Loyalty Programs

By: Susheel Aswani, MBA I

When the customer comes first the customer lasts….


Customer Loyalty is what every marketer seeks to achieve. Here’s a look at Loyalty Programs, their feasibility and the requirements to create a successful program…


From delivering to your doorstep those pair of altered trousers, to wishing you on your birthday, from offering you customized meals in the comfort of a private lounge to providing you and your families with the dream holiday of a lifetime, companies are getting the message across loud and clear, You are a loyal customer, and we value you…

Loyalty programs have now become extremely common in the Indian scenario. The need for these programs is based on the simple principle: A customer is the hardest thing to get and the easiest thing to lose. In today’s day and age with intense competition today any firm has only 2 ways to maximize its share of the pie a) Increase its customer base and attract new customers b) Maximize the value from its existing customers.

More than 90 % of the organizations lose more than 30 % of their customers in a given year. The only reason that market share figures remain more or less stable is because the customers are traded between competitors. There thus emerges the need for Loyalty Programs, which when supported by Excellent service, and delivery of value can be a potent force in emerging as true leaders.

The power of existing customers is immense. One good experience can create enough publicity which cannot even be generated through the widest means of communication.

The power of customers is illustrated through the diagram shown here.


The power of existing customers

The numbers say it all when they highlight the importance of retaining a customer:

Reducing customer defections can boost profits by 2-85 percent.(Harvard Business School)
The price of acquiring new customers can be 5 times than the cost of keeping current ones (US Office of Consumer Affairs)
The return on investment to marketing for existing customers can be up to seven times more than to prospective customers. (Ogilvy and Mather Direct)


Unfortunately loyalty programs are not the panacea for all the problems a company faces. They can be tremendous value additions and key component in building up relationships with your clientele. But they can exist only when the core offering ie your products and services offered is delivering value to the customers. No loyalty program can succeed when the core benefits do not satisfy the customer. The pre requisite thus always remains that a company must go beyond the expectations of its customers and strives to achieve Customer Delight.

Disappointment Satisfaction Delight


The current scenario

In the present scenario there are numerous loyalty programs existing, and in many ways the Indian customer is exposed to the “points barrage”. Today the customer is rewarded with points for virtually any scenario be it the frequent flyer miles earned, the points accumulated in the lifestyle and apparel stores, or even at your neighborhood grocery store. No longer is it a novelty and with so many of them around, they no longer influence the purchase decision. Moreover they are an expensive affair and require a heavy investment from the view point of companies. A company needs to break through the clutter and firstly evaluate whether loyalty programs are economically feasible, and if so which customers can it be “special” to.

Getting Started

Today of the numerous loyalty programs existing in the country, only a few of them are actually boosting the sales, and satisfying the customers simultaneously. The process of starting a loyalty program is far from simple. It requires proper planning, analysis of data generated, designing of an offering, tracking the data and transactions, updates and feedback. The most crucial point to be noted is that Investment in Loyalty programs is not a guarantee of success and all loyalty programs which are successful, pay dividends in the long term.

One of the key starting points for designing loyalty programs is deciding the membership criteria. This could be either by making purchases above a standard threshold level set, or by charging an annual membership fees. In either case, the success of the program largely depends on which customers the company decides to target. Setting lower threshold limits is a fairly common practice for ‘frequent use’ products like grocery stores.

Loyalty Programs in the Retail Sector

The concept of loyalty programs in our country was introduced by Shoppers Stop through their First Citizens Program. Today the program has a membership of more than 300000 members. The first citizen members account for 20% of the footfalls but 57% of the sales. Moreover the average cash memo size of First citizen members is twice that of non- members. One of the major requirements for the success of the program is a strong IT Infrastructure. The program was restructured in 2000, along international lines when a 3 tier structure was started based on the annual purchase bill of the customer. Some of the special services offered to first citizen members include: exclusive billing counters for the Golden Glow card members, free delivery of alterations, additional reward points on purchase of private label brands, carry forward and web tracking of reward points. The rewards are further sweetened through exclusive shopping festivals held for the first citizens, and updates on sales promotions and offers through the magazine First Update.



Although the First Citizens club program has been immensely well received it has not gone unscathed without its share of problems. The billing time increases as virtually every customer needs a point update, moreover the customers have realized that the redemption of points comes at a heavy cost. Co-creation of value one of the basics of Marketing is seriously doubted from the customer’s point of view. The heavy investment in terms of IT and back-end infrastructure, and the frequent updations, have recently led to the slashing of points on offer leaving a large number of disgruntled customers.


