Alternative reward model for customer loyalty

Customer loyalty is a fickle thing, but craft accelerator Mighty Craft is investigating a new way to engage with fans of its portfolio breweries.

Just before Christmas last year the accelerator, which owns or part-owns breweries including Jetty Road, Ballistic and Slipstream, announced to the stock market that it was engaging in a trial with startup Upstreet.

The partnership will allow Mighty Craft to offer fractional shares in exchange for money spent by customers at its Moonee Ponds and Hunter Valley venues.

Customer loyalty programmes such as Flybuys and Woolworths’ Everyday Rewards have typically been based on a rewards model, either offering deals, points or cashback for purchases.

Might Craft’s Mark Haysman said that the company was keen to get a loyalty programme in place, but one with a difference.

“We loved the concept of ownership and the strongest way to drive loyalty is ownership. We thought it would be a good business to help us build loyalty in terms of our businesses,” he told Brews News.

“People are familiar with loyalty programmes and are intrigued by this one, which offers them a chance to own a piece of the venue they are eating or drinking in, and we are communicating it through staff and simple POS, and will learn from how that goes.

“Share loyalty is scientifically proven, and if we could do that for Australian craft then that would be a really good thing to drive more people into our venues.”

With breweries constantly looking to cement customer loyalty from sometimes fickle fans beer clubs and equity crowdfunding campaigns have, until now, been the tools of choice. Mighty Craft’s ambitious new programme is the first time the Upstreet model has been used by craft brewers.

How does it work?

The Upstreet model firstly relies on the company being listed on a stock exchange, although there are options for non-listed companies.

According to Upstreet co-founder Christian Eckelmann, the idea came to him after seeing the diminishing returns on frequent flyer miles.

“Especially in the past couple of years, they started to decline in value for me as a user “ Eckelmann explained.

“I thought there should be a better way of doing loyalty, in a transparent way where you give back, because cashback doesn’t really drive loyalty we believe – you might go there because you get cashback, but you will go to a competitor if they offer more.”

It is already in its embryonic stages in the US, and it’s not even a completely new concept to Australia. Up until the early 2000s, Myer Coles increased their shareholder base from 62,000 to around 500,000 through its discount card scheme, before it was rolled back due to the complexity and expense in maintaining it.

The ownership-based loyalty scheme also has parallels to equity crowdfunding, which creates shareholders out of loyal fans and customers, although for different ends and via different means.

“I’m not an expert in equity crowdfunding, but we looked into it and my understanding from the regulator is that you need a prospectus, there’s a lot of regulatory hurdles offered in this programme, it has a start and end date and you cannot run it indefinitely,” Eckelmann said.

“Upstreet is the best of both worlds. You bring in new people who hold shares but only get one more shareholder because a custodian holds the shares on behalf of the shareholders.”

In the case of Mighty Craft, the single shareholder is Sandhurst which operates as the custodian, and is part of Bendigo Bank. Customers receive fractional shares as a discount on their purchase with Mighty Craft. Those amounts can be relatively small and not cover a full share, so Upstreet has built a fractional share platform which allows investments of cents into shares.

“We have a unit trust where we put all of the shares we have bought from the stock market,” Eckelmann explained.

“Upstreet bought shares to seed the fund and if you spend $100 you get $2 in shares. We put that in the unit trust and once we reach limits, we buy in bulk shares from Mighty Craft and put it into the fund.

“One share becomes an amount of units so you own units which have direct exposure to the underlying share.”

The relatively complex structure is needed to reduce cost and enable micro-investments (fractions) in shares.

“We need to run it this way to be all low-cost fund. It would incur $20 transaction fee for each micro-investment, and a programme like that would not be possible.”

And, unlike with equity crowdfunding, returns come at regular intervals.

“When people receive shares, regulatory demands mean we send communications out. We have 80 per cent open rates on those, so we know people are engaged and want to know how their shares are doing.

“It’s been running for 3 months now with various companies and we’ve only had one person who sold their shares, that’s a good sign of high ‘stickiness’.”

Mark Haysman of Mighty Craft said that like Upstreet, the accelerator was in a high growth segment at a relatively earlier stage, and he was confident customers could make strong returns as part of the loyalty scheme.

“It won’t be life-changing but young customers who get on board can build a bit of wealth and help them towards something like a home deposit and so on – we expect to see people will do well from it.

“We also talk about social benefits in addition to the financial returns, and being part of something like this, people really connect to local communities and Australian-owned business and it gives people an opportunity to be a part of it.”

Will it work?

Dr Jana Bowden of Macquarie University’s Business School said that there was a lot of contention around whether loyalty schemes in their standard forms really work.

“All we have to do is look around at the number of reward and point schemes that are being offered to know that they have become a dime-a-dozen,” she explained.

“Open up your own wallet and take a look inside to count the number of coffee cards you carry, or check your inbox to see how many flight reward schemes you are signed up to and ask yourself – do those make you loyal?

“The ROI on loyalty schemes can be negligible for many brands and it’s often because the incentives being offered are irrelevant to the consumer, their lifestyle and their spending habits.

“Brands need to ask themselves whether schemes actually create a point of differentiation, whether they give a decent ROI, and frankly whether consumers are even using them in their decision-making when they purchase.”

Customer loyalty is hard-won and easily lost, particularly in the world of Australian beer, and companies need to delve deeper into what makes a customer loyal.

“Loyalty comes down to a mixture of attitude and behaviour. It’s psychological in the sense that brands are attempting to shape consumers’ ideas, attitudes, beliefs and feelings about what they buy. It is behavioural in the sense that these feelings and beliefs need to also translate into action.”

Upstreet and Mighty Craft’s relatively innovative approach has a ‘novelty’ factor she said, but it is also more multidimensional that other loyalty schemes on the market.

“It benefits both consumers who are a part of it, plus the brand because it deepens the connection between the two and creates a symbiotic relationship,” she explained.

“For the label this interconnection reinforces engagement – consumers feel more invested in it because they are a part of the brand narrative, and because the bonus is now a high-value proposition – not your basic, mundane points reward scheme.

“For the consumer, it gives them a future, longer-term brand orientation – they want to see the brand succeed because they are tied into it not only as a drinker but effectively as an investor – it’s in their best interests to support the brand.”

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