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Harald van Heerde explains the constraints of loyalty programs

Professor Harald van Heerde is a marketing scholar of international renown who has recently joined UNSW Business School. A specialist in econometric models and analytics to improve marketing decision-making, he spoke with Julian Lorkin for BusinessThink.

BusinessThink: Big companies are spending a lot of money on traditional advertising and lot of those decisions seem to be based on gut feel that it’s working, not actual data. And yet the real data seems to show the traditional forms of advertising are losing their effectiveness. They’re just not getting the cut-through that they used to have.

Harald van Heerde: TV advertising has lost a lot of its effectiveness. What’s happening nowadays is that fewer people are watching television – they’re watching it less – and whenever they watch television, they skip commercials or avoid them altogether. As a result, TV ads don’t really work anymore. And that’s also shown in research, that during the past 40 years advertising has lost a lot of its effectiveness.

The only type that really seems to work well is search engine advertising. So, for example, if I Google for a new barbecue and I get a set of results. A lot of people click on the top listings and they may end up buying that brand. And that is really working well nowadays.

BusinessThink: The big supermarkets have put in millions of dollars into their own loyalty schemes, but they don’t seem to be working.

van Heerde: In grocery retailing they are not as effective as you might believe. The thing is that those customers that are already loyal to a supermarket, they end up taking their loyalty card. So, for example, I might live close to Coles supermarkets, spend a lot of my money there, and I then sign up for Flybuys. So, it’s not that Flybuys make me more loyal; it’s the other way around. Because I’m loyal, I’m taking Flybuys.

And I did some research on that as well in grocery retailing and the effects of those loyalty programs is really tiny on people’s loyalty once you account for the fact that a lot of people sign up for those programs because they’re already loyal.

"It’s not that Flybuys make me more loyal; it’s the other way around. Because I’m loyal, I’m taking Flybuys."

HARALD van HEERDE

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However, most grocery retailers really don’t do it that well. Also, because the amount of data that comes with tracking millions of customers, all of their purchases, is really huge.

BusinessThink: And how about those dedicated customers that really do want those points? Can you game the system?

van Heerde: There are absolutely those kind of customers. So, basically, what they do is buy from special to special. For example, they may have their favourite coffee brands, and it’s on special every three or four weeks, so they just wait until it’s on special and buy then. And actually for the firm that’s not that profitable because those customers never pay the full price; they only pay the discounted price.

Of course, you have to be quite a dedicated shopper to take so much effort and time to really get all the points you can. Many people don’t care too much about it and actually they carry a lot of loyalty programs from many different companies, and anyway it doesn’t make them any more loyal.

'You have to be quite a dedicated shopper to take so much effort and time to really get all the points you can.'

HARALD van HEERDE

Some loyalty schemes are very effective. In particular airline frequent flyer schemes have proved effective for airlines that can mine that data and they’ve turned it into a multi-billion dollar asset.

 Those airline loyalty schemes are really effective. A lot of customers are keen on getting points for those programs because those programs give them real benefits with the tiers you might achieve. So you might go up in tier and then you may be able to access the lounge and get all the benefits, and a lot of people find those benefits attractive.

And [keeping customers loyal] is another feature of those programs in that customers can lose their status.