Loyalty Programs are increasingly being used in other sectors of retail. To counter the advantages of the nearby kirana store, Loyalty programs have now been implemented in the grocery stores, and super markets. A typical example is the “TruSmart” card offered by the Tru Mart chain of stores. A one time purchase of Rs 500 could gain you membership of the club. Thereafter the customer enjoys a discount of 4% on all purchases. Moreover the company is in a position to collect data about the customers’ purchases, and also offer value added services like home delivery.


Making them Work

A company must understand that it cannot be everything to everybody. Although it is necessary to provide a delightful experience to customers it is crucial, that loyalty programs must be optimally designed to be economically beneficial. A company may categorize its customers on the basis of current revenue generated and potential for attrition. Those customers who are currently responsible for a major proportion of the revenue and who have a high potential for attrition are to be categorized as prime targets of the loyalty program. Another way to find out who your target customers for the loyalty programs would be by asking “ How likely are my customers going to recommend my product or service offered to others?”. The ones who would most likely do so are your “Idea Merchants” and they deserve special treatment.


Personalization has become the key: “ To know your customer is to love your customer” and a customer appreciates personalized, customized treatment. For those customers with whom the company has had a large gap between visits, they could possibly consider selling personalized mailers informing the customers of the latest in- store activities, and offers.

Two crucial points are to be kept in mind in the designing of the programs. Firstly if in case the loyalty programs have a tiered structure, then there must be a differential which encourages a customer to upgrade. Aspirations of the customers are to be targeted. Secondly, no one is going to make a purchase decision on account of mere points being accumulated. The customer must perceive value in what he would get after accumulating all the points. It is no longer enough to provide the customers with the run of the mill cash discount, or a gift voucher. If the reward is something which strikes a chord with the customer, causes him to look upon the pot of gold at the end of the rainbow with excitement, which gives him a sense of tangibility, only then would he consider accumulating those hard earned points. Abroad some of the innovative rewards include, a round of golf with Tiger Woods, or a test ride in F1 car! These are the “WOW” experiences which woo customers to be loyal.

The benefits of the programs should be clearly stated. These could be hard benefits in the form of discounts, or soft benefits like provision of toll free help lines, or magazines and free updates. Sometimes complaints arise that the free gifts comprise of the ‘dogs’ of the company’s product line. This is done at the company’s own peril as you can take the customer for a ride once, but not again. Moreover you have lost one precious ambassador, a potential evangelist for your brand. There are also complaints from customers that the data which the company collects, infringes on their privacy and many a time the sacrosanct database is sold to fellow marketers targeting similar customer segments.

Shining Examples

Just to drive home the point we consider 2 success stories. Raymond has long been the market leader in men’s apparel The company has recently launched its Premium Circle loyalty club in the metros. It realized that 9% of the customers account for 30 % of the sales and the average cash memo size of one its club card members is Rs 8000 as against Rs 2951 for a non- card member. The company has a tiered structure with Blue, Silver, Gold classes based on the size of the invoice purchased. The company has made an honest effort in delighting its members by offering fashion tips, personalized services and even free passes to events like concerts at the Belgian embassy, which have proved to be a hit with the customers and have ensured that the cash registers keep ticking away.

Loyalty programs in the real estate sector have been so far un heard of. But the Bangalore based Purvankara Group has innovated and succeeded. Owners and residents of the properties are offered a bouquet of tangible and intangible services right from home improvements to free tickets to movies. Apart from this the company allows its present member base of size 5000 families to earn through referrals. For example a Rs 25 lakh product sold would fetch a reward of Rs 25000. The company has managed to sell about 50 flats with a mere investment of Rs 50 lakhs on its Loyalty program.


The future ahead

Loyalty Programs have been introduced in numerous sectors. They have done rather well in the Airline Industry, particularly because they offer tangible and visible benefits like free trips, or personalized facilities. Also in the cooperative sector, certain cards have been introduced which require a monthly or yearly payment/fee and offer specialized services with respect to rations, and provisions.

With competition and international benchmarks set, a few loyalty programs are shaping up for the future ahead. Dual cards have become the order of the day. Earlier a few organizations had their exclusive club cards which could be used only at their outlets. For the customer it meant adding another piece of plastic to his already burgeoning wallet. Now the card doubles up as a credit/debit card, which can be used in other outlets. Considerable progress has been made through such collaborations like the Bharat Petroleum Petro Card, which offers convenience to customers by the usage of smart card, and lets them accumulate points which can be redeemed for points.


Another product launched recently was the first coalition program of the country, I-mint. This card brings together 6 large organizations, Airtel, HPCL, ICICI, Indian Airlines, Lifestyle and Make my trip and provides the customer with an integrated solution for his needs. Points are added to the kitty whenever the customer interfaces with the above mentioned companies, and can be redeemed.


