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"As a customer's relationship with the company lengthens, profits rise. And not just
by a little. Companies can boost profits by almost 100 percent by retaining just 5
percent more of their customers" - F.P. Reichheld
Loyalty programs have been used in commerce for many years, originating in
Germany where price based competition was disallowed by governmental
restrictions in certain industries. In the 1950s, S&H Green Stamps rewarded grocery
store and gas station customers with stamps redeemable for appliances and other
merchandise. The modern day loyalty program was launched in 1981 by American
Airlines, and was quickly duplicated by other airlines and other hospitality industries
including hotels, car rental companies, and credit card organizations.
Retail loyalty programs evolved when progressive retailers recognized that without
a "customer identification tool," they were unable to recognize individual customers
and reward them for desired behavior. This was in obvious contrast to banking and
telecommunications industries, among others, that have a customer database as
part of their regular service offering.
Both businesses and consumers have recognized the value of loyalty programs.
Only 12% - 15% of customers are loyal to a single retailer, according to the Center
for Retail Management at Northwestern University. But that small cadre of shoppers
generate between 55% - 70% of company sales. Some food retailers find that as
much as 65% - 95% of their sales go to members of loyalty programs (53% of food
retailers offer loyalty programs with 3/4 of program customers using their loyalty
cards at least weekly and 88% at least once a month).
In general, loyalty programs are often developed with good intentions but
unclear objectives. While retail loyalty programs have many purposes, the
greatest value that is created for retailers is the ability to identify individual
customers and to measure and understand their individual behaviors. This
consumer behavior data far outweighs the "currency" value of providing consumers
the opportunity to build a reward opportunity by shopping at one particular retail
banner. This opportunity is often misunderstood by retailers and consumers alike.
The basic benefits of using a loyalty program to obtain customer information are
summarized below:
These loyalty program benefits form the basis for all loyalty program initiatives.
The rising tide of expectations necessitates that loyalty marketers develop truly
innovative loyalty programs, utilizing loyalty marketing best practices. In reading
through this page, and this website for that matter, keep in the back of your mind
the question of how your program can tap into not only changing lifestyles, but
changing attitudes. The answer is not just in the rewards catalog, but in
understanding the fundamentals of loyalty marketing.
It is estimated by Colloquy (2009) that there are 1.807 billion loyalty program
memberships in the US (a 25% increase from their 2006 census) - with the average
US household participating in 14.1 programs. Approximately 56% of those
memberships were inactive (defined as no engagement within a 12 month period),
bringing the average household active participation to 6.2 programs. That is a lot to
compete with.
Not surprising, loyalty varies across industries. As reported in the New York Times,
Forrester Research found that across 12 industries, retailers inspire the most loyalty
while others, like TV service providers and internet service providers proved more
fickle. Most interesting is that "A whopping 98% of USAA's credit card customers
would consider the firm for another purchase, which ends up 24 percentage points
higher than the average across credit card firms." This research only reinforces the
critical importance of understanding the fundamentals of loyalty marketing.
Many confuse "loyalty" with "rewards." This is a fundamental mistake of many
marketers. Loyalty denotes advocacy and commitment not points. As such, let's
start with a primer on loyalty. Read through the embedded Power Point document
as it is the best explanation of loyalty marketing that we have ever run across and,
surprisingly enough, the fundamentals of which, are not well understood by the
executioners of some of the best known loyalty programs. This abridged Power
Point presentation was developed by Wunderman's Loyalty Marketing Practice. We
strongly encourage you to take a peek.
Program Positioning
Program differentiation starts with the positioning of your program. Most programs
don't have one - hence why so many programs look and act the same. Examples of
program positionings are:
Your program's positioning affects everything you do from how you communicate,
to what you offer, to how you want to be perceived. We can't emphasize this
enough. Develop a vision or positioning for your program, before you even begin
developing the mechanics. What do you stand for?
Regardless of how you develop your loyalty program - based on hard benefits (e.g.
a currency) or soft benefits (e.g. access, special privileges, exclusive partner
benefits and offers) - make sure there is alignment between your customer and the
loyalty program i.e. the program supports the customer experience and not the
other way around.
Program Positioning
Program Strategies
Financial Analysis
Value Proposition
Currency Strategy
Business Analysis
Data Analysis
Platform Selection
Measurement Plan
Exit Strategy
Below you will find a comprehensive loyalty checklist developed by a top Ogilvy &
Mather strategist, Michael Szego. Keep in mind, even following this check list, you
can never have the perfect program - you can't unless you change and evolve with
the market and your customer.
Program development
Leverage knowledge
Customer Management
1. Program Development
- What is our current sales channel strategy and how will this program
affect/enhance it?
- What is the number one complaint from our customer feedback system and can
this be addressed with the planned loyalty program?
- Will the needs of this group also satisfy the needs of our top customers?
- What customer needs will it satisfy? (tangible benefits, intangible benefits; rate the
benefits, cost, feasibility and competence;financial value, relevance for the
consumer, attainability)
- Who will serve the members: outsource, 1-800, web site, etc.
- Recognize that like a store, loyalty programs have a lifecycle, benefits need to be
modified periodically (what benefits can we roll out over time to keep the
momentum going?)
