1. Looking ahead
The business case for Loyalty
Jan, 2013

2. Executive Summary
Almost all market participants in the cards and payments industry are trying to grab a larger share of the
increasing payments value. One of the most potent weapons that need to be leveraged in future to
achieve this is Loyalty. This is because it would help all the market participants scale up seamlessly. It
would also allow card holders a lot of flexibility in purchasing and making their purchasing decisions, and
thus a reason for adoption. So, a strong case for all parties would make Loyalty a potent weapon in ecommerce.
All market participants would put their best foot forward to exploit the benefits of Loyalty in increasing
their share in the overall payments value. But changing paradigms in technology would change the way
Loyalty programs are delivered by market participants. With the near doubling of mobile phone
adoption from 2006 to 2011 and steep increase in the share of smart phones in this segment, mobile
technology would not only determine how Loyalty programs are delivered but also dictate them. So not
only would different delivery channels be leveraged for Loyalty but the success of Loyalty programs
would be determined by how the market participants are able to exploit emerging technologies in
coming up with more personalized and targeted offers, generating spend analytics of consumers and
building an intelligent system to trigger offers based on their purchasing patterns, encouraging Loyalty
linkage and helping consumers in managing different Loyalty programs coming from various market
participants.
Although Loyalty provides a lot of flexibility to the consumers, it would also bring with it their share of
problems. Adoption of Loyalty would bring a lot of challenges to the market participants and a lot of
problems to the consumers. The challenges would lie in the form greater intrusion into the life of
consumers and misuse of data provided by consumers during registration for Loyalty programs. Market
participants need to be aware of the implications of these challenges to prevent dilution of their brand
equity. Trade-offs between targeting consumers and intruding in their private space must be properly
decided to maintain a proper balance between them and make Loyalty a sustainable business driver for
all stakeholders in the payments industry.
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3. Loyalty-What is it all about?
Loyalty can be defined as something that “conjures up various notions of affection, fidelity or
commitment” (McGoldrick and Andre, 1997, p. 74). From a retail perspective it is the commitment of a
consumer towards a particular scheme, merchant, brand or a combination of them. As a customer’s
relationship with the company lengthens, profits rise. Companies can boost profits by almost 100 per
cent by retaining just 5 per cent more of their customers. (Reichheld and Sasser, 1990, p. 105).Hence a
lot of brands have been trying to cash in on customer loyalty. It has resulted in the increase of
memberships in Loyalty Programs over the passage of time.
% of population that belong to a
Loyalty Program
100%
90%
US Loyalty Memberships by Census Year
2.5
0.45
41%
90%
80%
2
74%
0.4
0.35
35%
0.3
70%
60%
1.5
60%
0.25
Billion $
50%
42%
40%
33%
30%
0.2
1
0.15
16%
0.5
20%
0.1
0.05
10%
0
0%
0
2000
2006
Membership
Source: COLLOQUY for the year 2011
2008
2010
Increase
Source: The 2011 COLLOQUY Loyalty census
Traditional Loyalty programs rewarded consumers for using the payment card. Loyalty was mostly
funded by the issuing banks and other financial institutions and earned rewards took the form of cash
back and points towards redemption for select merchandize in an online mall, air tickets, gift cards and
even donations to charities designated by consumers. Over the years consumers with rewards cards
have spent more than their non-rewards counterparts.
49%
% Spend
80%
Rewards
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51%
20%
Source: Affinity Solutions
Non Rewards
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4. Merchant funded Loyalty emerged whereby the merchant rewarded its repeat consumers through
loyalty points which could be redeemed later. It helped merchants in the following ways:




Customer Acquisition
Customer Retention
Up Selling
Cross Selling
Loyalty-Why would it be needed?
Merchants running Loyalty programs have witnessed an aberration between the attitude of consumers
towards their brand and their behaviour. So, a favourable brand perception always doesn’t lead to
Loyalty. The relation between attitude of consumers and their behaviour can be demonstrated through
Dick and Basu’s Customer Loyalty model shown below:
Repeat Patronage
High
Brand Loyalty
Relative Attitude
High
Low
Low
True Loyalty
Latent Loyalty
Spurious Loyalty
No Loyalty
Program Loyalty
The above framework actually demonstrates that Loyalty is not the consequence of brand perception at
all times. So the investments in generating a brand pull don’t always ensure customer retention. Hence
investments should be directed not only for creating a brand pull but also for designing Loyalty
Programs which ensure commitment of the customers. A properly designed Loyalty Program delivered
through the proper channels and at an appropriate time would convert some of the customers in the No
Loyalty segment to that in the Spurious Loyalty segment. It would also help in the retention of
customers in the True Loyalty segment and prevent their movement to the Latent Loyalty segment. A
recent survey conducted by the Maritz Loyalty Marketing on 6000 customers in the US confirms that
Loyalty is a key component of the Brand Relationship Loyalty. It also confirms that Loyalty Programs
influence purchase behaviours.