Conclusion

Increasingly it is realized that Loyalty Programs need to be Royalty Programs, and they do not work unless a customer feels special to be a part of them. Loyalty Programs have fast caught up in our country and are going through stages of transformation.

With improved emphasis on Data Analytics and CRM, these are being tailored to meet customized needs of various segments of business. But a word of caution, Loyalty does not come easy. It requires a solid structure, heavy investment and most of all an offering which satisfies and delights the customer. It takes a lot to build that magical bond with the customer and Loyalty programs if structured well enough to create a sense of belonging and value in the minds of the customer could be one of those threads which attach a company to the heart of the customer, the undisputed king!

Do you wish to send your articles and contributions to us? Please feel free to mail your feedback and suggestions to forthright@sibm.net.

Microfinance in India

By: Suruchi Chaudhury, MBA I

Microfinance, Micro credit, Self Help Groups, SHG-Bank Linkage Program, Partnership Model, On Tap Securitization Model, Farmer Service Centers, Social Initiatives Group etc. - these terms have come into sharp focus in the present day India and more so after Dr. Muhammad Yunus won the Nobel this October for his pioneering work in the field of Microfinance which began in 1970’s and the subsequent setting up of the Grameen Bank in 1976 in Bangladesh.

“A lot of directed lending is indeed wasteful and hugely inefficient. But microfinance is a form of directed lending that greatly improves efficiency. This is hard-nosed economics, not the bleeding heart variety.” - Swaminathan S Anklesaria Aiyar, Consulting Editor, Economic Times in 2004

According to Dr. Yunus, “Microfinance leads to poverty reduction through a virtuous cycle comprising: ‘low income, credit, investment, more income, more credit, more investment and thus growing income”. He further adds that the impoverished have skills that are underutilized and that they are creditworthy borrowers and hence their financing needs should be adequately taken care of.

The above mentioned benefits as well as inputs from various research studies show that in many cases microfinance has reduced poverty through increasing income levels. It is also believed to result in improved healthcare and nutrition, child education and women empowerment. And so in the recent past it has become a promising way to use already scarce development oriented funds to achieve the objective of “Poverty Alleviation”.

In the context of this increased activity in the arena, it becomes interesting to know more about the state of Microfinance in India, the industry setup, the challenges and roadblocks ahead and the way to handle them best.

Current Scenario

India has 400 million people spread across more than six million villages who are in need of micro-financing. The organized financial sector caters to the need of only 20 million people. Because of the lack of statistical validity of data sets, there are few reliable indications on the reach and demand of microfinance. The UN, in collaboration with the World Bank and the IMF is working on constructing a headline indicator for access to microfinance. However as per industry experts, the demand for microfinance in India is estimated to be around Rs.300 billion. All this suggests that there is a huge unmet gap between demand and supply. This happened because in the past big commercial banks considered small loans as a statutory obligation rather than a business opportunity. These loans were considered as the ones that were difficult to recover, unprofitable and involving high transaction costs.

Industry Setup

With so many Microfinance Institutions (MFI) around, the Indian Microfinance Industry is no longer “micro” in scale. As the Economy is growing this sector is also becoming more organized in comparison to the scattered system of individual moneylenders and loan sharks in the villages.

A case in point is that of an MFI named Spandana. Today it operates with 2,000 employees and serves 800,000 loan recipients at interest rates of 10 to 15 percent a year.

It lends to small Self Help Groups (SHG’s) of 5 to 10 people rather than to individuals and also insists on regular payments to be made weekly so that the borrowing family manages the debt and financial responsibility properly. When a SHG comes together, they save small sums on a regular basis. This serves to aggregate small funds into a sizeable and more importantly- “serviceable” amount. They also learn to handle resources of a size beyond their individual capacities, and get motivated to save more.

In India, there exists a variety of micro finance organisations in the government as well as in non-government sectors. Leading national financial institutions like SIDBI and NABARD have played a significant role in making micro credit a real movement.

India has also witnessed phenomenal development of SHGs in the past two to three years. These are better known as SHG Bank Linkages, as they are credit-linked to banks. The SHGs have remarkable rates of recovery of 98%-99% showing that their credit rating and ability to absorb credit and repay has increased.


New Entries

In the middle of all this, what is interesting about India is that its biggest commercial lenders such as ICICI, HDFC, SBI, UTI etc. to name a few have diverted their funds and attention to this sector in a big way. MNCs like ABN Amro, Standard Chartered, HSBC and the Citigroup are also moving into this sector.

Clearly what drives these institutions is not social responsibility alone. There is a bigger gain involved. What attracts them is a huge market opportunity here with 30% of India’s 1 Billion+ population still living below the Poverty Line and these banks realize that lending to credit worthy rural borrowers is a lucrative business proposition.

