Nectar : Making Loyalty Pay

Questions
1. What should Justin King do with the program?
2. What should Rob Gierkink do with the program
to keep Sainsburys happy?
3. What should he do to keep the other sponsors
happy?
4. What should he do to keep the collectors
collecting?
No Program
Loyalty programs are just a prisoners
dilemma
At best they are a cost of doing business.
Sanisburys should help break the
spiral of imitation by following the lead of
Safeway and Asda.
They cant pay out for a low margin business
like food storesyou need a 4% lift for a 1%
price cut.
Mimic Tesco
Why build Nectars brand?
Run the program in a manner that generates
gratitude to Sainsburys.
Dont help competitors like Thresher and BP.
Sainsburys point-of-sale equipment has been
hijacked to run Nectars business.
Stay With Nectar
Aint broke, dont fix it.
Attainability of rewards is much enhanced. A
weak brand-building tool is
inferior to a strong tool that can change
shopper behavior.
Sainsbury is leveraging the power of the other
coalition partners brands.

Mechanism of the Program
What should Justin King do with the
program?
There is no killer number to prove the program pays out for
Sainsbury, but there is a lot of partial evidence to suggest that
it works.

Low-cost communication to customers, both in brand-building
flyer inserts at 5 cents each and individually addressable
coupons at 1 cent each. Further evidence is that for a
segment of light shoppers (page 9) there was a sales lift of
$6.50 per week on a pre-promotion base of $100, which is an
incremental $1.63 of operating income given the gross margin
of 25%.
Should supermarkets try to be all things to all
people or should they serve only a segment of
the customers within a certain radius of a
store?

Sainsbury takes the view that a supermarket must try to serve every
household in its trading area.
They dont believe that a supermarket can restrict its appeal to a
particular lifestyle or demographic segment. The fixed costs of
operation are too high.
Consequently they use one-to-one marketing, through the medium
of Nectar newsletters, to customize the offering that each
household receives
Individual Approach
By customizing coupon values, each household sees not the same
price as all other households, but a net price close to its reservation
price.
A household some distance from the store is offered discounts on
total baskets (stretch incentives) over a certain size to compensate
them for higher travel costs.
A household close to the store faces higher prices on staples, but
might see lower prices on cosmetics if there is competition from a
local drugstore.
A household that under-consumes on fresh produce (suggesting
they use another outlet for this part of the basket) will be offered
discounts on fresh produce.
Households that are unresponsive to deals receive fewer deals than
those that exhibit high elasticity of response to deals.
Should Sainsburys Stay with Nectar or
Implement a Solo Program?
How crucial Sainsbury is to Nectars survival?
Sainsbury should demand more presence in
the program
But the stronger the Sainsburys presence, the
less enthusiasm there is for coalition partners
like BP and Barclaycard to participate.
Nectar faces a difficult balancing
act
Nectar apply one-to-one marketing to its own
balancing act? Can it promote Nectar in mailings
sent to new collectors, but as the collecting bug
takes root can it begin to promote sponsor
brands more prominently?
Each sponsor can use the collector database as a
whole to find customers they need to acquire.
There is the 2.9% lift that Sainsburys gets out of
the gate.
Should Sainsburys Buy Nectar?
Sainsburys is being exploited by Nectar ?
This program is a critical marketing resource.
Sainsburys is acting thoughtlessly in
outsourcing something so important. It needs
to own this asset. It cant risk Nectar raising
the price of participation once Sainsburys is
hooked.
Pros & Cons
Partners like BP and Debenhams would not
join a program run by a fellow retailer.
It took a trusted intermediary to act as
peacemaker among the big retail egos.
And as for the threat of holdup, if any party
threatens to betray the interests of another,
the threatened party can force the liquidation
of Nectar. In this manner, a strategic asset has
been successfully outsourced.
How Can Nectar Do Better?
End of the first year Nectar is earning $20
million a month from sale of points and has a
gross margin of 23%.
There are three sources of revenue
The program support fee
Interest on the float
Points breakage.
Nectar broke even on 20 million of revenue
Nectar could be doing substantially better if it
served only the top two quintiles of its
customer base.
Nectar can reduce the cost of serving the less
valuable customers?
Introduce Nectar tiers, offering higher levels of
service and rewards to customers who are
more active collectors?
Why Nectar manages the data of all collectors,
when it makes 157% of its contribution from only
40% of its collectors, and manages the other 60%
at a net loss? Table A

Nectar keeps records of all its collectors because it
wants to make revenue from direct mail to these 13
million names, not from the points spread across the
whole database. If it wants to grow its business it has
only to persuade its sponsors to do more PUM
mailings, and charge for them.

Core problem facing Nectar is how to get its
collectors to redeem points for something
other than a discount in the supermarket.
Summary
Point of the program is to let retailers do one-
to-one marketing.
To see that high fixed cost businesses like
supermarkets need very broad appeal, so
there must be some degree of differential
tailoring of their offerings to different
customer groups
Supermarkets in this sense are like airlines and
hotels
Summary
An empty aisle, no less than an empty seat in a plane or an
empty bed in a hotel, incurs nearly the same cost for the
owner as one that is occupied
It is true that it is easier to run an incentive program that
gives away idle capacity when the margin on the product or
service is 80% (hotels) than 25% (food stores).
But a coalition program can let the food store customer
earn points in the store and redeem them on high margin
vacations, or catalog merchandise, and run very efficiently
when the direct-to-consumer communications program
shares its costs across coalition partners.