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“Do you collect points?” This is the first question a cashier in any Chilean supermarket usually asks before scanning your groceries. Up until a few years ago, your answer did not necessarily predict whether you would return to that store or another of the same brand. That’s because collecting points was easy but redeeming them for products was a hassle. These days, however, it pays to collect points that can be redeemed for everything from cash discounts to concert tickets and holidays in San Pedro de Atacama.

Loyalty programs are nothing new. They have been used by Chilean companies as a tool, or some would say a trick, since the 1980s to reward their most loyal customers and stop them from switching to the competition.

One of the earliest programs in Chile was El Mercurio’s Club de Lectores, which gives subscribers significant discounts at associated stores, service stations, restaurants, movie theatres and more. Since its creation in 1985, the program has been very successful and is widely imitated by others, including rival paper La Tercera.

But it was the airlines – starting with American Airlines’ Advantage program established in 1981 after the deregulation of the US airline industry - that invented the modern concept of loyalty; giving value back to loyal customers in the form of points or miles, which can later be redeemed for products or free flights.

In 1985, LAN Airlines established its LANPASS frequent flyer program which has become one of the most successful loyalty programs in Chile with 1.8 million members.

It works, like other similar programs, by making customers more likely to fly with LAN again even if it costs more. For example, a member who is 2,000 kilometers short of the number needed for a free flight to Miami will fly with LAN – or another member of the One World alliance - on a shorter flight to Buenos Aires even if the ticket is more expensive than the competition.

Of course, earning kilometers or miles is only one factor travellers consider when choosing an airline. Another is the quality of inflight service for which LAN often wins international awards, but the loyalty program gives customers another reason to fly with LAN, says Ralph Piket, CEO of LANPASS.

Almost 90 percent of LANPASS kilometers are currently redeemed for free flights on LAN – about 1,000 of them daily worldwide – but some members complain that earning enough kilometers for a free flight can take years, depending on how often they fly, and there are restrictions on which flights they can choose.

LANPASS aims to make its redemption system easier to use with the launch of version 2.0 of its Flexible Rewards System later this year, says Piket. But it is also giving members more options to collect and redeem kilometers.

Thanks to agreements with companies like Unimarc, Petrobras, SalcoBrand and Movistar, LANPASS members can collect kilometers every time they buy groceries, fill up with gas, use their mobile phones or stop at the pharmacy. Banco Santander Chile also issues credit cards that allow clients to earn kilometers every time they make a purchase.

“People feel more tied to LAN if they can earn kilometers from other sources,” says Piket.

And for LANPASS it’s better if members earn more of their kilometers on the ground. Currently, only 45 percent of kilometers earned by members come from flying with LAN, while the other 55 percent are earned through partners like Movistar and Santander.

 “The more places you can earn and redeem kilometers, the better it is for the customer and the better it is for us,” says Piket.

Sweet as Nectar

But it’s not just airlines that have realized the benefits of giving loyal customers more redemption options. Chilean retail group Cencosud’s Nectar program, which was launched in August last year, has already become one of the country’s most successful programs by doing precisely this.

It allows shoppers to collect and redeem points at a variety of stores including Cencosud’s supermarket chains Jumbo and Santa Isabel, its department store chain Paris and its Easy home centers. Customers can also earn more points by using Tarjeta Más credit cards issued by these stores.

Unlike standalone programs, such as rival supermarket Lider’s Mi Club which offers discounts at the checkout, Nectar members can use their points on everything from products and holidays to live concerts. Over 2.4 million members have already signed up on the website or in-store and 1 million of these have redeemed.

This is not Cencosud’s first attempt to earn customer loyalty but its previous program, Círculo Más, failed to deliver the expected results. Customers couldn’t be bothered lining up to exchange points for products that were often out of stock and the redemption options were limited.

But Nectar is much more user friendly. You just give your ID number when making a purchase and, once you have over 5,000 points, or 4,000 at Santa Isabel, you can use them for a discount at the checkout by presenting your Nectar card or redeem them online for trips and products.

Nectar was developed by the UK’s Loyalty Management Group (LMG), which was acquired by the Canadian loyalty management firm Groupe Aeroplan in 2007. After several years of negotiations, Nectar was licensed to Cencosud through an exclusive agreement signed in 2009. In the UK, Nectar members have literally hundreds of options to collect and redeem points, but in Chile the options are, for now, limited to Cencosud’s business units.

Still, the fact that Chile is able to import an international program like Nectar shows that the loyalty market has “matured,” says Sebastian Goldsack, executive director of Chile’s Direct Marketing Association.

“The trend is towards programs that are more relational, multi-brand and transversal,” says Goldsack.

As international loyalty programs become more popular, some have become profitable companies on their own. This is the case with Groupe Aeroplan, which began as Air Canada’s loyalty program and is now worth more than the airline itself. It is expanding in South America and currently provides consulting services to both Cencosud and LANPASS.