As per Ranjan Ghosh, who heads Financial Institutions for India and South Asia at Standard Chartered Bank, "With fewer defaulters in this sector, clearly the risk return rate is acceptable to the banks. We look at it as an investment."

And may be that is why Nachiket Mor of ICICI spends so much of time in India's economically depressed rural hinterland looking for prospective borrowers.
So all in all it’s a good business for Indian banks, given the diminishing market for lending to companies and consumers in cities.

ICICI Bank is one bank that has developed a very clear strategy to expand the provision of financial products and services to the poor in India as a profitable activity.

ICICI Bank's micro credit initiatives involve provision of basic banking services like savings and withdrawal along with micro-investment products like mutual funds and insurance. This provides poor people with safer avenues for saving with little volatility or risk.

Its structures also include buying the microfinance portfolios of MFIs either on a selective basis or buying the complete loans of a branch or a particular area along with partnership arrangements with MFIs. This helps leveraging the operational strength of NGO/MFI with the financial strength of ICICI Bank. In the world's largest securitization deal, ICICI Bank purchased a portfolio of 42500 loans worth US$ 4.3 million from Share Microfin Limited in 2004.

In the Public Sector SBI is doing a commendable job in this area with its innovative products like Project Uptech, SBI Life ‘Shakti’, Sahayog Niwas, Agri SBU, Contract Farming and Kisan Credit Cards.

As has been mentioned earlier Indian Microfinance Industry is increasingly attracting the global attention. Unitus is a case in point. Started in early 2000 by a group of friends with a common mission of poverty alleviation, it is based in Redmond, Washington, with an office in Bangalore. Unitus works in Latin America and Southern Africa, but with one third of the world's population in India, its focus has naturally turned to India.

The structure that Unitus is using is based on what it calls its "accelerator" model, which basically implies acceleration of outreach. To address gaps, Unitus uses three different capital instruments, namely Grant, Debt and finally Equity. Working typically with MFIs, which are NGOs or have originally been NGOs, Unitus first uses grant funds to build the infrastructure in the MFI.

Unitus Equity Fund, along with SIDBI, Vinod Khosla and other social venture capitalists made a Rs 11 crore (Rs 110 million) investment in SKS Microfinance in India. The money would be used to access commercial debt and scale outreach from SKS's current 200,000 clients to 700,000 clients by 2006-07.

In short what the bigger institutions do is partner with microfinance specialists across India who have knowledge of the local villages and can identify worthy borrowers.

Another very interesting phenomenon that is associated with this industry is the creation of a secondary market over time. Under this the Micro loans would be bundled together into larger Bond issues which will be tradable among the Indian and the Global Investors taking Micro lending to a higher level.
The Challenges

All this sounds like a nice combination of corporate interests, fulfillment of social needs and a panacea for India’s balanced development. But this system is not free of complications and challenges.

There have been allegations time and again that microlenders structure their loans with hidden costs to exploit borrowers. The suicides of about a dozen women caught in this kind of a debt trap in Andhra Pradesh illustrates this point. The Government Inspectors had also pointed out four Organizations namely Spandana, Asmita, Umdama Pottu Pedatha and Share Microfin of charging interest rates as high as 40% to 50 %.

On the one hand, the industry is trying to grapple with problems of sudden growth, while, on the other, global social venture funds think that impact needs to be maximized and that institutions with the right professional leadership, governance, and systems need to be supported.

The biggest challenge is to develop a systematic growth mode which can cater to the accelerating demand. In this scenario the two main hindrances to the growth of MFIs are ‘lack of capital’ and ‘lack of capacity’.

Most MFIs are unregulated non-profit organisations, which prevents them from building an equity base. Through a combination of grants, equity and debt, it is possible to transform them into regulated financial institutions with an equity base that then allows MFIs to bolster their balance sheet and access local capital markets. Lack of capacity can be attributed to a variety of factors such as weak corporate governance, lack of management depth, absence of management and strategic planning systems and insufficient business infrastructure.

Another very inherent issue is that the focus of bigger funding organizations is always on mature MFIs, forcing young and mid-tier MFIs to look for capital from local sources, primarily grants. This focus on mature MFIs may be stalling industry growth as only a small percentage (1-2%) of MFIs is sustainable. So provisions have to be made to absorb some initial risk while the MFI develops a track record, relationships and credibility. Along with this what is required is upfront, longer-term involvement. And finally, there is a need for MFIs to work with policymakers on current regulations that limit options for MFIs and investors. Like in India, most MFIs are still NGOs and so they can accept local debt but not equity, and at the same time foreign investors have limited opportunities for investment in the sector.


