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Doug Reed: Disrupting ‘Rewards’ programs – The battle for retention

Loyalty programs are well known in the South African environment. And with banks and insurance companies at the heart of the rise, Ebucks, UCount, Multiply and Vitality, to name a few, have become household names. But these are all tied to big business, and there’s a gaping hole in the small to medium enterprise. And this is where serial entrepreneur Doug Reed’s Loyalty Specialists comes in to play.

Formerly from Vox Telecom, Reed is putting programs in place for the segment of the market that are unable to go it alone. It’s a disruptive idea, and Biznews’ Alec Hogg sits down with him, unpacking all that there’s to know about these ‘reward’ programs. – Stuart Lowman

This special podcast is brought to you by the Loyalty Specialists, whose founder Doug Reed, is with Alec Hogg in the studio. Doug, people will remember you from your days at Vox Telecom and in fact, you’re a serial entrepreneur. Just take us back to where you’ve been in the last few months.

Alec, I left Vox last year, in January. Spent the year trying to sort of stabilise and find out what I actually want to do, and invested in a couple of small start-ups. I enjoy that. I love growing businesses and I enjoy the energy of a start-up, the sort of ‘no rule books’ the ‘blank pieces of paper’ in terms of your strategy, etcetera.

How do you find these people?

Interesting and fun, everyone funny enough faces the same challenges, I mean I was amazed at this year’s strategy session I could have used the slides from a recruitment company in the mining industry, it was completely universal. Every businessman that I’ve come across is facing the same problems today.

Your background really, was in entrepreneurship and particularly well known because of Vox Telecom.

Well, Vox Telecom we had to be entrepreneurial. We were late in the game. We only entered the internet space in 1998, and we had to differentiate ourselves and essentially, Vox became a marketing company. Marketing other ISPs or other Telco’s as businesses and developed into a Telco over the years.

Now you’re going into a completely different area on the Loyalty Specialists. Where was your inspiration?

The Loyalty Specialists, one of the objectives is the reward for the Loyalty Specialist, we sell, these coins, and this a new business we’re launching in the next month or two. These coins are like, to keep it simple, like Voyager Miles.

Except you can do it in the broad context of anything in the leisure industry. You can reap them but we want to get rid of the stigma of Voyager Miles, it makes you into a second-class citizen. I think if you have to look at a case study of how not to do a Loyalty program, it probably is Voyager Miles.

That’s funny, I read about that this morning. Their whole approach to it was to rebase and retransform it and I guess that’s one of the challenges, if a Loyalty Program gets so big that how do you actually fulfil all the commitments?

Well, I think first of all it must be easy to redeem. It must be simple. It must give you value for money and it must be an indulgent type purchase. You don’t want to give a discount, otherwise it defeats the object, and it must be a reward that you reward yourself. Hence, we’ve stuck to the leisure industry. We’ve included flights and included direct bookings on flights, so that there’s almost no way you can’t do it. Ultimately, we would rather they book their holiday through us because in that way they earn more loyalty rewards, I’m talking about the consumer.

All right, let’s just go back a little bit. This is a completely different business to Telecoms.

Yes.

What drew it to you?

What happened with the Loyalty Specialist was I wanted a business that provided an annuity income, and the Loyalty Specialist is something that formed in my head as a problem a CEO faces. You know if you are a CEO of a reasonably sized business, to enter a Loyalty Program, if you’re not in it, especially something different like a ‘Be-to-Be Program’ or something like that.

You say a ‘reasonably sized business’.

I would say R10m – R20m a month plus. That type of size.

All right, so it’s not a Discovery or a SAA or FNB.

No, it’s not the top 100. I think they’ve done it.

They’ve got their own Loyalty Programs.

They’ve done it and got the resources to implement it and it’s fairly, cost effective. When you get smaller then that it’s a very costly exercise and then like all CEOs, they’re faced with resources. To find people to do the project is difficult because it needs energy and focus to get it off the ground.

The other problem is it’s costly, then the second problem is that if you use, for example, consultants – that becomes expensive. I’ve tried that in the past. It does work but it is an expensive exercise, so we’ve really outsourced the administration of the Loyalty Reward Program, for CEOs and we’re not replacing the marketing department but we want the CEO to make quick ad hoc decisions.

