1. Market and Customer Management - Customer Loyalty 1 ENVISIONING AN EFFECTIVE LOYALTY PROGRAMME Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

2. 2 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Content Page Overview3 Objectives of a Good Loyalty Programme4 Benchmarks setting Loyalty Programme Objectives5 Customer Buying Behaviour6 Targeting Customers9 Positioning the Loyalty Programme15 Designing a Programme19 Defining the Right Rewards and Benefits29 Communication37 Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

3. 3 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland By envisioning a new loyalty programme, best practice companies consider the following levers and aspects: Setting the Programme’s Objectives - what does the loyalty programme want to achieve? Customer Buying Behaviour - how does customers’ buying behaviour impact the programme and vice-versa? Targeting Customers - who are the programme’s target customers and how do you identify and influence them? Positioning the Programme - how do you position the programme in the mind of target customers? Loyalty Programme Structure - how do you design the programme structure and what offers should you make to influence target customers’ buying behaviour? Costs and Benefit Structure - which rewards and benefits should the programme offer to target customers and what does it cost? Communicating with Members - how will the programme develop an ongoing dialogue with target customers? Seven Levers of Envisioning a Good Loyalty Programme Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives Source: Price Waterhouse, 1998

4. 4 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Objectives of a Good Loyalty Programme Objectives Turnover growth (rising share of wallet) with cross selling offers and full service package Growth in customer retention with offering a attractive programme and rising the barriers of exit Cut costs with target marketing campaigns based on the customer behaviour knowledge and the customer portfolio Creating a customer master view for all products and services and getting additional customer buying behaviour. In highly competitive markets, the decision to launch a loyalty programme is often driven by threats of competitive parity. The programme therefore often has additional underlying objectives such as … to pre-empt a competitor from introducing a similar loyalty scheme … to differentiate a brand to avoid parity … to pre-empt the entry of a new brand or other goals. In any case, the importance of management board commitment has to be underlined. Good loyalty programmes normally have one or more objectives. These are official objectives, which the management board have to commit for. Source: Price Waterhouse 1998 Loyalty programmes normally have several objectives Some loyalty objectives are derived from the competitive situation Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

5. 5 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Benchmarks setting Loyalty Programme Objectives PricewaterhouseCoopers has knowledge about several customer loyalty programmes. The following list gives a good overview of benchmarks for programme objectives: Airline in Europe:  72% of the loyalty members spend club products and services instead of services of the competitors. The share of wallet is rising. Keebler (US; Food):  After launching a loyalty programme for a kids club, the turnover in this segment rose 100% and the market share rose from 21 to 29%. Burger Kids Club (US; Food):  The turnover tripled after launching a loyalty programme in the youth segment. Marks and Spencer (Retail Shops):  The turnover of loyalty club members is three times higher than for non-club members. Nieman Marcus direct:  After launching the In Circle Programme, the average turnover of a club member rose 25%. Amexco:  After launching a loyalty programme, the average turnover of a club member rose 55%. European Bank:  Loyalty programme members use the basic bank products and services between 100-400% more than non-club members. European Telco:  The planned cross selling effect after launching a loyalty programme is between 5-15% per year. Higher average customer turnover due to cross-selling/ up-selling Members in loyalty programmes defect less often than non- members Swiss Bank:  The normal defection rate is 5% in the private market. The defection rate of members in the loyalty programme is 2%. The reduction therefore is 60%. European Telco:  The expected rate of not churning/ defecting due to a customer retention programme is 50% (mass market) Amexco:  The defection rate of non-members is 15%. The defection rate of Amexco Club members is 2%. The improvement due to the loyalty programme is 87%. MCI (US; Telco; Gannett News April 98):  MCI could rise its market share in international telephony with high spending customers from 19 to 40% by combining its loyalty programme with the ones of Airlines. Due to more loyal customers, win-back costs don’t arise Swiss Bank:  The set-up of a new bank account costs about 400 Swiss Francs. France Telecom (Source: Datamonitor):  The costs for customer win-back in mobile communications business is between 1’500 and 2’200 French Francs. US Telco (Quelle: Telecom Magazine):  The costs for customer win back in mobile communications business is between 300 and 600 US Dollars. The costs for customer retention is between 50 and 100 Dollar.  60% of the customer defection is within the first three months. By focusing to the customers, the churn in the US mobile communications market could be reduced from 50 to 30%. Customer Retention Costs (Gartner):  To win back a new customer is 4-10 times more expensive, than to hold an existing customer. MCI (US Telecommunication):  MCI gives 2‘000 points for new customers as a win back or acquisition present.  If a customer uses these points for miles in frequent flyer programmes, the value is about 400 US $. Programme objectives: Benchmarks:

6. 6 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Customer Buying Behaviour (1/3) Customer buying behaviour Customers know their value for the company Super Quinn Best practice companies have long realised that developing a detailed understanding of what drives target customers’ buying behaviour is the one of the key drivers in a success- ful loyalty programme. Only when the needs, wants and opinions of the customer are fully understood the programme’s value proposition can become reality. Increasingly, customers are starting to recognise that their patronage is responsible for company profits and are learning that they can demand that products and services are bundled in a way that suits the customer rather than the company. Super Quinn’s programme uses a wide variety of ways to understand customers’ needs and then acts upon them to improve the supermarket chain’s value proposition for target customers. Super Quinn’s customers are fiercely loyal to the supermarket chain. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

7. 7 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Customer Buying Behaviour (2/3) Changing buying behaviour A customer can be worth up to $332,000 Research has shown most retail customers show ‘poly- gamous loyalty’ - where they share their spend with a number of companies’ brands. A typical frequent traveller has between 3 and 4 FFP cards in her wallet. Lufthansa research suggests that its Miles & More frequent flyer programme (FFP) is only the 10th most important flight selection decision factor for business travellers. The failure of its FFP to significantly alter flying behaviour is supported by the discovery that non-members have a higher satisfaction rating with the airline than Miles & More members! In complete contrast, British Airways Executive Club in partnership with Air Miles has identified the behaviours that lead to loyalty to the airline and has used this information to micro-segment its customer base. It then uses a combination of personal service, highly targeted flight promotions and reward selection to develop the ‘multi-collector-redeemer’ behaviour characteristic of its most loyal customers. The lifetime value of a customer can be considerable. Carl Sewell the owner of a chain of auto retailers in the USA calculates that the lifetime value of a lifelong customer can be as high as $332,000. Sewell competes on the superior quality of the service that he provides, the best way to develop loyalty in customers in the long run. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

8. 8 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Customer Buying Behaviour (3/3) Several assumptions are essential and must be reviewed critical, when launching a loyalty programme: …a lot of customers are loyal to brands. …it is possible to influence the loyalty with marketing activities. The results of several research studies about trends and customer behaviour have an impact for loyalty programmes too: … hybrid customer behaviour: The same customer buys Rolex Watches and eats cheap in Mc Donalds. … customer types like YUPPIES (young urban professional people) or DINKS (double income no kids) have different buying patterns …the customer wants to be in an emotional world during the buying period. Especially in warehouses, there are several engagements to create these environments (e.g. adventure corners; movies; original bakery in the food department). Turnover Costs Amount of products and services in use Danger of customer loss Price Sensitivity Length of customer relationship Profitability Turnover Length of customer relationship Source: Price Waterhouse, 1998 Several assumptions define customers behaviour normally Some assumptions about customer behaviour and buying patterns can be shown graphically: Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

9. 9 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Targeting Customers (1/6) Best practice companies develop an understanding of the ‘value exchange’ that links target customers to them and how they must position their products, service and marketing communications to …increase the number of target customers purchasing their products …sell more products to existing target customers …substitute high-margin products for low-margin products …keep target customers longer …all at lower cost per customer Best practice companies target customers based upon a detailed understanding of …customer segment needs and the economics of fulfilling them …its own capabilities to meet these needs …the abilities of competitors to meet customers’ needs, particularly when competitors have a cost advantage In competitive industries, the loyalty programme must be developed in a way that it provides the company with a sustainable competitive advantage Programme targets guide the value delivered by the products and services Target customers Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

10. 10 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Targeting Customers (2/6) Best practice companies target their loyalty programmes for several customer segments. Basically, there are two ways for a sequential targeting (see left chart below): Bottom up approach: Starting with a broad customer penetration. Targeting takes place in a second step and is based on more information about each individual. Top down approach: A loyalty programme tries to target only on the most profitable customer segment from the beginning. This approach is possible when already owning the customer profile and profitability. The example below shows a typical customer structure in a Telco. A possible target group might be the group with more than 250.- turnover (5% of the customers making 24% of the total turnover). Source: Price Waterhouse, 1998 500.- + 300 - 500.- 250 - 300.- 200 - 250.- 150 - 200.- 100 - 150.- 0 - 100.- Percentage Turnover Percentage of customers Legend: Turnover Percentage Percentage per monthCustomersTurnover 0 - 100.-72%40% 100 - 150.-14%18% 150 - 200.- 6%11% 200 - 250.- 3%7% 250 - 300.- 2%5% 300 - 500.- 2%8% 500.- + 1%11% Legend: Turnover Percentage Percentage per monthCustomersTurnover 0 - 100.-72%40% 100 - 150.-14%18% 150 - 200.- 6%11% 200 - 250.- 3%7% 250 - 300.- 2%5% 300 - 500.- 2%8% 500.- + 1%11% Band of turnover in US $ Example: 14% of the customers between 100 and 150 US$ generate 18% of the overall turnover. Figures have changed in this example 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Basically there are two targeting approaches Statistics and data mining often help targeting the right customers Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