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5. 70% Programs are part of my relationship with the company
Programs are part of my relationship with the company
I modify what brands I buy, to maximize the points I receive for purchases
46% I modify what brands I buy, to maximize the points I receive for purchases
Programs are definitely worth the effort of participating
80% Programs are definitely worth the effort of participating
57%
0%
IImodify when and where IIbuy items, to maximize the points IIreceive for purchases
modify when and where buy items, to maximize the points receive for purchases
50%
100%
Source: The 2013 Maritz Loyalty Report
The results reiterate the necessity of good Loyalty Programs for not only the retention of existing
customers but also for the acquisition of new customers. Hence Loyalty would always remain a value
proposition for merchants trying to generate a brand pull.
Loyalty-Why won’t old be gold?
With the advent of new delivery channels in electronic payments, traditional methods of disbursing a
Loyalty Card along with promotion of Loyalty Programs would only work partially. Only merchants who
are able to customize their Loyalty Programs in terms of the offers, communication and time of delivery
to its customer would be able to maximize their return on investment.
73% Smart phone users interested in interacting with their Loyalty programs with their devices
46%
53%
0%
50%
% of members who would like to receive communication from 3 or more channels
The communications I receive from the program are relevant to me
100%
Source: The 2013 Maritz Loyalty Report
With customers modifying their choice of brands based on Loyalty programs and with increasing
number of choices for customers, it is imperative that the timing of communication of the Loyalty
Program would be of utmost importance to get the customer to the store. Mobile Users use their
mobiles for Comparison Shopping to evaluate products and check prices. So if the customer receives a
communication about the Loyalty Program during his period of evaluation, it would definitely be
factored in his decision making process which ultimately affects his purchasing decision. So, merchants
offering Loyalty programs would have to align the communication of their program with the emerging
delivery channels of payments so that they are targeted more appropriately to match the requirements
of the customers and the time of purchase.
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6.  60% of Smartphone users use their phones for comparison shopping
 56% of Smartphone users want to receive location based offers on
their phones when they are near a store
Source: First Data
Learnings from experience-A case for market participants
The new trends emerging in the business models of Loyalty would be an
opportunity for all market participants to cash in. The following trends
would bring the maximum opportunity of different market participants.
Strike when it matters:
The 3 T’s of Loyalty
 Targeted
 Timely
 Tech-savvy
Targeted
Customized to consumers purchasing
history and his need of the hour
There are moments that matter during the purchasing decision of a
buyer. Delivery of communication presented to the buyer at these
Timely
moments would significantly affect the purchasing decision of the buyer
Sent to him at such a time which
would influence his purchasing
and the establishment of a possible relationship with the brand. So, if a
decision
buyer is entering a shopping mall thinking of making some purchase of
garments and has no particular brand in mind, communication of a
Tech-savvy
Loyalty Program at that point of time can significantly affect his decision
Easy to receive & redeem through
the device the consumer normally
of the order in which he planned to visit the stores, something the
uses
consumer would have been indifferent about had he not received the
communication. This would give merchants a better chance of
establishing a relationship with their potential consumers and retaining
their existing customers some of whom were only demonstrating Spurious Loyalty. This timely
communication is only possible when the potential customers are geo-tracked by the devices they are
carrying.
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7. Changing trends in Loyalty
91%
100%
80%
60%
40%
20%
0%
73%
46%
% of members who % of smartphone users % of smartphone users
would like to receive
who are likely to
who would like to
communication from
download the app
interact with their
three or more channels
Loaylty Program
through their device
Source: The 2013 Maritz Loyalty Report
Increase delivery channels:
Delivery of the communication of Loyalty Programs at an
TECHNOLOGY TRENDING
appropriate time requires the increase of delivery channels
through which customers receive the communication. With
 GEO TRACKING
increasing number of smart phone and tablet users and with
 MESSAGING
the increasing number of customers wanting to receive the
 MOBILE COUPONING
communication about the Loyalty Programs through the
devices they carry, merchants need to ensure that they have the adequate infrastructure to send the
communication through multiple channels and also allow their customers the flexibility to redeem it
conveniently when they do avail the offer. Merchants would need to ensure that they have systems
which are capable Mobile couponing, messaging services and compatibility with mobile payments which
would facilitate redemption of the Mobile coupons. The following chart shows the change in the
preferred Banking mode which resonates with the Loyalty findings.
SMS/Text Banking
Mobile Banking
Smartphone
12%
57%
64%
Source: Cognizant Research Center
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8. Introduce triggers:
Instead of operating in silos, merchants need to collaborate to grab a bigger pie of the spend of their
prospective customers. So a cab provider company can collaborate with an airlines company to
maximize their share in the spend of a prospective customer who travels frequently. So whenever the
particular traveller books an air ticket an offer of additional Loyalty points if he avails the cab service can
influence his decision of transport after he gets down from his flight. Similarly casinos, bars and
restaurants can collaborate with leading hotels and introduce triggers when the potential customers
make payment for booking hotels.
