Do all brands benefit from loyalty programmes? Could they affect a brand's image and eat into its profits rather than help it?
Traditional marketing paradigms have always stressed the importance of brand loyalty; and marketers have always believed that brand loyalty would lead them to customer relationships, which would enable them to make the best use of customer lifetime value. While academic literature has several articles on some of these latest concepts, practical considerations suggest certain cautious ways of applying these concepts.
Marketers may have to probe deeper into the concepts of loyalty to understand consumers' buying patterns before they embark on loyalty schemes. Traditional approaches to brand loyalty have stressed the importance of the fact that it is less expensive to maintain existing consumers than to get new ones. Consumers who are loyal to a brand are likely to spend more on it and also likely to spread the positive word of mouth to other consumers, thus becoming advocates of the brand.
While these may be true in today's context, there may have to be certain changes in the environment to be taken into consideration before a policy on loyalty is formulated. If the soap category is considered, there may be a propensity for consumers to try out many brands. A consumer may frequently purchase a herbal brand but may keep alternating with other moisturiser brands. The detergent category too may have such patterns. Even with a cut-throat price war on, not all consumers may prefer top-end brands every time they make a purchase in the category. A significant number of consumers may alternate between top-end offerings and middle-end offerings on several occasions.
This is very probable in markets where the income flow is unpredictable or not uniform as with urban markets. Weekly paid and even hourly paid consumers form a substantial portion of the target segments for such brands in semi-urban and rural markets. Even in urban markets, consumers shopping in departmental stores may alternate between national brands and store brands, especially when promotional schemes are announced by the departmental stores.
Challenges of brand loyalty
Some of the loyalty-based challenges faced by today's marketers are:
#How should loyalty be created and sustained ?
#Are there different approaches for fast moving consumer goods and durable categories?
#How should retail networks be used to build loyalty at the retail outlet level?
#How should loyalty programmes be floated so that they are profitable to companies too unlike several programmes which do not get much value for the brand?
The global example of frequent flier programmes is one in which several billion miles are logged by frequent fliers and several companies are apprehensive about profits from loyalty programmes. It is a good case of how the bandwagon effect has created problems for companies who have had to jump into it because of competitive demands. To make things complex a sizable cross-section of consumers are members of more than one frequent flier programme as they patronise several airlines across their routes.
While there are no easy answers to the challenges on brand loyalty, it is at least worthwhile to be aware that loyalty programmes do not have `fairy tale' endings. In consumable categories, companies attempt to bring out brand variants with limited success. Toothpaste brand Close-Up attempted several variants but has been able to only sustain a few. Introducing variants at the same price points serve to hold consumers who may need variety with regard to their consumption. This is different from product-line strategies which attempt to upgrade the consumers to a higher price point by offering variants (though there may be some similarities in both these approaches).
Britannia has a number of variants on some of its offerings at the same price points. This strategy is useful in a category like biscuits which is amenable to variety-seeking because of the hedonistic experience associated with the consumption of biscuits. If it is detergents, perhaps consumers would look for functional benefits and the company too may have to think of differentiated price points to convey the value (like a scented version of a detergent brand).
Both the approaches in both the categories aim at loyalty but the segments of consumers and the buying motives are different. The company, depending on the scale of operation, has to not only take into account the profitability aspects of the brand but also those associated with its range of offerings.
A1 brand of tea may have had a number of loyal buyers, but the company, with its string of offerings would have to also take into account the profitability associated with its overall offerings in a competitive context of regional brands and entry of multinationals in the category. Fair & Lovely has several variants and even a niche soap like Pears has an oil control variant. Managing the product line to sustain loyalty and profitability is a delicate strategy.
In the case of durable categories, repeat buys of the brand could depend on how well service has been provided. Beyond this, consumers may also require feature-rich offerings when they update. For example, a consumer who has bought a brand of washing machine ten years ago would like to replace the machine with updated features rather than buy the same model. The brand should be in a position to offer such features to ensure that the consumer is not lost to competition. It may be interesting to research if consumers desire updated features because they require it or because competitive brands offer them. This would enable a brand to define what value is all about for a loyal consumer.
Having an ongoing relationship with the buyer is another strategy to keep the brand on top of consumers' minds. The Passport scheme of Hero Honda related to service after the purchase is a good example where the consumer may perceive a value after the purchase is made as there are privileges which could be put to use while using the product. Retail outlets augment loyalty in a variety of ways. Shopping experience is one. Offering value on the merchandise with sales promotion bundling is another. Loyalty programme is also one of the ways of developing retail loyalty. Shoppers' Stop has one which is run in synchronisation with consumer preferences strengthened by a good supply chain system which would enable the company to save on procurement. A good information technology system is a prerequisite for any retail chain which has a good database of consumer purchase patterns.
Some critical factors for loyalty-based strategies
Past purchase patterns would provide several insights into the behaviour of consumers. In a number of cases, there may be more than one pattern of purchase and hence different programmes required for different consumer groups. A group of consumers may be interested in the discounts obtained through bundling of products in a retail chain. Another group may be more interested in the variety of brands being offered by the outlet, especially in the case of cosmetics, personal care, apparel and commodities.
RFM: How recently a consumer has bought from the retail outlet, how frequently he/she buys from the store, and monetary value, is a good pointer to arrive at various groups of consumers for a reward programme. But the limitation of this approach is that it does not take into consideration the profits per consumer and for a given period does not take into consideration the probability of purchase. For example, an infrequent purchaser could shop just after the time period considered and the analysis is likely to miss the probability (a consumer buying once in five months as against one buying once in four months for a time period of one year).
There is a concept known as `double jeopardy effect' which essentially mentions that smaller brands (in terms of market share) have few buyers and even fewer repeat buyers. This means that smaller brands are likely to have a loyalty propensity lesser than large brands. In several categories in the organised sector a category may be dominated by large brands and checking for the presence of this effect may open up new avenues to probe loyalty and the motivation for the buyers. For example, in the category of fairness creams dominated by large brands, a small brand may find that consumers are reluctant to try out new brands because of perceived risk associated with product formulation or because they are used to a formulation which they do not want to change. Communication campaigns or even personalised communication (as appropriate) may be useful based on the insight.
The bandwagon effect discussed earlier makes an interesting point with regard to loyalty-based strategies. A profitability analysis as well as the analysis of the brand's strength is required before a brand decides to follow competition for initiating loyalty programmes. A brand offering a strong product differentiation (which has to be backed up by the organisation) may not need a mundane loyalty programme simply because the competition has one; in fact, it has the competitive advantage of developing a segment of consumers who value the product rather than the undifferentiated loyalty programme which is offered by competitive brands.
Firms should examine the product category before firming up loyalty programmes. In a category like atta where only 3 per cent of the market accounts for branded offerings, there is immense potential to get new consumers besides retaining existing consumers who may have tried a branded offering. Hence the pros and cons of investing in a loyalty programme should be weighed.
A good loyalty programme has to offer profitability and add equity to the brand rather than direct it towards a price war which would dilute its equity.
(Mr. Ramesh Kumar is Professor of Marketing, Indian Institute of Management, Bangalore.)