If he wants to, for example, reward customers for purchasing a certain range, or switching to COD, or switching to debit order, for example or whatever he decides to influence behaviour he can do that relatively quickly.

I subscribe by that ‘keep it simple’ policy (simple/stupid) because that’s all you really want. If you put in complicated software then you need somebody to run it, and often these things just languish, so it must be easy to implement, easy to use. We do the ‘pain in the neck’ stuff, for example the integration. Getting the information out their systems, and then obviously, customising the reporting. Again, keeping that simple, they just need to really, measure the successes of the campaign.

Doug-Reed-and-Alec-Hogg-in-Studio large


Biznews’ Alec Hogg (R) sits with Loyalty Specialists founder Doug Reed (L).

Let’s just understand this. You’ve got a business of somewhere between R200m – R500m turnover a year. You need to retain your customers because we know it’s easier or certainly much, more profitable to retain customers than to try and get new ones, so you need some kind of a Loyalty Program but you’re not big enough to do it at the moment. Is this where you come in?

This is where we come in, so we believe, first of all in growing businesses differently. That’s my passion and that’s what I really do enjoy, and you can make a major change in your business by changing the behaviour, changing the behaviour of your staff, and changing the behaviour of your customers by just influencing them with a sort of character approach.

Agnostic because you can be quite effective by not earning your rewards, (which is a stick), but much nicer doing that than sending your customer an interest bill, for not paying on time, it’s just a little bit softer, so we provide the platform.

That administers it, and implements it and runs the program and then, essentially we look at a variety of things. We look at customer retention I think that’s critical, and it helps but, more importantly than that is the fact that you can also select your top customers and look after them in a sort of Rolls Royce type fashion.

What’s interesting is I’ve been doing some work on the Chief Procurement Office of the Government and they spend R10bn on travel agencies for Government flights and they don’t get a single reward back for it. They don’t even get discounts on their flights, so that’s kind of the one extreme. On another extreme, I suppose if you are a medium sized business and you do have a lot of travel, as an example. To manage that whole thing is pretty difficult. How do Voyager Miles work, etcetera? Isn’t this a minefield for you too?

Well, not really, because we want the redemption to be fairly quick. They just go in and redeem, and it’s online and they can choose what they want.

So it’s simple.

Yes, it’s simple on that basis. Where we’re looking at is like, for example, a paint manufacturer. He might have a couple of thousand hardware stores, a couple of thousand building supplies, maybe some panel beaters, etcetera on their books, and they don’t have loyalty schemes because everybody thinks it’s like Clicks shopping rewards sort of thing.

Where it works well is, it works extremely well for SMEs because it allows that owner to get a stake out of that business. It might be a trip overseas to visit his kids in Canada, or it might be take those points and reward his staff, the salesman of the month can get a weekend away.

There’s so many things you can do with that off balance sheet type of reward system, and we did it personally. I mean this was born out of my experience. We paid our telephone accounts at Vox with American Express ticket Voyager Miles, so we had millions and millions of Voyager Miles coming in a month.

We used that to cut costs for the company. We used it to incentivise staff. We used it for a variety of things and we became very user friendly, and I’ve always believed in that. When my previous life as Mica Hardware I was trying to come up with some sort of system because there you could see it work incredibly well, where those SMEs needed just a bit of luxury, a bit of an indulgent purchase.

They would come back to Mica rather than going to another hardware store because of it.

Well it becomes… The retention factor is quite big because if you put in, for example, say you’re taking your current purchases are in the communications side, and you’ve got R50 thousand a month with three different suppliers. First, it’s a great way to influence that customer to bring all his business into one, so that trebles it.

Then you can exponentially increase the miles, as they become more loyal. What I said earlier about rewarding your top customers is critical. I mean Harrows Resorts are the ones who own Caesar’s they basically invented this.

They recruited an academic from, I think it was Harvard who specialised or wrote a thesis on loyalty incentive schemes, and that’s become the gold standard. I think their reward system I think is called Total Rewards. It contributes 80% to their profits today.

I think all the casinos around the world have copied them. Now that’s looking after your top customers, so that’s an option but another important factor is you can engage with your customers. In the old days, you could take a leaflet and put it with your statement and you’d probably get a variety and a big portion of your audience.