The Path Ahead

Successful microfinance can be defined by three main characteristics: sustainability, outreach, and impact. Sustainability refers to the ability of a program to continue over time, preferably without ongoing subsidies. Outreach refers to the number of clients reached and targeting of the poor. Impact refers to the ability of a program to assist poor households and individuals to move out and remain out of poverty, and that is the ultimate objective of microfinance provision.

Enterprise growth is much more than just providing credit, it is also about financing a viable business idea. The importance of partnerships between the public and the private sector, as well as between social entrepreneurship groups and microfinance institutions thus becomes critical.

Care has to be taken that borrowed funds feed into a new business. No matter how the loan is described on paper, many families use the money to finance the purchase of a new motorbike or to pay the family doctor.

At the same time MFIs can help to facilitate capacity building consultancy projects to improve MIS/Accounting, technology and human resources. This emphasis on Management Information Systems (MIS) as well as the innovative use of technology (virtual branches, ATMs, credit and debit cards) is extremely crucial.

All this will lead to reduction in costs to clients and the institutions, building new distribution channels, helping clients build assets (not just debt), as well asmobilizing banks and capital markets for microfinance.

Distribution challenges: How will the Insurance Industry

By Banit Singh Sawhney, MBA II Mktg

The Distribution Challenge

India is arguably one of the most challenging and promising emerging insurance markets. Its rapidly growing economy, plus a young and huge population spell ample opportunities for the development of insurance. There is however much to be done to realize this potential. A few challenges to be tackled here would be to improve insurer solvency, raise a standard among insurance practitioners, asset management capabilities, distribution challenges, operation risk mitigation etc.

Reach: The ultimate challenge
More than 50% of India’s population lives in tier II-III cities and in rural India. While tied agents continue to play an important role in distribution, alternative channels like corporate agents, brokers, and bancassurance are starting to play a greater role in distribution.

The Power of Brick and Mortar: The Indian Banks
The penetration of commercial banks in India is unmatched, and no form of agent led sales-force can compete with it. There are around 68,500 branches of scheduled commercial banks. Each branch serves an average of around 16,000 people. The only other national institution with a bigger reach than this is the Indian Postal Service. Banks have expanded not only in urban areas; they have also grown in semi-urban and rural areas. Of the total number of branches of commercial banks, 32,600 branches are in rural areas and 14,400 are semi-urban branches.

Banks therefore provide great potential to be tapped. The HNI and Corporates in India are saturated in terms of product offerings. The growth would come from the 200 million strong Indian middle class. This would principally be from personal and rural banking.

The fastest and the most cost effective way to target this segment would be by selling insurance policies through their local banks. These local banks provide credibility, assurance and unprecedented reach for a life Insurance company.
World View World over where “Bancassurance” brings majority of the business, the full-integration model is in operation. France is undoubtedly one of the countries where the breakthrough in bancassurance has been spectacular. In the space of just two years, Predica, Crédit Agricole’s life insurance subsidiary first set up in 1986, became France’s 3rd biggest life insurance company in terms of premium-income. It should be noted that one of the effects of the rapid growth in bancassurance activities in France has been the creation of new market opportunities rather than weakening of the traditional insurance business.

Today, French bancassurance operators are doing better than insurance companies on individual risk. In 2003, the French Bancassurance Group (chaired by Michel Villatte, CEO of Predica), accounted for 60% of sales in life assurance, with premium income of €55 billion. At the end of 2003, 5 bancassurance operators were amongst the top 10 life insurance companies (base: premium income). CNP is obviously in the top three, but its status sets it apart from the others. Its distribution strategy, based not only on partnerships with establishments such as La Poste, the Caisses d’Epargne but also the mutual insurance companies, financial institutions and even local authorities, makes it difficult to compare with other bancassurance operators active in the French market.

The field of French bancassurance has recently changed following mergers between certain banks:
• The merger of the BNP and Paribas networks produced BNP Paribas Assurance, which encompasses the activities of Cardif and Natio;
• The merger of Crédit Agricole and Crédit Lyonnais, which resulted in a “new version” Predica, combining the activities of Assurances Fédérales Vie and Médicale de France;
• Even more recently, the takeover of Crédit Maritime by Banques Populaires.

In France, bancassurance seems to be at the dawn of a fourth stage-that of concentration.

Hence it can be seen that bancassurance and other distribution channels like the Postal service etc. are actually driving growth in the Insurance sector.

Bancassurance - The way forward: Why?
• Low cost to acquire and process customer applications. Bancassurance provides one of the lowest Cost-per-Transaction.
• The psyche of the Indian customer is to believe in a reputable name. The major banks have a strong relationship with their existing customer base. Hence it would be easier to convince people to invest.
• Average insurance premium in India would be comparatively lower than developed countries. Hence generally agents would not target the segments catered through these banks due to very low margin.
• Easy availability of customer care executives would lend better credibility and
will improve service quality and experience.

