Analyse Tesco’s Clubcards scheme in depth and comment on the various customer segmentation models the company developed after studying the data gathered.

Analyse Tesco’s Clubcards scheme in depth and comment on the various customer segmentation models the company developed after studying the data gathered.

Analyse Tesco’s Clubcards scheme in depth and comment on the various customer segmentation models the company developed after studying the data gathered.

 

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Marketing Management

 

CASE: 2       Tesco: the customer relationship management champion

Every three months, millions of people in the UK receive a magazine from the country’s number one retailing company, Tesco. Nothing exceptional about the concept—almost all leading retailing companies across the world send out mailers/magazines to their customers. these initiatives promote the store’s products, introduce promotional schemes and contain discount coupons. However, what sets Tesco apart from such run-of-the-mill initiatives is the fact that it has mass-customized these magazines.

Every magazine has a unique combination of articles, advertisements related to Tesco’s offerings and third-party advertisements. Tesco ensured that all its customers received magazines that contained material suited to their lifestyles. The company had worked out a mechanism for determining the advertisements and promotional coupons that would go in each of the over 150,000 variants of the magazine. This has been made possible by its would-renowned customer relationship management (CRM) strategy framework.

According to Tesco sources, the company’s CRM initiative was not limited to the loyalty card scheme; it was more of a company-wide philosophy. Industry observers felt that Tesco’s CRM initiatives enabled it to develop highly focused marketing strategies. Thanks to its CRM initiatives, the company became UK’s number one retailer in 1995, having struggled at number two behind rival Sainsbury’s for decades. In 2003, the company’s market share was 26.7 per cent, while Sainsbury’s market share was just 16.8 per cent.

CRM the Tesco way

Tesco’s efforts towards offering better services to its customers and meeting their needs can be traced back to the days when it positioned itself as a company that offered good-quality products at extremely competitive prices. Even its decision to offer premium-end merchandise and services in the 1970s was prompted by growing customer demand for the same (see Table 2.A for the company’s ‘core purpose’ and ‘values’, which highlight the importance placed on customer service).

The biggest customer service initiative (and the first focused CRM drive) came in the form of the loyalty card scheme that was launched in 1995. This initiative was partly inspired by the growing popularity of such schemes in other parts of the world and partly by Tesco’s belief that it would be able to serve its customers in a much better (and more profitable) manner

Table 2 A  Tesco: core purpose and values

CORE PURPOSE

Creating value for customers, to earn their lifetime loyalty

Values

 

1.   No one tries harder for customers:

understand customer better than anyone, be energetic, be innovative and be first for customers, use our strengths to deliver unbeatable value to our customers

look after our people so they can look after our customers

2.   Treat people how we like to be treated:

all retailers, there’s one team—the Tesco Team trust and respect each other strive to do our very best give support to each other and praise more than criticize ask more than tell and share knowledge so that it can be used enjoy work, celebrate success and learn from experience

by using such as scheme. Tesco knew that, at any of its outlets, the top 100 customers were worth as much as the bottom 4000 (in terms of sales). While the top 5 per cent of customers accounted for 20 per cent of sales, the bottom 25 per cent accounted for only 2 per cent. The company realized that by giving extra attention to the top customers (measured by the frequency of purchases and the amount spent) it stood to gain a great deal.

To ensure the programme’s success, it was essential that all Tesco employees understood the rationale for it as well as its importance. So, the company distributed over 140,000 educational videos about the programme to its staff at various stores. These videos explained why the initiative was being undertaken, what the company expected to gain from it, and why it was important for employees to participate whole-heartedly in it.

Table 2B:  Tesco: classifying customers

EXPENDITURE

SHOPPING FREQUENCY

Daily

Twice weekly

Weekly

Stop start

Now and then

Hardly ever

High Spend

PREMIUM

STANDARD

POTENTIAL

Medium Spend

STANDARD

POTENTIAL

UNCOMMITTED

Low Spend

POTENTIAL

UNCOMMITTED

FREQUENT

INFREQUENT

RARE

Impressed with the programme’s results over six months, the company had introduced the scheme in all its stores by February 1995. The stores captured every one of the over 8 million transactions made per week at Tesco stores in a database. All the transactions were linked to individual customer profiles and generated over 50 gigabytes of data every week. Dunnhumby used state-of-the-art data-mining techniques to manage and analyse the database. Initially, it took over a few weeks to analyse the vast amount  of data generated. To overcome this problem, Dunnhumby put in place new software that reduced this time to just a few days. As a result, it became possible to come up with useful and timely insights into customer behaviour  in a much faster way.