Today that doesn’t happen. Your statement arrives online. It’s read by somebody who’s processing payments, and it’s not necessarily the CEOs. You can’t communicate with them. Junk mail everybody takes it out, anything that’s irreverent will be cluttered with information, and also to reach your customers is impossible.

We used to put an advert on TV on one or two channels, and you can see the country today, with PVRs and multiple channels. You can’t reach your customer and this way, because you’re sending out a simple Loyalty statement every month, and it’s normally directed to one of the senior executives you can communicate.

You wonder why it took a gaming or a gambling operation to work this out. I know you read widely. Robert Cialdini’s book called ‘Influence’. It’s all about how we’re wired and we’re wired to reciprocate, so if I give you something you’re going to reciprocate back to me. That’s how we are as human beings.

Yes, that’s how we are.

That would translate pretty obviously into a…

Yes and your customers are second-class citizens. I remember once at Vox, we purchased Absa customers and we gave them a whole lot of incentives when we joined them but I couldn’t widely publicise it because our existing customers didn’t have those incentives and it’s wrong.

You can’t. In other words, you can’t give new customers something you aren’t giving your existing customers.

Yes, or if you’re a subscriber to Fortune Magazine, for example, you really are a second-class citizen. If you cancel the subscription and you apply, then you get all sorts of incentives and discounts to sign another subscription, so it’s wrong and, as you said, if we reciprocate properly and also use it properly. If you’ve got this opportunity to engage, really use it to bounce off your customer.

That’s an interesting point, so it’s almost like the marketing department is incentivised to bring in new business, so don’t worry too much about the existing business.

Yes.

Hence, you see the Fortune Magazine that you’ve just mentioned but actually, running a business you want to retain your customers rather than worrying as much about bringing in new guys.

Subscription businesses, like Telecoms business, are even more vital. If you take an easy to switch customer like, for example, ‘pay as you go’ they are at the bottom end of the market, lose four percent a month. That’s half your customer base and here, your cost of acquisition is incredible and that obviously, magnifies it. 

I think typically, if you can keep your retention rates sub two percent that’s quite good and if you improve this by another, say 25% it magnifies at the end of the day, in terms of your, because subscription businesses are, by reality, compounding businesses. It’s almost like compound interest but you can’t afford the attrition, so retention is critical on the subscription.

Hence, Loyalty Programs, Discovery knows all about this, don’t they? Is there anything you’ve learnt from them?

Yes, they’ve done it incredibly well. They’ve almost built an ecosystem and I was just, obviously now looking at the flight industry, (the travel industry), which is as you can imagine how complicated it is selling air tickets. I think Kulula has benefited extremely well out of that, part of that ecosystem. Obviously, it works well.

We’re not trying to emulate Discovery. We’re looking at companies that want a loyalty system because I’ve met people in smaller medical aid companies that battle to afford a rewards system, and if I tell you to run it as a separate business. It’s got its own profit and loss section, so it doesn’t really cost them that much.

If I understand correctly, you’ll be almost like the Vitality for SMEs, or not for SMEs but for medium sized businesses. They can’t establish their own loyalty programs. There’s a lot of complications there. You can do it all for them and, also organise the rewards.

Yes, but keeping it slightly more simple. We’re not going to spread it. We don’t believe in cashing in your rewards for vouchers at a shopping centre. You might as well just give cash. Why do credit cards use air miles because there’s a bank, it’s very easy for them to give an extra one percent to their customers, so there’s a very good reason to have this indulgent type luxury.

You say ‘indulgent’ so what can I cash these coins on?

Anything to do with leisure, so you can book a holiday and you can book your flights, anything to do with hotels, so basically a travel agent.

So I can’t go and buy myself luggage from Sandton City?

No.

But I will be able to go to Sun City?

Yes, so it’s not a grudge purchase because, at the end of the day the luggage is the grudge side. The holiday is the luxury bit. If you’re selling golf clubs, it’s a fun purchase. Replacing your gloves is a grudge purchase. One of the reasons I’ve gone into this is I want to get out of the grudge purchase business.

So the indulgences, as far as your business is concerned, (the Loyalty Specialist) will be what? What will the R500m a year company be able to reward its customers through?

In coins, which is our travel agent side of the business.

So you would earn the coins for doing business with my company.

Yes.

You can then redeem them at…

An online travel agent, essentially.

Anyway, you want to.

