Loyalty programs have been around since the 1980s, primarily with the advent of frequent flyer clubs, and then broadly expanding to retail through the type of loyalty programs that we know today, with pharmacy and grocery points programs.
2013 marked the first drop (0.4%) in grocery sales since 1996, which saw a .5% decline. With the famously razor thin margins of the grocery industry, incumbents were forced into a rethink over the question of how to grow recurring revenue.
Perhaps not coincidentally, 2013 was also the year that Loblaws introduced a new loyalty program, PC Plus, after working extensively with FICO Canada on building a next-generation loyalty program, which relied less on saturating neighbourhoods with door-to-door leaflets and coupons than on engaging people through their mobile devices.
FICO has a long history in the field of Big Data, well before the term’s current usage, through the development of credit scores and fraud prediction instruments for the financial industry. Recently, though, it has begun applying that methodology to retail. In Canada, FICO has worked with Canadian Tire, while maintaining its collaborations with the banking and government sectors.
In advance of FICO World, the company’s convention taking place in San Diego this year from November 11 to 14, Cantech Letter spoke with Michael Testa, FICO Canada’s principal consultant for marketing solutions, about FICO Canada’s experience working with one of Canada’s biggest grocery chains in applying the principles of one-to-one mobile customer engagement to its loyalty program.
What prompted Loblaws to initiate this collaboration with FICO?
Basically, Loblaws had a vision of what they wanted to create in their new loyalty program, and they had done a tender out to various companies. My understanding of it was, after we all presented, FICO’s solution was really the one they felt would deliver on the promise and the vision that they were trying to accomplish. There’s a lot of really established grocers in Canada. There’s a lot of new entrants in the marketplace. And there’s a lot of loyalty programs. Pretty much every retailer has a loyalty program. Loblaws really wanted to do something different. What they were really looking for is what we call the next generation of loyalty programs, which is utilizing true one-to-one, personalized offers. And working with them actually helped deliver that.
Loyalty programs have a history going back to the eighties/nineties. In what ways is this more granular, and in what ways does it lead to greater customer engagement?
The program is very different than your traditional loyalty program, where a loyalty program has a base currency. With the PC Plus program there is no base currency, so the points you receive are really based upon offers that we generate for Loblaws, that are actually attached to their app. What’s very unique is that those individualized offers are actually personalized, one-to-one to each member. So the offers that I get will be very different than the offers you get every single week. That’s quite an accomplishment, because when you look at these programs that have offers out there, producing once a month, or once a quarter, with this particular program we are generating a unique set of offers, usually up to about 20 per week, for every customer. So, if you actually look at the math, there’s about 6 million members in PC Plus, with the average store having about 60,000 products. That’s about 360 billion combinations that we actually filter through, and then determine which are the best 20 products that we expect a member will be buying that week.
The grocery business has famously slim margins. Recent research shows that 2013 was the worst year for the grocery business since 1996. Obviously, Loblaws knew that it wasn’t mainly the price of tomatoes that was pushing down their bottom line, and realized that increasing consumer engagement might be a way to unleash some of that missing potential.
All the players in the grocery industry are continuously looking for a competitive advantage. And Loblaws, being one of Canada’s leading retailers, honestly one of the world’s leading retailers, were interested in using analytic technologies to improve interactions with their customers and hence get a better engagement level. One of the insights they had is that their best customers accounted for more than 60% of their revenue. Their market data suggested that they were only capturing about 50% of the grocery spend of their customers. So they had a large opportunity to grow those sales of their best customers. Really, it’s about who your best customers are and how you actually get them to shop more in your store. By providing very relevant offers, and a relevant program for them, they feel that they’re increasing the engagement of their customers that way.
What has become the new paradigm is engaging people on their mobile devices. So you’re talking about an app and people actually in the store, in space, rather than say sitting at home looking at the computer.
What the mobile technology provides us every day of our lives now is, we now have a capability to interact. The way we interact with our friends and our family, businesses now have the ability to interact with their customers in a way that they never really have before. The loyalty application that they have in place provides a lot of information. You can create shopping lists, you can add recipes, it has a capability for weekly offers. Every single week, let’s say on a Friday, you’ll get an email reminding you that, “Hey, your unique set of offers has just been loaded on to your application.” You can then do it before the store, or in the store, it’s really up to the customer. When they go into the application, you’ll actually see the list of those up to 20 unique offers, and then you say, “Yes, I want to load those offers onto my card.” So once you actually do that process, it is then loaded onto your account. That can then be utilized in the store by either showing a plastic card, or what most people do is by showing the application. The application, like on an iPhone, when you turn it to the side has the barcode come up and then the clerk at the end can actually scan it for you. It’s a pretty simple process. And because of that frequent interaction, if you were doing this through email, because email is still a very large communications stream, or the old-school, a lot of retailers still use mail coupons, you just can’t get that frequency and flexibility that you have with the new mobile technology. And what Loblaws had to its advantage is, being sort of the last one out with a loyalty program, they skipped that whole generation of segmentation and paper-based programs, into now a new generation of loyalty, which is based upon a mobile device and having a very frequent interaction and dialogue with their customers.
