How can customer loyalty schemes create more revenue for retailers?

By Saul Meyer

I was recently interviewed by the BBC about the role that customer loyalty schemes are playing in helping retailers to generate additional revenue. This was off the back of a report published this time last year by the British Retail Consortium which looked at a whole range of strategies that retailers are utilising to fight tightening profit margins in a period of dramatic change for the sector fueled, in large part, by the dramatic growth of e-commerce. So what is secondary revenue and where do customer loyalty schemes fit in?

As highlighted in the report, secondary revenue is, quite simply, “revenue generated from goods or services which differ from the main product or service lines of a company.” This is something that airlines have been doing for a number of years by cross-selling services such as car hire and hotel bookings. Some airlines, particularly in the US, have been so successful with this approach that these so-called ‘secondary revenues’ are proving more profitable than their core product of selling plane tickets. For example, Wow Airlines is offering flights at below the cost of the tax that they pay the government because they are so confident that they will make back the money by charging ancillary fees for things like seat reservations, baggage and food.

So how are similar developments playing out in the retail sector?
As the retail environment gets tougher and tougher, retail businesses are all looking for additional means to earn revenue and in recent years we’ve seen a real blurring of the lines in terms of what goods as services retailers offer as a number of retailers move away from their core products. For example, it’s well known that the likes of M&S and Tesco have branched out into the insurance world. This is primarily because the margins for supermarkets are smaller within their core areas (e.g. 4% or 5%) compared with things like insurance (which can be closer to 20%). These businesses have also realised that because consumers are increasingly doing everything online, there’s a real benefit to creating a one-stop shop. Today a consumer could go on and buy groceries, link through to Tesco Direct (where they can purchase white labelled appliance goods), get their ISA and purchase some insurance on the same ‘shopping trip’. Of course, there are some clear benefits to the customers, but a big push point for this activity is about revenue generation.

How does customer loyalty fit into this?
Customer loyalty schemes go hand in hand with this kind of activity for retailers because not only do they help protect any existing revenue streams, they can also help to generate some interesting cross-selling opportunities.

Generally speaking, these schemes are about customer retention. For example, how can retailers – whose products are often difficult to differentiate with those that their competitors sell – reduce their customer attrition rate? Customer loyalty schemes have proven to be a very effective way of doing this. By offering certain perks, retailers are building in additional points of interaction with their customers and developing lasting relationships. Take Harvey Nichols as an example. Their customer loyalty scheme means that the more you spend, the more benefits you get access to. This includes perks such as free alterations, access to pre-sales, etc. This is clever because although they’re not really giving anything away that is of specific value, they are building in loyalty because their tiered approach encourages people to compete and try to push to the next level. Again this is something that airlines have historically done very well with things like air miles. They really pioneered this idea of tiering: the more you spend the more you get.

Effective use of loyalty schemes results in a situation whereby customers become loyal to the loyalty scheme itself and by extension the shop that manages it. Take Tesco as an example: Clubcard points can be converted to British Airways Avios, Virgin miles, Goldsmiths vouchers and suchlike. This has resulted in willingness from customers to overlook slight price differentials on their groceries because they enjoy the fact, even on a subconscious level, that they can earn air miles from their grocery shopping.

By contrast, Sainsbury’s (arguably less effective) revenue-based Nectar scheme has never taken off in the same way. People just aren’t all that enamoured with what the scheme has to offer. As a result, you’re less likely to find customers going several miles out of their way to shop or fill up with petrol at Sainsbury’s.

And this is where it gets really interesting. The knock-on benefit is that people opt to take out the aforementioned alternate goods/services from Tesco because they’ll earn a substantial lump of Clubcard points on that transaction – often ignoring the fact that cheaper policies may be available elsewhere. In effect, retailers can utilise their customer loyalty schemes as a way of cross-selling those ancillary goods and services.

This opens up a whole range of opportunities for both retailers and their customers and highlights the innovative approach that such businesses are taking to deal with an increasingly challenging commercial environment.

Xexec works with organisations to help develop exciting and rewarding customer loyalty programmes with the goal of increasing customer retention and revenue.