With the majority of large retailers offering a loyalty card scheme, the collection of customer data is now routine commercial practice. Whilst loyalty schemes were originally introduced to reward loyal customers and to encourage them to increase their overall spend, retailers have been finding more and more sophisticated ways to use customer data to their advantage.
The biggest loyalty card success story is arguably Tesco’s who, together with the customer science company dunnhumby, launched their scheme in 1995. Within the first five years Tesco’s sales had increased by 50%. This scheme was the first to really maximise the potential of customer data by using them to create accurate customer profiles and to improve their targeting of products and services.
See, for example, this blog, which reviews the book Scoring Points: How Tesco Continues to Win Customer Loyalty, and summarises some of the interesting ways in which Tesco uses its customer data. Essentially, they use so-called Recency, Frequency, Value (or RFV) analysis to look at the transactional behaviour of their customers and to score customers using a combination of how often they shop, how many items they purchase and how much they spend. This approach creates a formal framework for comparing different customer behaviours such as those that shop frequently with small transactions and those that only shop every few weeks, but spend a large amount each time.
Supermarkets don’t only want to identify loyal customers in order to reward them (or entice back customers who are no longer loyal), but they also want to understand the shopping habits of all their customers in order to better target their marketing and promotions. For example, this case study about Boots Advantage Card highlights the importance of targeted marketing. This is possible through customer segmentation where customers are divided into subsets that have common traits based on what they buy. By clustering in this way, the supermarkets can identify relationships between the products that people buy. For example, if someone has bought nappies then they might also require milk formula and consequently the supermarket offers a voucher for the associated product.
Of course, clustering on every product can be impractical and so Tesco groups sets of items that people buy for a shared reason into what they call a “bucket”. One bucket may contain items that represent indulgence, whilst another represents bulk buying or thriftiness. Based on their purchases, customers are linked to the relevant buckets and by examining which buckets they have bought from, how many items and how often, Tesco’s are able to gain valuable insight into the shopping preferences of that customer.
Whilst customer data are predominantly used to better understand consumer needs, there are additional operational benefits to be gained from analysing these data. For example, these data can also be used to understand demand and to ensure that stores are appropriately stocked.
What about those customers who don’t own a loyalty card? Increasingly these customers’ data are tracked via their debit or credit cards which they use to pay for their shopping. This article from the Guardian explains that by tracking a particular card, what was bought and when, supermarkets will know when customers do or do not return and can measure the effectiveness of their promotions and events. So you don’t need to have a loyalty card for the big retailers to be able to track your spending habits.
Supermarkets also often supplement their customer data with data collected from other sources, such as the electoral roll, Land Registry, the Office for National Statistics and credit reports. Understanding the demographics of the general population provides key additional insight when making large operational decisions such as deciding on new products, advertising and locating new stores. Tesco amassed such a huge quantity of data that they now own the Crucible data base, a lucrative venture set up to allow other commercial organisations pay for access to Tesco’s data.
The success in recent years of loyalty card schemes highlights how understanding your customers is crucial to any business. By collecting and analysing consumer data, together with other socio-economic data, supermarkets and other large retailers are able to make evidence-based decisions when devising their marketing and operational strategies. We’ll return to this topic in the future to look at some of the data mining techniques they use in more detail.