Loblaws has a strong belief, that’s all about providing a relevancy to their customers and giving them relevant offers, and not about cross-selling them constantly. It’s about what’s relevant to you as a person, and that’s really what’s unique about this versus other programs.
Tom Davenport, director of research at the International Institute for Analytics, wrote that aside from benefiting Loblaws itself as well as shoppers, “The program has also benefited Loblaws’ suppliers.” How so?
I think now suppliers have an ability to talk to their customers, their customers being Loblaws, but then the customers who are utilizing their products and providing them offers directly. In the past, a lot of them either had their own programs which would then have to generate those customer lists or generate their email lists, or they would go through mass programs. Both of those are very inefficient, whereas with this particular program they can efficiently communicate with their customers through the loyalty program.
You have this convention coming up called FICO World, in San Diego. Are you going to be presenting results or an updated progress report about how things have gone since you began working with Loblaws?
Loblaws agreed to speak at our conference. FICO World is a leading tech analytical conference that’s been around for many, many years. In terms of specifics on the success of the program, I can tell you that, obviously Loblaws is a public company so they’re quite protective in terms of what they won’t present, but what we will tell you in terms of the results overall is that the response rates that they have received have increased over 200%. They have seen a huge lift from the loyalty offers that are better than the offers in their flyers. And overall, we’ve seen that customers are saying, through some of the Twitter feeds, I’ll read one of them, “I never thought it would happen to me, but PC Plus points offers really get me excited.” So there are great consumer benefits. Overall, they’ve seen a benefit, obviously, in the financial aspect of the program and the result that they’ve seen shopping in-store, but also as a good will aspect from their clients.
It feels like there’s a large shift that’s been signaled over the last three or four years, in which companies are beginning to realize the diminishing returns in treating their customers like the objects of mass-communication campaigns, and we’re now entering into the era of “engagement” in which companies ideally are interacting with customers as if they were human beings.
Yeah, and you know what? I think it’s with the next generation, we’re seeing a lot of these things. Earlier you said that loyalty programs have been around for many, many years. What’s really different here with this particular program is how they’ve utilized analytics and actually personalized a mass program so that it is very individual. Somebody is literally broadcasting on Twitter the fact that, “They understand me. They know what products I’m going to buy.” And Loblaws has a strong belief, that’s all about providing a relevancy to their customers and giving them relevant offers, and not about cross-selling them constantly. The way the program works, if you don’t buy fish, you’re not going to get an offer for fish. I buy a particular type of corn relish, then you’re going to get an offer for corn relish. It’s about what’s relevant to you as a person, and that’s really what’s unique about this versus other programs. We’ve all had this, where you get an offer and you look at it and you go, “I don’t understand why I’m getting this. I’ve never bought this product. It doesn’t make any sense to me.” Really, the complexity about this, and what’s really the exciting part about it is how to use Big Data and analytics to be able to do that. We have a patented analytic framework called time-to-event models. What they do is, they predict what a consumer will buy in a particular time period. So in Loblaws’ case, we have over 3,400 time-to-event models that will predict what every member of their program will be buying. It goes through all of the different products that they have, it determines a score, and out of that we optimize and then select which are the best 20 products out of those. So it’s not only going out there, these models, in predicting your likelihood to buy lettuce in the next three months, it’s going to actually predict your likelihood to buy lettuce this week coming up. And that’s where the relevancy comes in. Because usually, there are things you buy every day, every trip, probably bananas, probably milk, probably bread. But those other items, that are much more personal and less frequent, that’s where the beauty in the analytics can come out and draw on those things. So that when you’re going to buy lettuce in that third week, it knows and can actually give you an offer, and that makes it very relevant for you.
What they were really looking for is what we call the next generation of loyalty programs, which is utilizing true one-to-one, personalized offers. And working with them actually helped deliver that.
Before Big Data was a term that we use, FICO has been working in the field of Big Data for a few decades, in terms of United States credit scores and whatnot. And everyone now is trying to harness this term, Big Data, and it’s a mystery for a lot of people.
What makes FICO very unique is exactly what you’ve said. We’ve been using Big Data and analytics for the last 58 years. For our founders, one of them was a mathematician and the other was an engineer, the whole basis of the company was, “How can you use analytics to make better decisions?” That started out with the credit score. It’s now in over 20 countries, including here in Canada. And then from there, they expanded into fraud prediction. So not only do we have the leading credit score in 20 countries, we also have the leading fraud predictor. I think it’s used by half the credit cards in the world, in terms of predicting every transaction that’s coming through, the likelihood of a good transaction or a fraudulent transaction. So when you’ve had that heritage and that pedigree, you can actually apply those analytical frameworks and analytical neural nets and all that knowledge that we have, to various different industries, including insurance, and we’ve also now expanded into the retail side. So really what’s exciting is, we’ve had this analytical heritage from financial services, which early on had probably the best experience with Big Data, and it’s now retailers who have embraced the whole Big Data topic. We’ve been able to utilize the same analytics and improve the analytics, and we’ve had to make the analytics work within retail for the unique sense of the problem that we’re trying to solve. But the framework of those analytics have been proven out over the last 50 years, and we’re constantly improving. We have something like over 167 patents in analytics. We have over 250 data scientists within our company. When you talk about analytics, that’s really what we do.
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