wants to be seen with them.

One of the reasons for this is that as we have a tendency to upward social comparison, we are more likely to want to align with those better off than ourselves – and as people tend to associate coupon usage more with less well off people, coupon usage overall has a negative image.

The modern word “coupon” derives from the French couper which means “to divide with a blow or stroke, to cut” which led to the word coupon which means “a portion that is cut of” - essentially describing how the coupon is actually presented.  However, the meaning of the word coupon today has less to do with physically how it is made available and more with how it is used – the association being more one of a discount.

Coupon perception can though span between money saving discount and deserved benefit, although at this end of the scale it’s typically called a voucher – probably more to disassociate it from its “cheaper” cousin. 

Whilst many of us may shy away from using a 20p off coupon, we wouldn’t think twice about a coupon which gave us a perceived exclusive benefit.

As an example, I was travelling on a flight recently and purchased priority boarding as part of my car park booking - a benefit which essentially allowed me to whisk through security and customs and something which many frequent flyer programmes offer as a feature. 

When I arrived, people were standing in a very long queue, which was even snaking down the entry stairs, and yet I had a “coupon” which allowed me to ride up the escalator and go through a dedicated channel with no hold-ups.  The cost of this privilege - £3 – the benefit (to quote a popular card brand) – priceless.

There is a very fine line between an unmerited discount and deserved benefit and it’s all in the positioning – how it is “sold” to the consumer and the reason for achieving it.

Clipping a coupon from a magazine for buy 1 get 1 free is obviously a mass campaign and smacks of penny pinching or smart consumer depending on who you talk to.  However, earning benefits based on purchase behaviour, perceived position or who you know turns it into a deserved privilege.

Another advantage of focusing on a benefit rather than a discount is that it tends to attract the more affluent consumer who, whilst not accounting necessarily for a larger share of the footfall or penetration will typically account for a larger share of the revenues – they will be loyal rather than shopping around based on who has the special offer.

In promotions I’ve worked on with FMCG brands where the campaign focuses on delivering a benefit, not a discount, there is a definite skew in participation and redemption to more affluent groups. 

Whilst less affluent groups tend to show initial interest, it is the more affluent who follow through to redemption.  However, providing a deserved benefit can be harder within an acquisition campaign than a retention one.

It is obviously hard to position something as a deserved benefit when quite obviously it is delivered via a non-discriminating channel such as a door drop or magazine coupon - however there are brands that have achieved this. 

Threshers famously managed to reposition a discount coupon to a deserved benefit by simply using viral elements so people thought they had access to a benefit that wasn’t intended for them. 

GHD created a programme called Blessed which was positioned more as a members only club than a mass loyalty programme.

Closer to home, I’m currently working with a hotel group which has created a programme which uses advocacy to drive through acquisition.  It’s positioning of secrecy which bestows privilege to those invited, allows them to offload inventory at discounted rates, without ever appearing to be discounting their brands.

It’s not the discount itself that is bad, it is how the discount is positioned and the perception as to why it has been granted that is key.

For them, the whole proposition is one of deserved benefit rather than cheap discount and they get to know their customers and potential customers at the same time.  (I’d love to tell you who they are and how you get access, but I'm sworn to secrecy – unless you’re a friend of course…)

Ironically, despite the negative image coupons have, usage has increased in the last year or so as people look to reign in their spending – however this is a false positive for brands.  These consumers are buying simply on price and won’t stick around for long or at all after the coupon has been used.

Better to make people want your brand, rather than paying people to take your brand - coupons can be used to do both, it just depends on how you position them.

Whilst the original definition of a coupon referred to the division of the physical paper, used correctly they can be used to divide good customers from bad – now that's got to be a challenge worth conquering.

A Tale of Two Budget Hotels

2008 it seems is an interesting year for budget hotels.

On the one hand there is Premier Inn which has just been ranked highest in the latest JD Power survey for the Economy Segment 2008, with an "among the best" score in Overall Satisfaction, Reservation, Check-in/Out and Cost. Not only did it out rank the other economy hotels, but it also out-ranked many mid-scale segment hotels including Express by Holiday Inn, Best Western, IBIS and Park Inn.

On the other hand its competitor Travelodge has announcements of a different kind – the fact that it is cutting prices, selling some rooms next year for just £9 and dropping prices by around 10% on average. In fact it sounds like it's trying to change the sector to one more akin to budget airlines.