Table 2C:  How Tesco used the information generated by its Clubcards

Pricing

Discounts were offered on goods that were bought by highly price-conscious customers. While the company kept prices low on often-bought goods/staples, for less familiar lines it adopted a premium pricing policy.

Merchandising

The product portfolio was devised based on customer profiles and purchasing behaviour  records. Depending on the loyalty shown by customers towards a particular product, the substitute available for the same, and the seasonality, the product ranges were modified.

Promotion

Promotions were aimed at giving special (and more) rewards to loyal customers. Few promotions were targeted at the other customers.

Customer service

Extra attention was given to stocking those products that were bought by loyal customers.

Media effectiveness

The effectiveness of media campaigns could be evaluated easily by noticing changes in the buying patterns of those customers whom the said campaign was targeted at.

Customer acquisition

The launch of new ventures (such as TPF and Tesco.com) went smoothly since Tesco targeted the ‘right’ kinds of customers.

Market research

While conducting marketing research, Tesco was able to tap those customers that fitted accurately into the overall research plan.

Customer communication

It was possible to mass customize communication campaigns based on individual customer preferences and characteristics. Tesco began holding ‘customer evenings’ for interacting with customers, gathering more information, and gaining new customers through referrals

The analysis of the data collected enabled Tesco to accurately pinpoint the time when purchases were made, the amount the customer spent, and the kinds of products purchased. Based on the amount spent and the frequency of shopping, customers were classified into four broad categories: Premium, Standard, Potential and Uncommitted (see Table 2B). Further, profiles were created for all the customers on the basis of the types of products they purchased. Customers were categorized along dimensions such as Value, Convenience , Frozen, Healthy Eating, Fresh and Kids.

Tesco also identified over 5000 need segments based on the purchasing habits and behaviour patterns of its customers. Each of these segments could be targeted specifically with tailor-made campaigns and advertisements. The company also identified eight ‘primary life stage’ need segments based on the profiles of its customers. These segments included ‘single adults’, ‘pensioners’ and ‘urban professionals’, among others.

Using the information regarding customer classification, Tesco’s marketing department devised customized strategies for each category, Pricing, promotion and product-related decisions were taken after considering the preferences of customers. Also, customers received communication s that were tailored to their buying patterns. The data collected through its Clubcard loyalty card scheme allowed Tesco to modify its strategies on various fronts such as pricing, inventory management, shopping analysis, customer acquisition, new product launches, store management, online customer behaviour and media effectiveness (see Table 2C).

Tesco began giving many special privileges, such as valet parking and personal attention from the store manager, to its high-value customers. special cards were created for students and mothers, discounts were offered on select merchandise, and the financial service venture was included in the card scheme. The data generated were used innovatively (e.g. special attention given to expectant mothers in the form of personal shopping assistants, priority parking and various other facilities). The company also tied up with airline companies and began offering Frequent Flyer Miles to customers in return for the points on their Clubcards.

Reaping the benefits

Commenting on the way the data generated were used, sources at Dunnhumby said that the data allowed Tesco to target individual customers (the rifle-shot approach) instead of targeting them as a group (the carpet-bombing approach). Since the customers received coupons that matched their buying patterns, over 20 per cent of Tesco’s coupons were redeemed—as against the industry average of 0.5 per cent. The number of loyal customers has increased manifold since the loyalty card scheme was launched (see Figure 2A).

The quarterly magazine Tesco sent to its customers was customized based on the segments identified. Customers falling into different categories received magazines that were compiled specifically for them—the articles covered issues that interested them, and the advertisements and discount coupons were about those products/services that they were mostly likely to purchase. This customization attracted third-party advertisers, since it assured them that their products/services would be noticed by those very customers they planned to target. Naturally, Tesco recovered a large part of

Figure 2A:      Tesco increasing number of loyal customers

its investment in this exercise through revenues generated by outside advertisements.

The data collected through the cards helped the company enter the financial services business as well. The company carried out targeted research on the demographic data and zeroed in on those customers who were the most likely to opt for financial services. Due to the captive customer base and the cross-selling opportunity, the cost of acquiring customers for its financial services was 50 per cent less than it would be for a bank or financial services company.

Reportedly, the data generated by the Clubcard initiative played a major role in the way the online grocery retailing business was run. The data helped the company identify the areas in which customers were positively inclined towards online shopping. Accordingly, the areas in which online shopping was to be introduced were decided upon. Since the prospective customers were already favourably disposed, Tesco.com took off to a good start and soon emerged as one of the few profitable dotcom ventures worldwide. By 2003, the website was accessible to 95 per cent of the UK population and generated business of £ 15 million per week.