The Present Indian Scenario
It is not hard to figure out that the leading insurance players in India are already using the Bancassurance model .A brief overview would show that many leading companies have Ranking As per Market Share Name Distribution

1 8,00,000 agents.
479027 individual agents, 159 corporate agents and four lakh plus agents under
2 Agents 1,00,000 Bancassurance partner ICICI Bank 3 agency channel Bancassurance partnersinclude Standard Chartered Bank. (reason , it had a good customer base of HNIs & corporate customers), Syndicate Bank , Centurion Bank ("B" class city presence).
4 Individual agency, corporate agency including brokers and credit life. Bancassurance partners SBI ( 14000 branches )
5 Personal Finance Assistance(25,000), corporate agents, brokers Bancassurance partners including HSBC, United Bank of India and The Orissa State Co-operative Bank, rural and direct marketing. The company has 140 branch in 60 major cities.
6 It has got 44 branches all over India.

Insurance advisors( 25000)
Bancassurance partners include CitiBank,DCB,Karur Vysya
Bank,BNP Paribas,Syrian Catholic and a few co-operatives
Tata AIG Life Insurance
Company Ltd
BIRLA SUN LIFE
INSURANCE COMPANY LIMITED
Life Insurance Corporation of India
ICICI Prudential
Bajaj Allianz Life Insurance
SBI LIFE INSURANCE

already tied up to foster growth and penetration.
Some Alternate Channels In order to increase penetration into the Indian market, companies could look at :

Medical Tie ups
Tie-up and increase distribution through leading hospital chains e.g. the Apollo Group etc. It could start with a campaign that promotes health care, good living and a secure future. It could be a good move looking at the way the Medical Service Industry is slated to grow.

Automobile Tie ups
Distributing life insurance through automobile companies like Maruti, Hyundai, Honda, Toyota etc. depending upon the target customer segment, could be another option. The auto industry is booming currently thanks to the rapid consumer spending of the middle class. As it is the Per-Capita-GDP to Insurance Ratio and the Population to Lives Insured Ratio is abysmally low compared to other emerging markets, such an agreement would take the company to a place where target customers frequently visit in sizeable numbers.
Innovative advertising should help the cause as people could be made to realize that if they are taking a car insurance, their lives are more important than the car and hence the requirement for a life insurance too is advisable.

Rural Partnerships
The company can look for possibilities of a tie-up with various micro-finance organizations, Self Help Groups, and NGO’s. A partner like ITC’s e-choupal could help make inroads into the rural markets.

Indian Postal Services
As soon as the regulation is passed by the government to allow partnership with postal services of India (which practically reaches every household in India), the companies would move in to exploit this channel.

Conclusion
The insurance market today is seeing cut-throat competition, with new entrants like Reliance turning on the heat on existing players, not just in the customer market but even in the job market. The industry will definitely see a round of consolidation in the near future with minor players either merging into each other or forming a bigger company.

The company that survives in the long run will not be the company that offers the highest returns, advertises the most or earns huge margins, but a company that sticks to its strategy, adjusting it when the situation demands and constantly innovating its offering and reach to suit the customers’ changing requirements and segment demographics.

We will be delighted to receive feedback, ideas and contributions on forthright@sibm.net . Please feel free to contact any RF member regarding your
suggestions and thoughts. Once again, have a very Happy Diwali!!

Is advertising becoming more manipulative?

By Mrunmay Mehta & Rohit Hanjura, MBA II Mktg

“Most advertising tends to be”, Edward Kosner once said, "a trailing indicator of popular culture".
This might have been true 30 years ago, but the scene today is different. Advertising is actually CREATING culture(s) and is more and more targeted at changing the basic psyche of the target customers.

Let’s define advertising right away. According to Philip Kotler, “Advertising is any paid form of non personal presentation and promotion of ideas, goods, or services by an identified sponsor.”

Ads thus serve some standard purposes like:
• Advertising differentiates products
• Advertising communicates information about the product, its price and location of scale
• Advertising induces customers to try new things and induces reuse
• Ads stimulate distribution of the product
• Ads increase product use
• Ads build brands preference, value and loyalty
• Ads decrease overall cost of sale etc.
For understanding how ads influence consumer choice, it is imperative to understand the phenomenon of needs, wants and demands.
To understand the importance and structure of needs, Maslow’s framework can be used, as shown. However, Maslows’ theory has a major drawback; as today most physiological needs are already satisfied. A better idea of consumer mindset can be obtained by McClelland’s Trio Need Theory, also shown above.

Once, this is established, let’s understand the reasons why ads have adopted the
“emotional manipulation path” for ensuring brand success.

