Do consumers ditch loyalty in a downturn?

With the current financial downturn expected to continue until 2010, Martin Hayward, director of strategy and futures at dunnhumby, looks at how brand loyalty can be sustained through turbulent economic times…

In a recessionary period, there is enormous pressure to chase revenue of any sort, regardless of the long-term implications for brand health, price premium protection, or longer-term positioning. Often, brand and sales managers can become overwhelmed by events, subsequently influencing them to chase every deal on offer in a continuous cycle of requiring extra volume turnover to make up for margin dilution. Typically then, as the economy struggles, dedication to securing customer loyalty diminishes.

In the current economic climate, it is unsurprising that many retailers are following this trend of cutting prices and increasing promotion during tough times. This is perhaps motivated by a genuine recognition of customers’ need to control tight budgets, particularly as a response to competition. If companies fail to cut prices, they risk losing customers to alternative stores, which obstructs their ability to maintain customer loyalty in their store.

However, added promotional activity is not necessarily the best option. Often, it can in fact encourage promiscuous customers who shop around and maximise their savings by picking and choosing between the various offers across the different stores as opposed to maintaining loyalty. Although brands can experience uplift when they do promote, their baseline sales are likely to decline and cannot be magically restored through halting promotions, as customers are already trained to buy on deal. In this instance, the trend in “Deal Seeking” can be exacerbated, further eroding decreasing loyalty to brands.

Nevertheless, if used sensibly and in a targeted way, promotions can act as a powerful tool in maintaining customer loyalty. Typically, a loyal customer will only spend half of their budget in a single store. Therefore, the right promotions can be utilised to help reduce the cost of each basket they buy whilst increasing the number of visits they make to your store instead of someone else’s. Although, within the marketing community, there has always remained a dangerous preoccupation with continually hunting out the excitement of the new at the expense of existing business, even in easier economic periods.

Not only are retailers and brands making the huge mistake of failing to recognise and reward existing customers, but they are also giving price undue preference over other tools within the marketing mix. Often a strange myopia envelops the industry, with additional tools ignored at the expense of running another promotion. Although during hard economic periods, price becomes important and should consume a greater proportion of budgets, it is not the only available tool. New products, re-merchandising categories and repositioning against consumer needs are all examples of initiatives that can pay dividends, without attacking margins if handled correctly.

Today, there is little or no excuse for continuing to rely entirely on the distribution of untargeted promotional campaigns to support sales in an economic downturn. Unlike in previous economic struggles, retailers and brands now have access to very rapid, granular data regarding their shoppers and consumers. Alongside this, there is the ability of companies to access a range of targeted communication media that allow different messages to be delivered to different groups.

At dunnhumby, we analyse the shopping behaviour of approximately 200 million households worldwide, providing a richness of understanding that was never possible when relying on samples and panels to provide insight. This huge store of information is also available within days, allowing rapid feedback on market dynamics, and the opportunity to respond to changing customer priorities. Such customer level sources of insight provide the means to truly understand where value lies, ensuring that loyal brand customers are treated as well, if not better than, the ephemeral “Deal Seekers”.

With today’s rapid, granular insight, there is no such thing as an average consumer, and therefore no excuse for treating any customer as such.