Last month a report from Verdict Consulting revealed that British consumers are more disloyal than ever, with 10.8m shoppers prepared to switch between stores on the basis of price. According to the research, while the credit crunch has made consumers more inclined to shop around for a bargain, the fundamental issues facing the market - increased competition and the proliferation of internet shopping - remain key.
Martin Hayward, director of consumer strategy and futures at loyalty marketing agency dunnhumby, claims that loyalty marketing is essential in a downturn. 'Targeting individual consumers with a tailored message is often more effective than blanket price messages,' he says. In the UK there are 13m Tesco Clubcard holders and, according to dunnhumby, the make-up of this group reflects society as a whole. The success of the Clubcard scheme is held up by many in the industry as a blueprint for the potential benefits of creating a loyalty programme. Key to its success is its place at the centre of Tesco's marketing strategy and the fact that it enables the retailer to capitalise on a wealth of data about each individual's shopping habits.
While data capture is both commercially lucrative and a vital tool for marketers, some observers believe there are marketing departments that put too great a focus on data. Using loyalty schemes simply to find out more about consumers and bombarding them with hard-sell offers is short-sighted. Gavin Dein, chief executive and founder of loyalty marketing agency Reward, argues that the primary reason for companies to run loyalty schemes is to reward their customers. 'However, the majority of companies do it to gain valuable data on their consumers,' he adds.
Reward has developed an innovative cardless scheme allowing consumers to register their data and then collect loyalty points across a range of retailers every time they use their credit card. 'It is very simple - you could be in Sainsbury's or an Italian restaurant and you can use the scheme,' says Dein.
Jonathan Shilling, head of strategic consulting at rewards agency Grass Roots, says the fact that many consumers are reducing spend should not detract from the important role played by loyalty schemes. 'While we are seeing more pile them high and sell them cheap strategies from value brands, those brands seeking a long-term relationship with consumers are taking a different approach.'
Shilling points to the increasing number of brands using loyalty schemes to enable them to progress beyond simply the value of the product or the service they provide. 'Many brands are now seeking to position themselves as a broader lifestyle provider and to do this they need to provide rewards and value to customers beyond their own proposition,' he says.
To some extent the worsening economic situation is bolstering the importance of loyalty schemes - particularly in the fickle pay-as-you-go markets. With consumers becoming unwilling to commit to 12- or 18-month contracts, the pay-as-you-go model has become more popular for consumers when choosing, for instance, a mobile phone operator or gym membership.
In response, Virgin Mobile has created a loyalty scheme designed to create brand warmth among consumers at the earliest possible opportunity. Whereas loyalty schemes have traditionally rewarded consumers for long-standing or repeat purchases, the Virgin Mobile scheme offers users discounts immediately. While the offer of money off at hairdressers Toni & Guy may not necessarily cost Virgin Mobile a great deal, the reward for consumers is instant.
According to dunnhumby's Hayward, those brands taking a long-term view will benefit by investing in loyalty schemes, though they will be few and far between. 'Many brands won't be investing in long-term marketing investment in a downturn and will simply focus on short-term promotional activity.' This view is echoed by Louise Isaacs, head of the Loyalty Practice, a division of relationship marketing agency HS&P. 'Discounting is a slippery slope - it is not a long-term fix for falling sales, and it can devalue the brand.'
A great deal of marketing carried out in the name of loyalty is, in reality, short-term promotional activity and, while there is a rush of brands embracing prize promotions and price cuts, whether these campaigns represent a sustainable, long-term marketing strategy is not clear-cut.
Case study: Tottenham Hotspur: One Hotspur
The London football club's scheme, which was created by Reward, was launched in April 2007 as a way to manage oversubscription for match and season tickets. Fans simply register any or all of their credit or debit card numbers on the One Hotspur website and can then redeem points for cash every time they spend on their card in participating retailers. The scheme has proved so successful that it is to be extended.
The retailers
Over one six-month period, Halfords experienced a 60% uplift in sales from Spurs fans when compared with average customers. Over the past 12 months, average member spending in Reward's retailer network has increased by 55%.
The club
Tottenham Hotspur has benefited from increased revenues both through an increase in spend within the club as fans redeem their points and through the direct commissions the club has earned from retailers.
Looking ahead
Emma Taylor, head of marketing at Tottenham Hotspur, says that as a result of fans' enthusiasm, the loyalty scheme is to be extended. A 'Club Cash' card is being developed, which will enable members to redeem their points directly with the club and earn cash back through club-related activities.
Case study: Mr & Mrs Smith - The Vault
James Lohan, managing director of boutique hotel guide brand Mr & Mrs Smith, tells the story behind the launch of the firm's loyalty scheme, The Vault, which debuted this summer.
How does it work?
When a Smith member books a hotel online - at www.mrandmrssmith.com or through their travel agent - 5% of the total room cost is deposited into their account in 'Smith Pounds'.
'Loyalty schemes can be depressing, but we are pretty generous in the returns we are offering our customers. Most companies operate on a margin of 1%-2% but we are giving 5%,' says Lohan.
How long did it take to set up?
The scheme took less than six months to set up from start to finish. The concept was devised in-house and the website designed by Elvis. The scheme was kept simple using pounds as a reward denomination, not points.
Choosing the rewards offered was 'fairly simple', with Smith opting to link up with brands that had a natural affinity with travel and the company's ethos, and building on relationships with key brands it has worked with in the past. The company also added glamour and boosted the launch's PR-potential by offering a diamond as the biggest reward.
Why was it set up?
The primary rationale was focused on the bottom line - namely to encourage consumers to keep booking through Mr & Mrs Smith. However, creating a 'guestbook' that allows users to share hotel reviews plus travel hints and tips has the added benefit of helping to build a community.
Advice
According to Lohan, the key is to ensure a loyalty programme offers rewards that are relevant to the brand's target audience. He also advises the highest level of generosity possible to engage consumers by offering products they will love. 'We are not offering them a set of crap crystal glasses,' Lohan adds.