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Loyalty programs utilizing big data analytics to improve CRM for retailers
Loyal customers are indispensable if retailers are to succeed. According to the Chartered Institute of Marketing, it can cost between 4 and 10 times as much to acquire a new customer (primarily through marketing costs) than it does to retain an existing one. Recognizing the benefit of loyal customers, responsible for around 55%-70% of revenues according to the Center for Retail Management at Northwestern University in the US, retailers developed loyalty programs very early on.
From early beginnings in Germany to get around a government ban on price competition, to the popular S&H Green Stamps in the US and the advent of computerized data mining with American Airlines’ AAdvantage air miles reward program in the 1980s, loyalty programs have increased in their importance over the past few decades.
Retailers began to embrace loyalty programs in the 1990s, primarily using loyalty cards which allowed customers to collect points, rewards, or enjoy discounts whilst their purchasing habits were recorded by the retailers. With up to 95% of food retailers’ revenues coming from loyalty program members, according to the Food Marketing Institute, it is in the best interest of companies to develop a successful loyalty program.
Loyalty programs work in tandem with customer relationship management (CRM), and have become one of the essential tools companies employ in their efforts to understand the customer to better serve them and engender loyalty. The main objective of CRM is the retention of customers and the establishment of loyalty as, with no acquisition costs for existing and loyal customers, costs are reduced and revenues correspondingly increase.
CRM focuses on the customer rather than the product. A higher share of customers increases upselling and cross-selling opportunities for other products, resulting in a higher return on investment than focusing on a single product’s market share as more traditional marketing strategies are prone to do. Loyalty programs are a perfect tool to assist in achieving this as they have evolved to reward customers on an individual basis through targeted marketing, rather than rewarding all customers in the same manner, which fosters increased spending.
Loyalty programs have become sophisticated marketing tools through the application of big data analytics, which analyzes the collected customer information for correlations, patterns and trends in customer purchasing behavior. Using the results of this analysis, retailers are now able to accurately predict the contents of a customer’s shopping basket and can apply targeted marketing appropriately. Big data analytics is also used by retailers to make operational decisions such as where to open a new store, what products to stock and what discounts to offer in-store, all for the good of the customer and the revenues of the retailer.
Big data analytics is facilitating customer loyalty programs, which is, in turn, facilitating highly effective CRM strategies. As such, this triumvirate of CRM, big data analytics and loyalty programs has become one of the retailers’ most important tools in winning the heart, mind and wallet of the customer.
As retailers have become more sophisticated in the methods they employ to part a customer with their money, customers have also become savvy in their shopping. With the proliferation of online retail channels, there are a multitude of tools available to consumers to ensure they’re getting the best possible deal, for example price comparison websites, online coupon sites such as Groupon, and consumer advice websites and forums.
Furthermore, according to the 2013 COLLOQUY Loyalty Census, active loyalty scheme members as a percentage of total members actually declined 2% between 2010 and 2012 in the US. Customers are beginning to understand that loyalty programs gather and utilize customer data to make marketing decisions, and many see this as an invasion of their privacy.
Whether or not this trend in declining active memberships continues will be a minor concern to retailers. Using big data techniques, retailers are now also capable of analyzing card and cash payment transactions of non-members, as well as all forms of social media, and even physical locations through technologies such as geo-fencing. As technology evolves, the means and methods of gathering and analyzing data will evolve in tandem. Due to the importance placed on the value of the loyal customer, retailers will inevitably endeavor to remain one step ahead of the consumer in the battle for their wallets.
For a more in-depth analysis of CRM, loyalty programs and big data analytics in the retail sector, take a look at my case study “From token loyalty to meaningful relationships: How loyalty programs and Big Data Analytics are facilitating CRM in the retail sector“.