Anyway, you want.

Can you give it to anybody you want to?

Yes, you can transfer them. We’re going to make it, you have to for accounting reasons, have some sort of time limit on these things but we want to make it very generous and lots of time. We’re going to be membership driven, so it gets us closer to the customer. We don’t want to, for example, when he gets onto the page, produce a teenage holiday experiences, when they’re retired and they want something like a cruise, for example.

We want to profile the members to make sure that we offer correctly and then being online and being a New Millennium business, we want to cut the margins. That’s obviously, the disintermediation component, and we want to work on…Typically, travel agents worked on ten to 15%, but the airlines obviously changed that dramatically.

Some airlines are at zero percent. What we’d like to do is work on six and eventually get that down to three. What we make in excess of that, we won’t pass back as a discount. We’ll pass it back in coins and we’ll reward those customers for rating that holiday and referring it, etcetera.

Bring a bit of social media into it.

It would be very social-media orientated and the ‘Loyalty Specials’ is just using that platform as a place to redeem. The reason I did this is that I looked at a Loyalty scheme in the past and I wanted to use Voyager Miles. I realised it was impossible. It was possible at that stage to deal with SAA. They were actually very expensive.

I could have given the customer a cheque and they would have been better off. You had to pay airport taxes and all sorts of things and it just became difficult. I thought that would I’d do then is just give them a voucher to the travel agent.

That’s how the Loyalty concept started. When I decided to go into the online travel business …and really, we were going to try to be the Uber of travel. That’s a bit of a grandeur scale, but I tend to have these crazy goals.

You did okay with Vox.

Yes, we did grow it quite fast and then I realised we don’t have the annuity component in this and hence, the birth of the Loyalty Specialist, which was something I always wanted to do. I always enjoyed that type of business and (I think it’s very important) I like that referral – almost bringing your customer as part of your company, almost treating your customer as part of your community, which is easier said than done.

You can’t sue your uncle if he is part of your family because he hasn’t paid his bill so you have to treat your customers slightly differently but I think that in today’s world – especially with these new generations coming up, it has become more and more critical. Let’s be honest.

One of the factors that I drilled in to all the companies I’m invested in is ‘if you’re going to do the same as you did last year, you’re going to get the same result. You’ve got to do things differently’ and we’ve just gone on and on, and on.

I think you did that article on ‘Throw away the rulebook’ in the David and Goliath story. That’s instinctive. I hate these rulebooks but smaller companies can do that and they can be different. Otherwise, we are just going to follow the economy basically, which is not great at this stage.

So, it’s disruptive. It’s offering benefits to company’s who, at the moment, can’t get them but is it cheap? What does it cost?

That’s one of the biggest inhibitors. If the company does it themselves, you end up with software costs, consulting costs, setup costs, and the whole of your internal resources focuses on it becomes extremely expensive.

The other option is if you hire a consultancy company. Again, you’ve got that massive cost so what we’ve done is we’ve gone on the same principle (6%). For example, if you allocate 2.5% of your turnover, our costs are 6% of that, which is 0.5%.

Just unpack that for me again. I’ve got 100 million turnovers today.

You allocate 2.5%.

That’d be 2.5 million.

We will charge 6% of that 2.5 million.

How do you make a business out of that? It’s very small. It’s like R180 000.00.

Well, it’s dependent on the success of the Loyalty campaign. Many companies won’t implement at the stroke of a pen. It would be designed to reward customers who switch to debit orders and that will be trickling in. It’s important for us to make it work so we can’t just sell it and run. It makes us part of that marketing campaign to help it work.

Secondly, it’s scale. Don’t forget that this is not our primary business. We’re leveraging off the travel business where we have the technical platforms, and we have the technical skills. We’ve got technical skills that are used to integrating systems and pulling information out.

You have a travel business, which is itself disruptive in the online space and now you’re going to add Loyalty programs to it, which gives you greater scale. I understand the travel business.

Yes. We’re really, a technical and a marketing company (to be honest) and that’s our skillset, and that’s what we’re going to do for the customers. We’re not going to go and teach that paint company how to market. We’re going to go and provide them with the tools to market their own business, but keeping it ‘simple and stupid’ and maybe give them some ideas.

So, it would be people who’ve been thinking about this up to now, haven’t been able to implement it because of the costs and complexities. You hold their hands and are their partner in it.

