More misguided loyalty programs

In a previous post I commented on Coles Myer’s misguided new loyalty program.

Now I read that they have hired Tom Lemke a former Kmart US executive in charge of loyalty programs. One hopes he will bring new knowledge to the company, but I doubt it. More likely he will consolidate blind faith in loyalty initiatives.

And today I read that they are testing a new program that asks shoppers to register and fill in a questionnaire on what brands they buy. They are then sent a shopping list which switches them to other brands - if they stick to this list they get large discounts in the form of loyalty points (that can later be converted to cash).

Good to see experimentation, but they would be better off first putting money into fundamental research into marketing. This program is doomed to be insignificant at best, and most probably a waste of money.

A 5% drop in defection does not lead to 80%+ more profits

Some of the most popular modern marketing myths come from the writing of Frederick Reichheld. In particular a famous article with Earl Sasser where, on the very first page they write:

Companies can boost profits by almost 100% by retaining just 5% more of their customers.

This has been quoted extensively. Even academics, who should know better, quote it in textbooks and in articles in leading scholarly journals.

And yet it is a grossly (and rather obviously) misleading line.

To read the full article go to the University site - click here.

Misguided Myer Marketing

Two major Australian newspapers ‘The Australian” and ‘The Age’ have reported that the department store chain Myer is to launch another loyalty card, they already have Fly Buys and a credit card.

Called ‘Myer One’ this loyalty program is to be aimed at Myer’s high value customers. According to chief executive Dawn Robertson “Myer One is for our most loyal customers”.

This is so fashionable, and so misguided.

Given the things Ms Robertson has said, this marketing initiative appears to have been planned in ignorance of the serious R&D into the effects of retail loyalty programs, not to mention fundamental patterns of buyer behaviour and brand performance.

And the logic is faulty.

Think about which customers a loyalty program might attract, and who are desirable to attract (from the perspective of making money):

1) Occasional buyers of the category - these customers are unlikely to be attracted to a loyalty program (they realise they won’t earn many points), indeed they aren’t even likely to hear about it let alone give it much thought.

2) Frequent buyers of the category but occasional Myer shoppers - these would be very attractive to gain, and they might be attracted to the program, after all they could earn a lot of points if they shift their buying towards Myer. Unfortunately all of our research shows that loyalty programs do very little to attract non and light customers of the loyalty program brand.

3) Frequent Myer buyers - these are the customers that Myer One is targeting. But these are the least desirable group. These customers represent the greatest subsidy cost of a loyalty program, ie giving people rewards for doing what they were doing anyway. They are of course the most likely group to join - they will see the program’s promotional activity (remember they shop at Myer regularly) AND they will realise what a good deal it is…something for nothing !

In short the Myer One will probably be a good deal for a few customers, and a poor marketing investment.

And it won’t lead to growth, real growth comes from winning more customers…and that’s mainly occasional customers. No brand ever got big by simply trying to get more out of its most loyal customers.

Why marketing research matters

It is quite normal to consider some types of human activity more noble than others. A career in medicine ranking ahead of one in advertising, for instance. Likewise research into heart disease, or even traffic congestion is considered more important than research into marketing.

Here is a story which illustrates some of the problems with this sort of thinking.

Once upon a time….there was a large company on the Western side of the USA, called Combucon, that provided ambulance services to the public and institutions such as nursing and retirement homes. Combucon largely operated on a subscription basis, where customers would pay an annual fee which enabled them to call an ambulance in an emergency. Similar organisations operate around the world.

Over a two year period Combucon experienced a drop in subscription income. The economy had slowed somewhat, and the company had diverted much of its advertising budget for that period into a single sponsorship event, but overall, as is often the case, the causes of the drop in new subscribers were not clear. A hastily organised sales promotion, offering substantial discounts, had boosted subscriptions somewhat and reduced the proportion of lapsing members but these sales were not profitable given the company’s existing cost structure.

Faced with this drop in revenue and profits the company was in a difficult position, it had recently made a heavy investment in acquiring another ambulance service company in the mid-West. The costs of integrating the two companies systems was higher than expected. Also the Chief Financial Officer of Combucon had made a commitment to shareholders to reduce the company’s debt levels considerably over the next five years.

Combucon’s major cost was its large team of paramedics who drove the ambulances. It was clear to management that cuts in the size of this workforce would have to be made. This brought management into dispute with the union representing these workers. The union threatened strikes, and potential legal action against Combucon if it went ahead with the cuts in paramedics for not delivering the levels of customer service it promised subscribers.

Negotiations dragged on for some months, meanwhile staff morale plummeted, this was evidenced by the 400% increase in the number of ’sick days’ taken by paramedics. Even without staff cuts Combucon was having difficultly maintaining its previous levels of service. Ambulances were taking longer to get to the scene of an emergency and there was an obvious impact on patient welfare. The company also began to lose some of its contracts with nursing and retirement homes.