11. 11 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Targeting Customers (3/6) To keep track of progress towards their goals, companies must develop a suite of performance measures based around … growth in customer lifetime value... growth in customer share of wallet... penetration of the loyalty programme in the target segment An example of a balanced scorecard for a loyalty programme is shown below: Performance measurement is a key success factor Overall measures 1.Net profit 2.Net profit per club member 3.Customer satisfaction Overall measures 1.Net profit 2.Net profit per club member 3.Customer satisfaction Customer structure 4.Amount of club members 5.Change in the amount of club members 6.Average turnover per club member 7.Change of the points collected but not redeemed 8.Club penetration 9.Future cross-selling potential in each target segment Customer structure 4.Amount of club members 5.Change in the amount of club members 6.Average turnover per club member 7.Change of the points collected but not redeemed 8.Club penetration 9.Future cross-selling potential in each target segment Loyalty programme profit 10.Decrease of churn/ defection due to the club 11.Overall gross profit 12.Securing the turnover of not defected customers 13.Cross selling effects 14.Cost reduction due to less win-back costs Loyalty programme profit 10.Decrease of churn/ defection due to the club 11.Overall gross profit 12.Securing the turnover of not defected customers 13.Cross selling effects 14.Cost reduction due to less win-back costs Cost oriented measures 15.Total costs 16.Operating costs 17.Communication costs 18.Costs for point redemption 19.Costs for rebates Cost oriented measures 15.Total costs 16.Operating costs 17.Communication costs 18.Costs for point redemption 19.Costs for rebates Process oriented measures 20.Amount of club members per FTE 21.Time from first contact to welcome package received 22.Average length of a customer call 23.Response; cost per mail; costs per order for the different actions 24.Amount of questions per telephone, internet and/ or e-mail 25.Amount of faults 26.Amount of address changes Process oriented measures 20.Amount of club members per FTE 21.Time from first contact to welcome package received 22.Average length of a customer call 23.Response; cost per mail; costs per order for the different actions 24.Amount of questions per telephone, internet and/ or e-mail 25.Amount of faults 26.Amount of address changes Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

12. 12 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Best Practice in Targeting Customers (4/6) British Airways uses a version of the strategic staircase to map the behaviours of customers through their relationship cycle. The objectives for each step and target group are listed below as well. Position the loyalty programme in the mind of target customers reliable partner fair and trustworthy Make the promise ‘Ready for Service’ Mutual Interest Relationship Commitment/Trust Based Relationship Value-based Relationship Use information about customer segments to exceed their overall expectations targeted promotions responsive service desirable, achievable rewards Exceed the promise Leverage information to personalise the service that the target customer receives personal promotions superior service in comparison to new competitors rewards and recognition Leverage the relationship Understand what target customers need and give it to them develop predictive behaviour models driven by data mining personal promotions proactive service to pre-empt problems share value created through personalised rewards Build a value- based relationship Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

13. 13 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Best Practice in Targeting Customers (5/6) Winning new customers at AT&T Winning back defecting customers at AT&T AT&T redesigned how markets to segments based upon segment economics it identifies underserved segments it buys in market data and develops predictive models to identify target segments and the value exchanges that would produce the optimum results it identifies the most likely prospects from competitors and then identifies potential reasons for not signing-on it then develops and tests hundreds of market offers to win target customers from competitors Its results have been impressive: in 1995 it attracted 700% more customers than in 1990, with 50% of marketing spend being directly trackable to closure compared to 5% in 1990 Customers defecting from AT&T are contacted up to seven times to win them back, each contact offering a better incentive to return. The incremental offers are based upon an understanding of the customer’s value to AT&T, what they can afford to give away to win them back and what has worked for other customers with similar profiles Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

14. 14 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Best Practice in Targeting Customers (6/6) Hilton hotels has developed a number of loyalty pro- grammes targeted at different customer segments Hilton HHonors programme for frequent stayers offers ‘double dipping’ where members can collect points from airline partners as well as HHonors points Hilton Business Privilege programme for very frequent stayers costs GBP 30 to join but offers an extended range of services to members It has also developed a programme for hotel agents and secretaries to reward them for placing congresses with Hilton hotels rather than with competitors Target group simulator as a supporting tool A target group simulator was developed with this metholodogy to specify the behaviour and benefits of certain (micro) segments. Based on the current customer behaviour, the company can estimate the impact and benefits of certain offers in a loyalty programme for each target group. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