Cool uses of Loyalty information
Set preferences for purchase on your smartphone such
that, upon arriving at partner retail stores, your order is
processed and paid for instantly
Determine your location using your smartphone and offer
you deals if you are near a partner
Special benefits to those who “like” or “Follow” a
program on Facebook or Twitter
Personalized offers you want, based on your
preferences, that you can manage and update
Personalized discounts on your favorite items, based on
your purchasing habits
0%
Age 16-34
10%
20%
30%
40%
50%
60%
70%
80%
Total Population
Source: The 2013 Maritz Loyalty Report
Encourage Group Loyalty:
The benefits of Loyalty programs can be maximized when merchants hunt for groups of people in family,
friends, colleagues etc. Merchants need to ensure that the individual Loyalty benefit of each member in
the group is greater than if the member would have been in the Loyalty Program individually. This would
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9. ensure that the True Loyals in the group would always put pressure on the Spurious Loyals and Latent
Loyals to come into their category so that their benefit is maximized. And the True Loyals can put
pressure on the other groups on the rationale that everyone’s benefit would be maximized. Reward also
matters. So transfer of benefits between group members when one actually needs it can also lure
potential customers.
Timing of Reward
Delayed
Repeated & immediate
Direct
Direct
Individual Loyalty
Group Loyalty*
Indirect
Type of Reward
Group Loyalty*
Group Loyalty*
*Possible areas of implementation of Group Loyalty programs
The benefits of Group Loyalty to the customer – An illustration
Let’s consider a Loyalty program which has the following rated slab for Loyalty points. The Loyalty points are
rewarded for total spending for the month. Considering that all other merchants also have a similar Loyalty
Program
Simple Loyalty point allocation slab based on monthly spend with a particular merchant
Spending with the merchant
Points
0-100
2
100-200
3
200-300
4
300-400
5
400-500
6
500-600
7
Family Member
Spend in $
Loyalty
points
earned if shopping
with
different
merchants
Loyalty
Points
earned if shopping
with
the
same
merchant
Net Benefit for the
consumer
A
300
2+3+4=9
13
44%
B
200
2+3=5
9
80%
C
100
2
4
100%
Total Spend if A+B+C is a group: 300+200+100=600
Total Loyalty Points rewarded=2+3+4+5+6+7=27
Loyalty points for A= (300/600)*27=13.5
Loyalty points for B= (200/600)*27=9
Loyalty points for C= (100/600)*27=4.5
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10. Loyalty Management:
With more and more merchants deciding to offer Loyalty Programs, customers would start facing
difficulties in assessing and evaluating the best one for them depending on their nature of spend,
shopping patterns and brand preferences. This is where they would need apps which would analyze
their shopping and spend patterns and sort the Loyalty offers according to them to help them and
choose the Loyalty Program which would make most economic sense to them. The apps can also help
the customers track the different types of Loyalty Programs in terms of their classification according to
merchant categories(like Retail, Airlines etc.), validity, expiration dates, number of points left for
redemption.
Challenges
Privacy issues:
With more and more merchants deciding to use Loyalty as a tool for brand building, customers would
find it cumbersome to deal with overflowing Loyalty offers and mobile coupons. The merchants would
also utilize the registered mobile numbers to send communication about their other discount schemes,
unique products and other promotional offers. Customers might feel that merchants would be intruding
too much into their privacy. The fact that there would be a scrutiny of their shopping patterns might also
give an uneasy feeling to the customers.
Privacy concerns in Loyalty
40%
29%
30%
24%
20%
10%
0%
Program requires personal information
Privacy Concern
Source: The 2013 Maritz Loyalty Report
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11. Information Misuse:
Loyalty Programs in future would require the registration of the mobile number that a customer uses. It
would facilitate timely communication of offers to the customers. Registration would also mean the
tracking and profiling of customers depending on their age, profession, average spend and spending
patterns. But such information could be misused by criminals in many ways. That would deter customers
from registering for Loyalty Programs and the purpose of such programs would be ultimately defeated.
Hence data security should be of utmost importance to all stakeholders in the value chain.
Wierd uses of Loyalty information
Ask personal questions during enrollment to provide
offers based on your demography
Allowing Programs to review your status updates and
send offers
Offer special benefits to those providing personal
information about others
Offers made on status updates on friends profile
0%
Age 16-34
10%
20%
30%
40%
50%
60%
70%
Total Population
Source: The 2013 Maritz Loyalty Report
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12. References
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Can Loyalty schemes really build Loyalty- Lisa O’Malley
Customer Loyalty and Customer Loyalty Programs-Mark D. Uncles, Grahame D. Rowling and
Kathy Hammond
The 4 C’s of Customer Loyalty-Jennifer Rowley
Testing Dick and Basu’s Customer Loyalty Model-Ron Garland & Philip Gendall
Comparisons of Competing Models between Attitudinal Loyalty and Behavioral Loyalty-Cheng,
Shih-I
Exploring Loyal Qualities: assessing survey based Loyalty measures-Sharyn Rundle-Thiele
Effects of Loyalty programs on value perception, program loyalty and brand loyalty-Youjae Yi
and HoseongJeon
Brand Loyalty Measurement-A framework-Sancharan Roy
The 2013 Maritz Loyalty Report
Cognizant Research Center
First Data website
COLLOQUY Loyalty census
Affinity Solutions
About the Author
Kaushik Basu is an Assistant Manager within RS Software. He can be reached at
kaushikb@rssoftware.co.in
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