Management reacted by scaling back their cost cutting plans and quickly reached agreement with the union. The company largely wore the reduction in profits, much to the detriment of its shareholders, until sales gradually returned to their normal level a few years later. Any longer term impact on Combucon (and perhaps others in the industry) was that investors were less willing to provide it with funds for expansion and improvement of services.

Maureen Forsyth, founder of Combucon, now retired, had intended to make substantial donations to medical research through establishing her own charitable foundation. But the above incident, which occurred around the time she was in the process of setting up the foundation, changed her thinking somewhat. She wanted to lessen the chance of such an event happening again. It had not occurred to her previously that fundamental research into marketing (or industrial relations, or management in general) might also have a positive influence on patient welfare. And might benefit other companies, and their customers, in related industries or even unrelated industries.

Surprising market research findings may very well be true

I was recently asked to review a paper for potential acceptance at a conference. The paper’s topic was the evaluation of market research reports by users.

The standout finding from this survey of market research buyers was the association between the the degree of critical evaluation and whether the findings were surprising or not. Put simply, if the findings weren’t anticipated then the report was more likely to be critically evaluated and checked.

Now this could be prudent application of Twyman’s law - “anything surprising or interesting is probably wrong”. But Twyman was talking about deviations from well established patterns (i.e. deviations from ‘laws’), in market research surprising findings are more likely to be deviations from managerial assumptions, politics or marketing mythology. And particularly findings that no one wanted (like that customers are unhappy - or even that customers ARE happy).

It seems that managers, being human, exhibit substantial confirmation bias. Even scientists have been found to check and re-check surprising findings, but less so ones that support their hypothesis. Similarly academic journal reviewers tend to accept papers with results that support existing beliefs, and reject others.

The scary thing therefore about this paper is that we already know that market research companies are more likely to present findings that conform to client beliefs (eg, new product tests are more likely to say the product could succeed, than that it is likely to fail).

Given the researchers’ own confirmation bias (they want to give their clients the results they want to hear), surprising market research reports are more likely to be correct - because they were probably checked and rechecked for error. And non-surprising findings are less likely to be correct. Yet it is the surprising findings that get clients’ critical evaluation.

It should be round the other way.

Footnote: I’m (very pleasantly) surprised that so many companies around the world are our sponsors because we keep coming up with discoveries that surprise – even ourselves.

Faulty textbooks

Marketing textbooks seldom contain substantive research findings, let alone new research.

Popular marketing/management books written to sell to managers are even worse but that’s another story.

My good colleague, Wharton Professor Scott Armstrong completed an analysis of popular marketing textbooks looking for managerially useful and research supported principles - he concluded that “marketing principles texts contain no principles!”. Click here for a copy of his article.

But before we chide our discipline for its sloppy texts it seems we are not alone - a survey has shown that 12 of the most popular science textbooks used at middle schools throughout the USA are riddled with errors (http://www.edu-cyberpg.com/Teachers/sciencebookerror.html):

THE QUALITY OF SCIENCE TEXTBOOKS
A recent survey of science textbooks used in the USA compiled 500 pages of errors, ranging from maps depicting the equator passing through the southern United States to a photo of singer Linda Ronstadt labeled as a silicon crystal.

None of the 12 textbooks has an acceptable level of accuracy, said John Hubisz, a North Carolina State University physics professor who led the two-year survey, released earlier this month. “These are terrible books, and they’re probably a strong component of why we do so poorly in science,” he said. Hubisz estimated about 85 percent of children in the United States use the textbooks examined. “The books have a very large number of errors, many irrelevant photographs, complicated illustrations, experiments that could not possibly work, and drawings that represented impossible situations”.

A team of researchers, including middle school teachers and college professors, reviewed the 12 textbooks for factual errors. “These are basic errors,” Hubisz said “It’s stuff that anyone who had taken a science class would be able to catch”. One textbook even misstates Newton’s first law of physics, a staple of physical science for centuries. Errors in the multi-volume Prentice Hall “Science” series included an incorrect depiction of what happens to light when it passes through a prism and the Ronstadt photo.

The study’s reviewers tried to contact textbook authors with questions, Hubisz said, but in many cases the people listed said they didn’t write the book, and some didn’t even know their names had been listed. Some of the authors of a physical science book, for example, were biologists.

Hubisz said educators need to pressure publishers to get “real authors” for textbooks. “They get people to check for political correctness … they try to get in as much cultural diversity as possible,” he said. “They just don’t seem to understand what science is about.” Hubisz said the researchers contacted publishers, who for the most part either dismissed the panel’s findings or promised corrections in subsequent editions. Reviews of later editions turned up more errors than corrections, the report said.