15. 15 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Positioning the Loyalty Programme (1/4) Positioning the programme Positioning the loyalty programme in the mindset of target customers is one of the most difficult problems to overcome. Best practice companies use a combination of advertising and promotions to position the programme. Ford Motor Company’s subsidiary Ford Bank offers credit card holders the chance to save points towards a discount off a new vehicle, with up to GBP 1,800 off the price of a new Fiesta. The loyalty programme (to the credit card) builds long-term loyalty to the credit card especially amongst customers who wouldn’t normally buy a Ford. Ford calculates that it breaks even if one of every six new cars sold is bought by someone who otherwise wouldn’t have bought a Ford. In contrast, Hoovers free flights give-away persuaded tens of thousands of customers to buy a Hoover just to get a free flight to the USA. Hoover couldn’t honour its promotion, was quickly taken to court by disgruntled customers and faced a barrage of hostile press. The company was forced to close its factory in the UK in 1997. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

16. 16 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Positioning the Loyalty Programme (2/4) Example of a programme positioning in the service industry The following positioning example shows the ideas, which were done for the positioning of a loyalty programme in the service industry. In this example the two dimensions “profitability” and “risk of customer defection” were most important. Each field in the matrix concluded in different positioning programmes. Customer Profitability Today Risk of Customer Defection NoYes Highly profitable +/- profitable Not profitable Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

17. 17 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Positioning the Loyalty Programme (3/4) The number of programmes determine the positioning The loyalty programme can be positioned due to a customised offering for specific customer segments. A basic question therefore is, how many loyalty programmes a company wants to start for their segments. As an example, FFP programmes have specified loyalty programmes for their premium customers. These customers have free access to the airport lounges and several other advantages. The example below (right side) shows another example of the structuring of loyalty programmes for different target groups. Programme for Premium Customers Launch basic programme Programme young & trendy Programme for Small Companies Additional programmes for other target groups over a period of time. Example of different loyalty programmes Pros and cons for more than one loyalty programme Advantages of more than one programme (vice versa) Customized and effective marketing and targeting. Costs reductions due to segment specific offerings. Disadvantages of more than one programme (vice versa) Risk, if there is not enough information about the customer segments. Intransparency for the customer, when he gets confronted with several offers/ programmes. Risk of an internal cannibalisation of the programmes Risk, that the communications is to broad and costs too much money. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

18. 18 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Positioning the Loyalty Programme (4/4) There are several possibilities for positioning a programme European Telco The programme positioning can be done with a variety of features. Some of the positioning possibilities are listed below: cost advantages quality advantages innovation time / time to market exclusivity others An European Telco differentiates its loyalty programme based on the customer turnover and positions their offerings in the different target groups as follows (see below): 010%20%30%40%50%60%70%80%90%100% 500.- + 300 - 500.- 250 - 300.- 200 - 250.- 150 - 200.- 100 - 150.- 0 - 100.- Percentage Turnover Percentage Customers 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Four different segments Premium Customers: Keep them loyal for every price Profitable Customer: Keep them loyal and intensify cross selling Average Spending: Bundlings and Cross Selling Not interesting customers: Without cross selling, no profits with the loyalty programme Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

19. 19 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Designing a Programme (1/10) Designing the programme Rigorous costing Setting-up a loyalty programme from scratch is fraught with difficulties and can become very expensive. Best practice companies start simple, develop the programme for core products and their most profitable customers and extend it then to other parts of the business. The programme should be rigorously costed and compared against alternative uses of marketing funds (or even non-marketing funds). Costing should include both the visible costs associated with programme launch, database creation and maintenance, purchasing of customer information, communications with customers, and the value of rewards claimed, and invisible costs associated with negotiations with partners, partner points reconciliation and internal co-ordination costs. The airline industry estimates that a typical FFP cost 3-6% of annual revenue, compared to typical advertising costs of 3%. These costs can significantly increase if new competitors enter the market with a comparable or superior loyalty programme. In the Telco industry, the cost for a state of the art loyalty programme is between 5-10% of the total turnover. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

20. 20 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Designing a Programme (2/10) The design of a good loyalty programme must fit several requirements The programs objective are important when designing a new offering. Several requirements from different per- spectives must be considered when designing the offering (see below): The programme offering must fit each requirement. Eg. the attractiveness for profitable customers can be rised by giving additional points from a specific turnover of the customer (eg. from 1‘000.- US $ turnover, the member gets additional 300 points.) Requirements to the Offering Requirements from a customer point of view:  Benefits  Simplicity; Understandable  Transparency  others Requirements from a company‘s perspective point of view:  Attracting a broad amount of customers  Pushing additional sales, profitability and loyalty  Pushing cross selling/ up selling  Rising the image of the company  others Requirements from a market point of view:  Focusing on large market fields  Considering the competitor intensive market fields  Focusing on future market fields  No legal conflicts  others Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