“Nectar’s results have been very positive,” says Hugo Cisternas, Loyalty and Alliances Director at Groupe Aeroplan South America, which is based in Santiago.

As opposed to traditional loyalty programs that are basically coupon catalogues, Nectar gives value back to the customer. “Each time you buy something in one of Cencosud’s stores, a percentage of the purchase comes back to you through the points you earn,” says Cisternas.

But loyalty has a price. The investment by Cencosud for a top of class loyalty program is “significant”, notes Cisternas. Over 35,000 workers have been trained to use the new program in Cencosud’s business units.

Still, in less than a year that investment is paying for itself. In Chile’s fiercely competitive supermarket industry, for example, Nectar members are spending more at Santa Isabel and Jumbo, especially in the higher income segment, says Cisternas.

Consumers have caught on quickly to the benefits and, according to Nectar, in-store and online promotions for bonus points and redemption deals have been successful.

Paris has also captured a greater market share, forcing its competitors to react. Falabella, which has its own loyalty program CMR Puntos and remains Chile’s leading department store chain in terms of sales, has signed an agreement with Easy’s rival, Home Center Sodimac, while Ripley has revamped its RipleyPuntos program.

But the greatest benefit of Nectar for Cencosud is the ability to obtain detailed information about its clients. Nectar currently tracks how much each customer spends, which helps design better marketing campaigns, but in the future it could also analyze the bill to make promotions more targeted.

For example, a woman who buys diapers at Jumbo may receive an email promoting other baby products a few days later. This type of direct marketing is already common in the UK, but it will take time to develop in Chile, says Cisternas.

“The program gives the company a mix of tools to relate better with the customer,” he points out.

Data management

But collecting data at the checkout is useless without the ability to analyze it. Sophisticated loyalty programs like Nectar require data mining and business intelligence to track customer behavior and customize benefits.

The technology exists in Chile to do this but the problem, according to Rodrigo Edwards, executive director of the marketing agency Edwards & Asociados, is that Chilean firms don’t spend enough on research.

“This is the biggest weakness of loyalty programs in Chile,” he says.

Chilean retailers spend far less on marketing studies than their counterparts in developed countries, meaning loyalty programs tend to be less effective.

Analysts are needed, for example, to keep track of how many customers click on advertising emails and which of those redeem points. Using this information, companies can then design campaigns that target specific segments of their customer base.

And this type of data analysis can improve the results of loyalty programs significantly. “It’s an investment that pays for itself very quickly,” says Edwards.

Some companies, like LANPASS, manage their customer data internally, but for smaller firms outsourcing this service can help to keep costs down.

One Santiago-based firm that offers this service is Celmedia, which was founded in 2002 and now has offices throughout Latin America providing mobile marketing and data management solutions.

Celmedia’s co-founder and sales manager, Mario Cumsille, agrees that one reason for the failure of some loyalty programs in Chile is that companies don’t measure their results.

“In many cases only a small number of clients use these programs because it takes too long to collect enough points to redeem,” explains Cumsille.

Some 18 months ago, Celmedia began offering customized loyalty platforms to its clients including technology that allows them to collect and analyze data about their customers.

Celmedia already has several major clients including Movistar, Corpbanca and Unimarc, and the results have been promising, says Cumsille.

Though there are some pending issues, like the high cost of Internet access in Chile compared to other countries, the loyalty market is competitive and poised for growth, he says.

Shifting loyalties

But earning customer loyalty is harder than it used to be. Through social media like Facebook and Twitter, consumers have access to more information than ever before and they are increasingly picky.

The success of LANPASS and Nectar shows that Chileans value the freedom to earn kilometers or points through different brands. But many Chilean companies still have the mindset that loyalty means strengthening the relationship between the customer and their brand, or brands, exclusively.

In other words, they don’t want other companies to “harvest” the points they have sewn, says Goldsack. “Loyalty programs are no longer about just a single brand, but many brands”, he says. And these brands form a virtual community with the customer at its center.

But with websites like Groupon already offering deep discounts on many products and services, customers expect more from their favorite brands than just coupons.

This explains why programs like Club Metrogas, the loyalty program of the Chilean gas distributor, allow customers to redeem points for free movie tickets, holidays and carbon footprint offsetting.

“The trend is towards programs that offer memorable experiences and greater participation,” says Edwards. This means tracking customer tastes and preferences over time, which is easier to do using modern technology and data analysis.

For now, most Chilean companies still prefer to manage loyalty programs internally but outsourcing loyalty management is an option worth considering, especially for smaller firms that don’t have the economies of scale or cash flow to support in-house programs.

Chile has the technology and human capital to develop innovative loyalty programs that are adapted to the local market. But as customers change, the concept of loyalty is changing with them. The question is will Chilean companies be able to keep up?

Julian Dowling is editor of bUSiness CHILE