By sharing the data generated with manufacturers, Tesco was able to offer better services to its customers. It gave purchasing pattern information to manufacturers, but withheld the personal information provided by customers (such as names and addresses). The manufacturers used this information to modify their own product mixes and promotional strategies. In return for this information, they gave Tesco customers subsidies and incentives in the form of discount coupons.

The Clubcards also helped Tesco compete with other retailers. When Tesco found out that around 25 per cent of its customers who belonged to the high-income bracket were defecting to rival Marks & Spencer, it developed a totally new product range, ‘Tesco Finest’, to lure them back. This range was then promoted to affluent customers through personalized promotions. As planned, the defection of customers from this segment slowed down considerably.

In February 2003, Tesco launched a new initiative targeted at its female customers. Named ‘Me Time’, the new loyalty scheme offered ladies free sessions at leading health spas, luxury gyms and beauty saloons, and discounts  on designer clothes, perfumes, and cosmetics. This scheme was rather innovative since it allowed Tesco customers to redeem the points accumulated through their Clubcards at a large number of third-party outlets. Company official Crawford Davidson remarked, ‘Up until now, our customers have used Tesco Clubcard vouchers primarily to buy more shopping for the home. However, from now on, “Me Time” will give customers the options of spending the rewards on themselves.’

As a result of the above strategies, Tesco was able to increase returns even as it reduced promotions. Dunnhumby prepared a profit and loss statement for the activities of the marketing department to help assess the performance of the Clubcards initiative. Dunnhumby claimed that Tesco saved around £300 million every year through reduction in expenditure on promotions. The money saved thus was ploughed back into the business to offer more discounts to customers.

By the end  of the 1990s, over 10 million households in the UK owned around 14 million Tesco Clubcards. This explained why as high as 80 per cent of the company’s in-store transactions and 85 per cent of its revenues were accounted for by the cards. Thanks largely to this initiative, Tesco’s turnover went up by 52 per cent between 1995 and 2000, while floor space during the same period increased by only 15 per cent.

An invincible company? Not exactly…

Tesco’s customer base and the frequency with which each customer visited its stores had increased significantly over the years. However, according to reports, the average purchase per visit had not gone up as much as Tesco would have liked. Analysts said that this was not a very positive sign. They also said that, while it was true that Tesco was the market leader by a wide margin, it was also true Asda and Morrisons were growing rapidly.

Analyse Tesco’s Clubcards scheme in depth and comment on the various customer segmentation models the company developed after studying the data gathered

Analyse Tesco’s Clubcards scheme in depth and comment on the various customer segmentation models the company developed after studying the data gathered.

Analyse Tesco’s Clubcards scheme in depth and comment on the various customer segmentation models the company developed after studying the data gathered.

Tesco’s growth was based largely on its loyalty card scheme. But in recent years, the very concept of loyalty cards has been criticized on various grounds. Some analysts claimed that the popularity of loyalty cards would decline in the future as all retailing companies would begin offering more or less similar schemes. Critics also commented that the name ‘loyalty card’ as a misnomer since customers were primarily interested in getting the best price for the goods and services they wanted to buy.

Research conducted by Black Sun, a company specializing in loyalty solutions, revealed that though over 50 per cent of UK’s adult population used loyalty cards, over 80 per cent of them said that they were bothered only about making cheaper purchases. Given the fact that many companies in the UK, such as HSBC, Egg and Barclaycard had withdrawn their loyalty cards, industry observers were skeptical of Tesco’s ability to continue reaping the benefits of its Clubcards scheme. Black Sun’s Director (Business Development) David Christopherson, said, ‘Most loyalty companies have a direct marketing background, which is results-driven, and focuses on the short term. This has led to a “points for prizes” loyalty model, which does not necessarily build the long-term foundations for a beneficial relationship with customers.’

Commenting on the philosophy behind Tesco’s CRM efforts, Edwina Dunn said, ‘Companies should be loyal to their customers—not the other way round.’ Taking into consideration the company’s strong performance since these efforts were undertaken, there would perhaps not be many who  would disagree with Edwina.

 

 

Questions:

  1. Analyse Tesco’s Clubcards scheme in depth and comment on the various customer segmentation models the company developed after studying the data gathered.

  1. How did Tesco use the information collected to modify its marketing strategies? What sort of benefits was the company able to derive as a result of such modifications?

  1. What measures did Tesco adopt to support the CRM initiatives on the operational and strategic front? Is it enough for a company to implement loyalty card schemes (and CRM tools in general) in isolation? Why?

 

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