Changes in nature of Needs
“Advertising is found in societies which have passed the point of satisfying basic animalneeds.” - Marion Harper Jr.
Today, most basic physiological needs are satisfied amongst the most common target audiences for advertising. Thus, the “need” behind consumption is most often NOT basic.

Also, the higher order needs are increasingly becoming more “basic” in nature amongst common TGs (Target Groups). Even the basic needs are used as a vehicle to address higher needs. E.g Food can range from a simple off-the-road burger, to an expensive Subway sandwich. What it does is, use “food” not only to satisfy hunger, but also certain other “higher” needs related to social class consciousness or ego. The functional utility remains the same.

These higher needs are more emotional or behavioral in nature, as the basic needs are mostly similar at the core. Thus, the manner in which these new needs can be addressed have changed for marketers.

Effect of too many choices available to consumers:
With the shift from basic needs, it is also observed that the choice available to consumers has grown exponentially. Where few choices suffice, the consumer is faced with a frightening array of options. This makes an essentially simple decision process unnecessarily complex, as the consumer now has to think subconsciously before makingevery decision. Emotional ads provide the right vehicle to deliver the brand-payload right where it strikes the most – in the consumers psyche, in their self image, in their confidence etc. This is exactly what has compelled marketers to resort to manipulative advertising.

Effect of changing nature of offerings from marketers and a hypercluttered
market-space:
Today, most offerings are not unique. Their USP is not sufficiently different from the next me-too product. Competing products are increasingly more similar in their functional attributes. Thus, the positioning has moved from the functional plane to the emotional/intangible plane. This increasing product commoditization has seen marketers running for cover under advertising and non-functional positioning. In fact, not only are products getting common, even product categories are becoming “commoditized”. Companies no longer have a sustainable competitive advantage in the functional difference of their offering. The next company follows suit in an astoundingly short time frame, thus destroying the first mover advantage.

However, if the first company succeeds to place its offerings by changing the attitude of the consumer towards its offering itself, it gains an upper hand. Advertising is increasingly being used as the sole differentiator in a plethora of me-too offerings, as functional differentiation is no longer a position of advantage.

Also, newer categories are being created to shift from a cluttered market (Blue Ocean Strategy et al). However, how does one create new categories? There must be a need from the customers to create such a position. THIS is done through subtle/blatant advertising, by changing consumers’ wants into needs (Teenagers-“But Dad! I NEED that mobile handset.) or by creating entirely new needs (Indian women had been doing quite well even before they were educated by HLL-quite blatantly- that dark skin was a detrimental factor in their careers for success, and that Fair & Lovely is a dusky woman’sbest friend.)

All this has led to an increasing number of ads taking the “manipulation” route to reaching into the consumers’ normative buying behavior.

Effect of changing communication environment:
The communication scenario in today’s world has also radically changed. This has resulted in a fundamental shift in consumer behavior. In the words of Schwartz (1973) “Most important, this characteristic of the new environment eliminates the time between receiving information and responding to it. People do not think out decisions.” This acts a cue for advertisers, and thus the one who manages to be a part of the consumers selfimage itself, wins hands down.

Ads also have thus departed from promoting solutions to the “basic” needs to the “emotional” needs in an attempt to keep pace with the changing consumer psychology. According to Dr. Sandage (1951), "We live in an economy which is dependent upon the psychological needs and wants of the consumer".

Changing role of advertising:
Our hypothesis is that indeed ads have been increasingly using methods to manipulate customer’s behavior. The evolution of the role of advertising (from the initial organized ads in the 1840s) in the consumer buying decision process is captured in the scale shown below.

To illustrate the changing role of advertisements, we have some examples in each broad category, which are present today in the Ad-space.

• Informative: Ads of computer brands like Lenovo focusing on the physical
attributes of the product.
• Impressive: Ads of Sonata focusing on impressing the consumer and peers
• Influencing: Ads featuring celebrities endorsing a product. E.g. the Parker ad
showing Mr. Bacchan and driving the fact that if Mr. Bachhan uses Parker so should you.
• Persuasive: Ads on the theme of Pester Power, i.e. targeting the kids in the
family who are a major source of influence in buying decisions. For example,
Maruti Esteem ad with the tag line “My Dad’s Big Car”
• Manipulative: Ads in this category can be divided into two sub categoriespositive or negative. An example of positive manipulation is ad of Pepsodent trying to inculcate the habit of brushing teeth in the night. An example of negative manipulation could be an ad of Rexona deodorant wherein a college boy is shown as a smelly goat since he does not use the Rexona deodorant.
• Brainwash: This is more on the lines of Pavlov’s conditioning experiment,
where unconditioned stimuli cause a conditioned response through psychological manipulation. They differ from manipulative ads in degree of intensity and frequency of administration on TG. Is this the dark future of manipulative ads?