Yes, and also people who perceive that it’s not for them. A business might say ‘it’s a consumer product’ and the consumer Loyalty schemes have a bit of a bad name. You have so many different cards so it’s slightly different. Where it is very effective is that little paint store might buy R1m per month. R1m per month accumulates a lot of points as opposed to a consumer who can take four years to get close to that – that type of scenario.

As an SME, you would presumably want to be doing business with those companies who can give you these rewards that you could use for the family’s holiday.

Yes, or for your own staff or a variety of reasons – even to cut your own expenses. If you have travel costs, it helps. You can even use it a little bit for variety of reasons.

Doug, you always think big. How big are you thinking here?

It’s early days, but my goal…It’s crazy to have a 25 year business plan at 57.

Why not? Warren Buffett’s 85.

People call me crazy anyway but essentially, I want this to be a billion dollar business and I have a ten-year horizon. Maybe it is a bit ridiculous.

You said Dollar. Does that mean external/outside of South Africa as well?

Yes, I wanted us to be a multinational business – hence, the .com domains etcetera. We definitely want to be international but we want to start here and make sure it works. Something like the Loyalty Specialists and growing businesses… We’re passionate about it. We love doing something different and we love being able to bounce ideas.

My greatest pleasure in another business is part of the brainstorming sessions. I don’t even like the formal strategy sessions. I like the brainstorming sessions where we come up with various/different ideas to try and differentiate. At the end of the day, a lot of these ideas don’t work. You need to try something, improve it, and try again but it leads onto something else.

Any activity leads to more business. It just adds to the energy of the business. Again, there’s not a massive cost factor here. If a customer tries this and after a year, they decide ‘this is wasting my time’ then get out of it with no massive investment. Obviously, it’s in our interest to make sure that it does work otherwise they will get out of it.

In a way, it’s quite interesting that the entrepreneurial space has been neglected by many companies. I know Mercantile Bank is focusing there as well. You, being an entrepreneur yourself, can speak the same language to the people whom you would like bring in.

Yes. Obviously, our strategies diverged when the banks took over Vox but essentially, my strategy was that Vox was a marketing company – not a Telco. I was very keen on doing a deal with Telkom to supply their SME’s. They have got 330-odd thousand SME’s. It’s a massively powerful position. Nobody can market effectively to those in a block.

I felt that the power of Telkom (for example) is that marketing division to the SME’s and if they could harness that properly with things (and again, I was obviously going to use a Loyalty scheme there) and then use it, and focus on an area. It’s a difficult model to sell because nobody else has done it. As a result, it’s almost impossible.

It’s easy to say, “Look, we’re going to follow so-and-so.com in San Francisco” because everyone knows what you’re talking about. That was my idea. All of this blends into what I was wanting to do anyway. I just decided to not go back into the telecommunications industry for a change, and I wanted something that wasn’t a grudge purchase.

I didn’t want short life cycles. This business fitted two pages of criteria because at the end of the day, if we’re not passionate and we don’t love what we’re doing, we’re not going to get very far if we don’t provide something that people want that’s literally value for money, easy to use, and fun.

You want it now. Get into people’s offices, tell them about how it works, maybe say, “Give us a try. It’s not going to cost you a lot of money anyway” and grow it to scale from there.

 Yes. We expect to sell three to four new companies per salesman and at this stage, two of us are focusing on the sales and we’ll grow it as we see. It’s a slower sales cycle. Implementation times take months so this is not a major thing but I’m used to selling like that.

In the early days, when we were selling Internet (when people didn’t even know what email was), it was a ten-month average so I’m used to that side of it. I do believe it will add value. I do believe we will add value even if that company doesn’t use us. We’ll add value. That meeting won’t be a waste of time.

Close relationships: you continue to build those. You’ve got many of those already with people from your previous career.

Yes. What I’m going to is I’m going to start with my own contact base and mail them, but I’m not aiming at middle management. I’m aiming at CEO’s, Marketing, and Sales Directors. It’s not the sort of sale where you have to plough your way through the corporate thing. If I can’t meet the CEO or one of the Senior Executives; well, we’ll go for the next one that we can.

Doug Reed, the serial entrepreneur who is focusing on the Loyalty game now. This special podcast was brought to you by the Loyalty Specialists.

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