21. 21 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Designing a Programme (3/10) Questions to be answered when designing a new loyalty programme Each programme has its structure based on the customer behaviour and objectives of it Several questions are important and must be answered when designing a new loyalty programme: Which type of programme should be the basis? Which products and services should be in the programme? How many partners should be involved? The company must consider the different impact of the programme rewards when structuring the offering. As an example, an European service company structured the point collection of its loyalty programme as follows: Each part of the pie has its separate objectives. E.g. with the (relatively high) entry offering, the company wants to attract 50% of its residential customer base. Entry offering Point collection with the customer turnover product 1 Point collection with the customer turnover product 2 Bundling and cross selling bonus Point collection based on timely limited actions Point collection based on additional turnover Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

22. 22 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Designing a Programme (4/10) The following examples show the loyalty programme design in Telcos: Loyalty programme design in Telcos CompanyTarget Customers Structure & Benefits PartnersRedeeming Points Market Comms Comments MCI Bonus Program Linked to MCI One and International Savings Plan savings plans All customers using MCI long distance No joining fee USD1 = 5 miles 500 bonus enrolment miles with Northwest, Continental, Southwest and Midwest airlines 2,500 bonus miles upon enrolment with Delta and American Cash back option instead of FFP miles Collection Airline partners Miles redeemable with airline partners’ FFPs Cash back available by telephone or by writing Monthly account statements Periodic promotions Toll free number Internet web site American Airlines customers must enrol in MCI/ AAdvantage Calling Card Other airline customers must enrol in residential long distance CompanyTarget Customers Structure & Benefits PartnersRedeeming Points Market Comms Comments AT&T True Rewards Linked to AT&T One Rate, One Rate International, One rate Plus, True Country Savings and True Reach Savings savings plans All customers using AT&T long distance and spending more than USD50 per month Over 14million members have joined to-date No joining fee 1USD = 1pt 100 free points when booking holiday through AT&T 15% discount with partners (not airlines) On the spot discounts at some national retailers with Benefit Card Redemption 1-800 Flowers Alamo car hire Blockbuster British Airways Disney Firestone tyres Marriot hotels United Airlines US Air Other partners Customers must call, write or visit web site to redeem points Quarterly statements contain redemption forms Account information available on True Rewards web site Quarterly statement Adhoc statement stuffer with promotions or other mailings Freephone number Internet web site Points expire after 2 years Premium members earn double points High spenders eligible for elite membership leves Must be a member for one year before points can be collected CompanyTarget Customers Structure & Benefits PartnersRedeeming Points Market Comms Comments Sprint Rewards Linked to Sprint Sprint Sense California, Sprint Sense Dime Zone, Sprint Sense International and The Most II savings plans Customers spending over USD 50 per month No joining fee USD1 = 5 bonus miles 1,000 bonus miles with first usage Low international rates Billing via credit card Collection Airline partners Points can be traded for Long distance discounts applied automatically to bill Points redemption by telephone or letter Redemption forms stuffed with points statements Welcome pack Points statement twice yearly Special mailing three times per year Freephone Internet web site Average of USD 50 must be maintained over whole year to be eligible Customers who no longer qualify stop collecting points which expire after one year Cannot be a member of Sprint Cash Back CompanyTarget Customers Structure & Benefits PartnersRedeeming Points Market Comms Comments Telecom New Zealand Talking Points All customers who spend more than NZD50 per month Enrolled over 400,000 new members in the first year No joining fee 1,000 talking points for completing long questionnaire Redemption Fly Buys points Through contact with telecom New Zealand or Fly Buys programme Launched with mailing to top 350,000 customers Quarterly statements Programme guide Freephone 90% of high- spenders enrolled in programme Plans to develop recognition rewards for top customers AT&T Sprint Telecom New ZealandMCI Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

23. 23 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Designing a Programme (5/10) Influencing members with offers Shell Smart - managing customers up the relationship staircase The trend in retailing is away from mass marketing, towards customer specific marketing. This is considered by many to be but a stepping stone on the way towards the holy grail one-to-one marketing. As best practice companies develop sophisticated models of customer buying behaviour and are able to actively monitor customer decisions by using customer specific offers and promotions. Shell Smart with its wide network of partners uses information about members’ buying behaviour with other partners to offer specific promotions. The promotions are designed to trigger members to spend more as they approach a threshold in their collection activity or in their membership lifecycle. First USA, a credit card issuer has developed a menu of over 750 different offers carefully tailored to suit the tastes of its many different customer segments, all driven by market intelligent approach to using customer information. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