So how would one describe “Manipulative ads”?
“Some elements of such ads are designed to influence consumers without consumers having any possibility of rejecting that information.”

“Advertising is a negative influence when it dictates what an individual should do, rather than just inform or persuade a consumer about a product.” – Dr. Sandage.

At present, manipulative advertising seems to simply represent poor ethical standards and lack of consideration for members of the public. In future, with the development of new technologies, it may become more effective, more manipulative and more difficult to detect.

This question of manipulation by ads can be viewed from different angles. The question is-WHO or WHAT is being manipulated. On a very mundane level, consumer behavior is being manipulated through some advertisements. This too can be classified into positive and negative manipulation.

Positive Manipulation: In layman terms, these are ads that carry the message “If you do this/buy this, then you will achieve XYZ benefits.” This may actually lead to betterment in the lifestyle/personality/psychology of the target. The absence or non-use of the offering does not hamper the target in any way, and this is not suggested in the communication. Thus, ads of products like Dettol actually benefit the target with the inculcation of cleanliness as a regular habit. This ensures that the target’s manipulation can only result in betterment, and not in feelings of inferiority.

Negative Manipulation: These would go to suggest that if some product is not purchased, then the target chances the risk of non acceptance, or unsuccessfulness, or some kind of negative repercussion. These brink on the edge of using fear psychosis to induce people to purchase the offering. Worse, these actually may alter the ego/personality or confidence levels of the target. E.g. The Fair and Lovely Ads clearly mention how a female will NOT succeed (in a field not even related to beauty) if she does not apply the product, while if she does, she achieves instant success (and can buy a coffee for her father). There is no proven correlation between the skin color (not comparing ethnic races, but within a homogenous market like India) and the chances of success of a female individual. These ads use more of Neuro-Linguistic Programming (Ref: Pavlov’s Experiment).

Studies have proven that such ads have an enormous influence on susceptible targets pecially youth and children. Thus, manipulative ads not only affect comparative buying behavior of the currently adult TG, but also form the normative behavior pattern of future consumers, by targeting kids today.

Role of advertising and sustenance of the global economy & society: A debate is emerging amongst the neo-economists about how advertising encourages high-level consumption and squandering of resources on the macro economic level. This assumes all the more importance when the sole differentiator amongst similar and superfluous offerings is only advertising. Thus, it is not about manipulating individuals, but also manipulating the entire economy. A special congregation of experts from the UNenvironmental program have mentioned in their report how sole reliance and success through advertising as the only differentiating element, can negatively affect e conomies, when the same resources can be spent for more constructive purposes. Thus, advertising is not only a marketing effort, but it also has a social responsibility to play, by encouraging “Sustainable Consumption” (First UNEP meeting, Paris 1999).

Also, the same manipulative ads that are used to advertise tobacco products and alcoholic beverages can be used for social causes using similar creativity and insights into consumer psychology and behavior. This puts a great responsibility on the shoulders of the modern advertising personnel.

Conclusion:
In today’s world, while purchasing a product, a consumer takes it for granted that the basic need-solution derived from that product will be satisfied (it’s a hygiene factor). So what is going to drive a consumer towards a product? What will it take to equate a brand with a common name? It’s whether his/her emotional and ego needs are going to be satisfied from the offering or not. So in order to influence his behavior for that offering, an ad has to necessarily appeal to (or manipulate) his/her emotional/irrational behavior.

Manipulative ads are here to stay for now. As markets get more and more cluttered in increasing number of categories, such ads are going to spill into many domains. With the burgeoning information overload, manipulative ads offer a good path for the marketer to ensure loyalty. However, this trend also shall die its death as NOT every product can participate in the consumer’s normative thinking process. Manipulative ads are NOT the ultimate panacea for all marketing needs, only a time-adapted solution in accordance with the current market-customer variable mix.

When every ad tries to manipulate customers’ behavior, a time will come when customers shall refuse to let every other marketer to mess around with his/her mind, and marketers will have to find a new method to ensure sustenance of the growth curve.

References:
1. Marketing Management, Phillip Kotler
2. Olson, Erik L. "How Magazine Articles Portrayed Advertising from 1900 to 1940" Journal of Advertising, 1995
3. www.ciadvertising.org
4. Changing face, by Ajita Shashidhar , The Hindu Business Line, 2004
5. “Can ads impact popular culture?”, Guest Column, O&M, www.rediff.com
6. “Advertising and Sustainable Consumption”, First Expert Meeting Report, UN environment programme, Paris 1999
7. “The Fall of Advertising and Rise of PR”, by Al Ries
8. www.wikipedia.org