Premier Inn has so far not been drawn into this price war with no announcement about price cuts. In fact I was at a conference early this year when Gerard Tempest, Marketing Director for Whitbread Hotels & Restaurants was there speaking about loyalty for Premier Inn. He was discussing why Premiere Inn had made a conscious decision not to create a traditional loyalty programme providing points for nights stayed. Instead he discussed that their customer retention programme is based on delighting the customer. By having a consistent level of quality across their rooms, customers know what to expect in every hotel they stop in and so they are not unpleasantly surprised. This is then backed up by great customer service and a money-back guarantee stating that if you don't get a good nights sleep then you'll get your money back.

Through personal experience I have seen first hand how this focus on the customer works. A female colleague of mine noted that if you're a lone female guest then they don't give out your room number verbally so that it can't be over-heard - it's only a little thing but it shows they are thinking all the time about their guests.

Once you've stopped at a Premier Inn they then send you a Guest Satisfaction Survey – on which they have a very high response rate despite its length.

I had reason to try out their customer service a few weeks back when I accidently managed to mis-book a room online – getting the date wrong and so not turning up for the date I'd booked and then having to re-book on the day I needed it when I realised the mistake. By the time I got to the hotel the manager had already made the decision to refund my mistaken no-show. No arguments despite it essentially being my fault – now with service like that who wouldn't recommend them.

It would seem there are two strategies going on here. Travelodge it would appear is hoping to attract customers on a budget – bringing in new customers who may be shifting from a family holiday to a weekend break or business customers downgrading from mid-scale hotels to budget. It would also appear to be working with a 45% increase in bookings for October compared to the same period last year.

Premiere Inn on the other hand is working hard to retain existing customers – providing quality and service for a competitive price. With their Good Night Guarantee they are also looking to reassure customers who may be looking to down-grade from the mid-scale hotels that they will not be compromising on the fundamentals. Premier Inn sales are 18% higher in the first 6 months of 2008/2009 fiscal year than last year so it would seem that their policy is also working.

What will be interesting is how these strategies fair in the longer term – with premium pricing and a focus on the retention of existing customers, Premier Inn may be in a better position as the economy starts to grow again – Travelodge on the other hand may find it hard to increase their prices once customers have become accustomed to them.

Boom and Bust Marketing

Despite assurances from Gordon Brown at the Labour conference in 2000 that we would not return to the days of boom and bust, here we are in 2008, tumbling out of a boom and right into a bust. There are probably many reasons for this that I'm not qualified to discuss, but it would appear one of the primary reasons is an overheated and overvalued housing market. A market which created a great amount of perceived wealth and was encouraged and hailed as an indicator of our successful economy.

There was no real recognition that it was essentially a bubble waiting to burst – like the internet bubble before it and the tulip market bubble way back in the 17^th century. Opinions differ as to why they form – whether it's simply greed or herd mentality – but it's generally only in retrospect when the bubble has burst that we see it for what it was and people begin to recognise that demand goes down as well as up.

What's interesting is that while we see this at a macro level, its happening all the time in different markets. Through my work with various FMCG brands I was amazed to see that the number one measure of success for many brand marketers was penetration – the number of people who have the brand's product in their basket in a given period of time.

The movement of this measure in a positive direction has become critical to many and being the number 1 or 2 brand in penetration terms is the place most brand marketers want to be. Changing this measure can be relatively simple though – in the short term – by creating a sales promotion which targets a large number of people with a very compelling offer.

The problem is, the gain from this sales promotion is not real – many of the brand's existing customers have simply bought forward to take advantage of the offer and many others have only purchased it because of the offer. Sure it has introduced new people to the brand – some of whom will stay – but no where near the amount of people who were contained in the spike in penetration.

Now there is nothing wrong with this approach – generating awareness and creating trial is a key activity for any brand - the problem is believing that the spike in penetration is reflective of the actual customer base.

Where brands believe this, thus starts a never ending cycle of sales promotion – creating new promotions to follow quickly on the heels of the previous promotion so as to prop-up the penetration figure over time. This can be costly on two accounts – firstly the brand is literally buying this extra penetration with free product and secondly they are conditioning their existing customers to only purchase through offers.