24. 24 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Designing a Programme (6/10) Detailed information about customers allowed MotherCare to tailor its programme to capture its target customers - young mothers - during the first months weeks after birth while they are feeling vulnerable. By carefully segmenting customers by age of child and fashion, Mothercare was able to reward customers lightly for purchases that were just about assured, whilst building their loyalty to the company’s products. A series of promotions were offered to mothers in danger of switching to mainstream stores based upon changes in their buying behaviour and listening to customers comments whilst they were in the shop. The hardest lesson to learn is not to oversell in the short-term by focusing on promotions. It is generally accepted that one-off promotions do not change long-term customer loyalty, although they can change behaviour while the offer lasts. The new customer wars between mobile telephone companies in the US has succeeded in sensitising the market to shopping around for the best deal and then switching provider when a better deal comes along. The battle for customers in New York has cost providers an estimated $500 million in promotional, win-back and administration costs with a net reduction in customer loyalty. The destructive nature of promotions MotherCare TM Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

25. 25 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Designing a Programme (7/10) Each loyalty programme is designed differently but has one of three common schemes as its basics (see below). Normally, a combination of these schemes will come true when starting a programme. The different impact of each scheme is important to know when designing a programme. A loyalty programme can be based on three different schemes Bonus point related programmes: Description: The club members collect points for certain behaviour. The collected points can be used for several products and services. Advantages: Flexibility; individualised offering is possible; can be linked with several products and services also from other companies. Disadvantages: Very complex and a lot of administration costs. Very often linked to long term benefits and therefore not tangible. Good to use for: Long term offers; high benefits; win back offers; Offers linked to a broad variety of products and services. Example: Membership Rewards Amexco Rebate programme: Description: The club member gets a certain amount back. Advantage: Short term redemption possible; good planning; tangible and easy to use for customers. Disadvantage: Only cost related; undifferentiated; is promoting the waiting for special offers and conditions (price hoppers) Good to use for: Short term offers; Relaunches; entry offers; offers to acquire new customers; single product related offers. Example: 10% offer for all company products at the point of sales, when joining the loyalty programme of an European telco. Recognition Programme: Description: The club members gets some specific service conditions when joining the programme. Advantages: Pushes the exclusivity for the club members. Disadvantages: High administrative costs; undifferentiated offers. Good to use for: Customers with high profitability Example: Access for club launches in certain frequent flyer programmes for their most profitable customers. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

26. 26 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Designing a Programme (8/10) The offering in a loyalty programme consists of …an entry offering …a point collection scheme and …a point redemption scheme. The point collection scheme must be as easy as possible. The point redemption scheme can be fairly comprehensive. The value for the redeemed point in the view of the customer is then higher. The cooperation with other companies can be considered for the collection and the redemption of points. Also possible are timely restricted offers for collecting or redeeming points. Several elements have to be considered when designing a new programme Club Members Entry Buying Behaviour US $ Collecting Points Points Redeeming Points Value Value of the Loyalty Programme Customer: “How many points do I get with my behaviour?” Target Groups Loyalty Scheme Customer: “Is the loyalty programme bringing me the value I expected?” Collecting SchemeRedemption Scheme Points US $ System for Collecting Points Company -Product -Service... -Product -Service... Third Party Company: “Which behaviour do we want to influence when?” Points US $ Company Third Party System for Redeeming Points Direct Advantages when joining the programme Customer: “What do I get for my points?“” - Product - Service... - Product - Service... - Product - Service... - Product - Service... - Product - Service... - Product - Service... Customer: “What are my direct advantages when joining the programme?” Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

27. 27 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Designing a Programme (9/10) The importance of the right partners Four different strategies when planning the involvement of third parties in a loyalty programme The amount and structure of the partners is a critical question. If the company cannot offer an overwhelmingly attractive value proposition through its loyalty programme it must find partners who can. The involvement of third parties can basically be done in four different ways. Each co-operation strategy is considered as the best in certain situations. Nevertheless, a combination of the different strategies over time is also possible. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

28. 28 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Designing a Programme (10/10) True smart card scheme - Chelmsford Star Co-operative gives customers at the beginning a card rather than points. All information is stored on cards and can be used to offer tailored promotions and discounts at POS, without massive back-office support. The trend is towards multi-partnerships of ever increasing numbers of partners, each offering access to each other’s customer base and customer information. Used wisely, customer information offers the partners a better chance to leverage the next sale. Two leading examples are Argos Business Solutions Premier Points (Argos, Mobil, Somerfield, Toby Hotels, Graham’s Builders Merchants, BP) and Shell Smart (Shell, Currys, Hilton Hotels, John Menzies, UCI Cinemas, Dixons, Commercial Union, Vision Express). In a new development, up to 48 points per week can be collected by visiting certain partner web sites and clicking on icons hidden in the site. Chelmsford Star Co-operative The trend towards multi- partnerships Argos Premier points Shell Smart Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