As times get tough and budgets are reviewed, this constant over spend on sales promotion is going to result in some brands coming back down to earth with a bang as the penetration bubble bursts.

Ideally brands should be looking at how to maintain market share and grow this in a controlled and responsible way – not focusing on price reductions and volume lifts but focusing on brand values and recognising and rewarding existing customers. Sales promotion will always have its place to drive awareness and trial, but acquisition without a focus on retention is a slippery slope to boom and bust.

As Gordon Brown said a little prematurely back then - no return to short-termism – no return to boom and bust.

Customers Pay the Price for Quality and Service

I had some push back on my article "The customer is always right (unless they’re wrong)" where I commented that I felt price ceased to be a major reason for churn for existing customers. It was pointed out to me that although this may be true to a point, brands still needed to reassure their customers that they were receiving a fair price, even if they wouldn’t really know either way. This is evidenced by brands such as Tesco continuing to provide messages on "value" and comparisons to other retailers.

I was then reading an article on Retail Week by Mark Price, MD of Waitrose with the title "Cash-strapped shoppers might be chasing after value, but they can still appreciate quality". He raised the question that in these challenging times and the sudden need to realign around price, how a brand such as Waitrose, with a tradition of quality for over 100 years can reassure about price (and real value) without losing their quality credentials.

He then went on to outline how Waitrose is meeting this challenge by actually investing in their products rather than cutting back and cutting costs. They have invested in the quality of their own brand lines meaning these now stand up well against other own-brand and branded products. This has then been backed up with advertising saying that if you don't enjoy your Waitrose product they will refund and replace it.

To fight the challenge that consumers will naturally think that a "quality" product is automatically going to be more expensive they have introduced subtle ticketing in-store to communicate that they are the same price.

Most interestingly they are also investing in their staff - an area many businesses actually cut back on in hard times, reducing training and staff numbers. By investing in customer service training they are now seeing a 10 percentage point gap on mystery shopping scores between themselves and their closest competitor.

Mark finished of his article stating that they have improved their quality, value and price perceptions over recent months and are holding on to their customers. Waitrose it would seem are doing a good job of retaining their customers by building on the things that customers value – good quality and service – whilst reminding customers that they are still competitive on price.

I still maintain that price is not the number 1 reason for churn despite what customer research may say - but it would seem all brands in these more trying times need to consistently reassure customers that the price paid is fair for the quality and service delivered.

The customer is always right (unless they're wrong)

I was reading a loyalty white paper today from Accenture on retail loyalty. It was discussing a survey they carried out asking customers what they wanted from a loyalty programme. As expected (and as shown in many surveys before it), customers said that price was one of the top reasons for continued loyalty. The article continued by pointing out that one of the top reasons for loyal customers defecting to another retailer was also price.

Does this suggest that customers are only loyal to the retailer providing the lowest prices? Well evidently not or else there would be just one retailer in each sector with some very long queues. When was the last time you actually checked the price of things though?

Do you know how much a pint of milk costs - and if you do are you aware of how much it costs at the retailer next door? In practice customers say they care about "price" - but most are not actually aware of the price they are paying. This was born out last week when I attended some research focus groups for a credit card loyalty programme - customers were asked what elements of a credit card they considered important and almost all customers agreed that APR was top of the list. When asked though what the current APR was on their existing cards, no one could provide an answer.

Price it seems is more important in initial customer acquisition when customers will research the best options available, but for existing customers the price ceases to be something they really use to evaluate their relationship with the retailer. Many financial companies have actually taken advantage of this fact which is why there are financial products where the interest rate declines overtime - with the companies hoping that customers will not actively re-evaluate their relationship.

Rather than price, customers defect from retailers because of other factors including service, relevance and benefits.

If a store you frequent changes its range, ceases to keep up with your requirements or tastes or removes benefits it provided (or doesn't offer benefits competitors are promoting) then this will create moments of reflection when you'll begin to consider other retailer options. If this consideration turns into trial then price may well come back into the equation - more likely however a customer will actually defect if the service and experience they receive from the new retailer is considered better than they've been used to.

I'd argue that retaining customers is not about providing discounts, promotions or everyday low prices - its about how you treat customers and the service you provide. Feel free to ask your own customers - but I suspect they'll be wrong.