29. 29 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Defining the Right Rewards and Benefits (1/8) Entry offerOngoing Benefits Entry costs Long-term benefits Annual fees Costs for exit Short-term benefits Win-back offers Variables on the benefit side for the customer Variables on the membership cost side Several factors influence benefits of a loyalty programme in the view of the customer and create costs for the company Each of the variables have an impact on the customer behaviour on the one side and on the financial business case of the loyalty programme on the other. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

30. 30 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Defining the Right Rewards and Benefits (2/8) The structuring of the point collection have different impact to the customer behaviour Several point collection structurings are possible (see be- low). Each of these curve has another impact to the customer behaviour. This must be considered when setting up the rewards and benefits for the different customer segments. Amount of benefits Time Customer Defection Point Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

31. 31 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland With the support of a so called target group simulator, each customer portfolio can directly be translated to the benefits for the customer. An European Telco for example uses the target group simulator for 21 different customer portfolios (e.g. portfolio 1 is a fixed line access with 50 US $ turnover per month; portfolio 19 is a household with two mobile phones and a fixed line with 230 US $ turnover per month). As a result, the provider gets the exact benefits of its point collection/ redemption programme for each target group. Defining the Right Rewards and Benefits (3/8) The costs and benefits must directly be linked to the target groups and the programme‘s positioning Target groups Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

32. 32 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Defining the Right Rewards and Benefits (4/8) The programme rewards and benefits Range of rewards Sharing value with the customer Transmedia Card Best practice companies use frameworks to evaluate their rewards from the customers perspective and then to seek other partners to develop a more robust offering. American Express recognised this only after launching Membership Miles, and has successfully converted the programme into Membership Rewards to be able to offer a wider range of more achievable rewards than air travel. Best practice companies offer a wide range of rebates, rewards and even recognition awards. What all of them have in common is that the range of rewards is carefully designed to match the aspirations of target customers and to encourage them to display the right buying behaviour for the company. Barclaycard Profiles offers over 200 different rewards, some instantly redeemable, some only redeemable through partners such as Ford Motor Company. The best programmes share the value of the customer’s patronage with the customer in explicit value-based relationships. The reward is inextricably linked to the profit creating behaviour of the customer. As the customer makes more purchases, the value of the reward increases, motivating the customer to make the next purchase. A bad example is the Transmedia restaurant card which gives 25% off restaurant meals at 100s of participating restaurants in USA. The restaurant loses as there is nothing about the scheme that encourages the right buying behaviour as the reward is not dependant upon the amount spent. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

33. 33 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Defining the Right Rewards and Benefits (5/8) Increasingly, programmes are basing their rewards and benefits on simple frameworks that show how customers evaluate them the cash value of the redemption rewards - how many USD must I spend to receive one USD in reward the range and choice of rewards the aspirational value of the rewards - exotic travel is more interesting than money off the next petrol purchase the perceived likelihood of achieving the rewards - will I ever collect enough points to win my desired reward? how easy the programme is to use the psychological value of being a ‘member’ and of receiving ‘rewards’ for buying the company’s products - the feeling of participation, anticipation of future rewards and sense of belonging How does the customer evaluate the rewards available? Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

34. 34 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Defining the Right Rewards and Benefits (6/8) The rewards must be achievable for customers within their normal buying behaviour. The AT&T True Rewards pro- gramme lacks relevance for most customers as it will take far too much long-distance usage to be able to win anything but the most humble award. They must also be convenient for all participants in the programme. Air Miles in the UK, Holland, Canada and Spain developed a wide network of merchants to gather points and redeem them, based upon swipe card technology and vouchers, and later transaction based relationships with banks. The programme failed in the US as merchants resisted spending on POS technology (the card had no credit or debit functionality) and customers tired of sending in receipts and vouchers to administration centres. The programme folded within two years of starting. AT&T true rewards Air miles - a success in Europe, a failure in the US Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

35. 35 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland The given rewards and benefits to clients have the largest impact on the financial business case of loyalty programmes. Other elements of the financial business case, which have to be considered are listed below. In addition it is very important to make different simulations about the collecting and redemption behaviour of customers as well as with the penetration of the club programme as a whole. Defining the Right Rewards and Benefits (7/8) The financial business case is mainly based on the given rewards and benefits Operating Costs Operating Costs Benefits for Customers Benefits for Customers Net present value IT and Fulfilment Costs IT and Fulfilment Costs Securing the turnover of not churning customers Less win-back costs due to higher loyalty More turnover due to cross selling/ up selling More turnover due to cross selling/ up selling Costs Benefits Assumptions Net Present Value Month Penetration 50% Penetration 35% Penetration 20% Typical Net Present Value Curve of a Customer Loyalty Programme Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

36. 36 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland The customer loyalty programme is normally not the first benefit or rebate given to customers. More often, it replaces existing rebates. The combination of the different rebates must be considered, when pricing the whole offer (see graph on the left side). The so called Price Waterfall Scheme gives an overall view of the rebates given to different stages of the distribution value chain (see graph on the right side). New loyalty programmes and benefits must be coordinated within the current price and margin structure. Defining the Right Rewards and Benefits (8/8) The cannibalisation of other marketing activities has to be taken into account when launching a customer loyalty programme Source: Marn/Rosiello, 1992 100.0 83.3 60.9 8.1 Standard dealer discount 2.0 Order- size- discount 3.9 National promotional discount 2.7 Exception discount 2.0 Cash discount 4.1 Co-op advertising 3.5 Promotional bonus 3.2 Product line discount 5.6 Annual volume bonus 1.9 Marketing allowance 2.1 Freight Pocket price Invoice price Dealer list price Price Waterfall Scheme Combination of rebates Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

37. 37 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Communication (1/4) Communicating with members Jet Petrol JetCash Building a dialogue with customers Andersen Corporation To be effective for the company, the loyalty programme must increase the customer’s perceptions of the value delivered in the long run. The best programmes integrate all of the marketing communications to target customers through segment or relationship managers whose role is to optimise the relationship with their customers. This requires marketing communications to be built into the design of the programmes rather than added as an afterthought. The loyalty programme must sit well with the company’s brand strategy. Jet Petrol’s branding - ‘cheap and friendly’ - sits well with its JetCash rebate programme which offers instantly redeemable prices in exchange for points collected for each GBP 5 spend at the pump. Although a loyalty programme should seek to develop dialogue with customers, it is only sensible to build a dialogue those who are profitable and who want one. Companies who do not have a regular contact with customers or whose product is too dull to develop one, should develop one through partners. The Andersen Corporation, which manufactures windows, has cultivated relationships with architects, home builders and window distributors to replace its once in a lifetime contact with customers themselves. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

38. 38 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Communication (2/4) A state of the art briefing for a communication strategy of a loyalty programme has nine elements The involvement of a good advertising company and a direct marketing expert is essential for the success of the pro- gramme. Important is, that the creative part does fit well with the results from the pre- tests, that should be done with customers. In addition, it is important, that the levers above the communication in the envisioning pyramid (e.g. positioning; benefit structure) are known and respected by the advertising agencies. Programme Identity and overall concept Programme Identity and overall concept Ongoing communica- tion with members Ongoing communica- tion with members Ongoing communica- tion to all customers (e.g. billing) Ongoing communica- tion to all customers (e.g. billing) Communica- tion in the point of sales Communica- tion in the point of sales Communica- tion during the launch period Communica- tion during the launch period Internet Piggy Back possibilities Piggy Back possibilities Media planning Media planning Tests of the advertising response Tests of the advertising response Briefing content Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

39. 39 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Communication (3/4) A single communication is less value compared to the modern dialogue techniques that are possible today A best practice communication architecture An important advantage of a point collection and redemp- tion programme is, that the company gains a lot of important information about the customer behaviour. This information can be stored in a data warehouse, other source systems or in a campaign management tool. The impact of these information is tremendous. A much more focused customer oriented communication approach (one to one) leads to better mailing response and a higher sale volume by equal or less costs. A best practice communication architecture focuses inbound on call center communication. A modern IVR solution helps reducing the amount of agents necessary in a call center. The support of Data Mining tools to overview all customer information is essential. A modern campaign management helps in addition to target the responses and to lower the cost per order. All information should be saved in a customer loyalty software, that generates reports to the loyalty management. Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives

40. 40 Market and Customer Management - Customer Loyalty 04 Envisioning.ppt © MCM Switzerland Communication (4/4) The communication in a loyalty programme consists of strategic and tactical instruments The communication of loyalty programme messages has several objectives. On the strategical side, the objective is a positioning of the programme in the mind of the customer. On the tactical side, the communication objectives is an ongoing perception of the offerings. Core idea of a loyalty programme (e.g. point collection - point redemption idea) Long term offers point redemption Special offers for point redemption Long term offer point collection Special offers for point collection Variable tactical communication instruments Direct marketing Newsletter Acquisition stuffer Point of sales communication Internet Strategic Communication instruments for positioning the programme Branding / Wording Club-Identity Launch Package (e,g, booklet) Customer Behaviour Tar-geting Positioning Programme structure & offers Cost and benefit structure Communicating the Loyalty programme Loyalty programme objectives