- Cost recovery: entrance fee, annual membership fee, co branded credit card,
merchandise sales
- Financial
- Human resource
- Customer acceptance
- Transactional penetration
- Supplier participation
- Investment required
- Estimated payback
- Break-even point
- Go/No Go decision
- Training
- Employee participation/enthusiasm
- Monitoring
Research
Technology Assessment
- Limitations
- Will the data be delayed (for how long) or will it be real time at POS?
- Will the data be delayed (for how long) or will it be real time at head office?
Partners
Retail
- Communication at retail
- Employee scripting
Advertising
- Web site
- Direct Mail
- Statements
- Newsletter
Privacy
Web site
- Communication
Launch
- Media Plan
- In-store execution
- Special incentives
- Program enhancements
Exit Strategy
- Identify specific criteria that would result in the wind-down of the program
- Identify process for wind-down of program including partnership agreements,
consumer commitments
- Refresh plan
- Privacy
- Analyze results
- Offer tests
3. Leverage Knowledge
- Decile analysis
4. Customer Management
- Churn reports
One common mistake Marketers make is in currency selection. Too many decide the
value proposition prior to customer research. Ask the question as to whether the
currency fits the frequency and the size of the transaction. And does the currency fit
with the brand i.e. cash is a pure discount?
In general, many retail loyalty programs are converging into a blend of each
particular value proposition. That is, many programs offer points, rebates, discounts
or a combination of the program offerings.
Although similar to discount programs, which are immediate rebate programs allow
participants to accrue financial benefits from purchases that are saved up and
redeemed after a set threshold or time period. These benefits can be tracked over
time but often involved a rebate of a percentage of total purchases over a month or
quarter. The rebate is often in the form of a gift certificates to drive customers back
to the store. Rebate can be in the form of a dollar value or a percentage value.
Pros
- Rebates in the form of gift certificates can often drive customers back to the store
Cons
Discount Programs
As is implied by the name, discount programs are programs that offer a specified
percentage off (or a dollar amount for large purchases) of the retail purchase price.
This can be product specific or offered on the total basket of purchases. The
distinction from rebate programs is rather than accrue the benefits, discount
programs typically apply instant benefits to participants at the point of sale.
Pros
- Simple to consumers
- Instant gratification
Cons
Discount programs are typically the easiest to administer loyalty program offering.
However, discounting products for members is expensive and it is difficult to exit
such a program once it is launched. An example of a successful discount program is
Canada's oldest, best known, best loved reward program - Canadian Tire Money -
often suggested as a replacement for the nation's weak currency.
Points Programs
Pros
- Can be difficult to match because earning and reward thresholds can be easily
adjusted - therefore can offer greater competitive advantage
- Can allow more targeted, flexible and imaginative promotions e.g. points for
special purchases
- Enable the collection of customer data to put in place targeted promotions and
cross-selling opportunities
Cons
- The "halo effect" of programs where thousands of points are required to earn a
benefit devalues all points programs
Fifteen years ago, they were saying that private label retail programs were dead.
Well, they are alive and well and there are a number of lessons we can take away
from these programs. The first being that the "one product fits all" approach is no
longer effective. This may be shocking news to some, and it doesn't matter what
business you are in or the demographic of your customer; you do NOT need to treat
all customers the same.
Loyalty programs need to be designed with more targeted rewards; they need to
communicate differently with different groups of members based on their value;
and they need to provide greater value at higher customer value tiers, by rewarding
best customers to encourage higher spending levels.
Two private label programs of note are the Neiman Marcus InCircle Rewards
program and the Saks Fifth Avenue SaksFirst program. Both have multiple tiers of
earning, with earning accelerators built into each graduated tier. Same true for the
Neiman Marcus program, with the added benefit of catalogs differing by redemption
level. You don't have to recreate the Neiman Marcus catalog to be successful, but
we would suggest that you start discriminating among your customers.
Customer Recognition
Inherent in the loyalty level tiers of private label programs is the idea of recognition
- "I'm a Gold customer." Customers wear their recognition badge with honor. After
all, it says that "I am important." Just look at frequent flyers. How many brag about
the fact that they are a Global Services member (United Airlines' top loyalty tier) or
a "1K" flyer? The fact that you flew one hundred thousand miles in a calendar year,
to us, is a badge of shame. But how many United Mileage Plus members wear that
badge with honor?
With each loyalty tier comes increased recognition. That recognition can be very
tangible e.g. bonus points, or intangible e.g. early boarding on flights. For the
frequent flyer, being able to board an airplane and hog-up all of the overhead
storage space before any of the common travelers board, is nirvana. Or being able
to go through an expedited airport security line is heavenly. Don't underestimate
customer recognition. And here we are talking about the intangible.
What are you doing to address your customer's craving for recognition? Remember,
when airline Marketing folks said that they wanted to create a special line at the
airport for their best customers, the airline Operations folks balked and said they
were crazy. Don't take "no" for an answer.
Your gross margin is going to dictate how much you have available for investment
into your loyalty program for both hard and soft benefits. As a rule of thumb, if you
have a 10%+ gross margin, you should be returning at least 100 basis points. Retail
loyalty programs vary in terms of perceived value - the magical threshold tends to
be around a 3-5% perceived value. A point-per-dollar offer tends to have a higher
perceived value than gift certificate or discount offers (even if they have the same
perceived value of approximately 3% - go figure).
One item to consider with your program design and execution is whether you want
to, as a matter of principle, encourage redemption or pray for breakage. A lot of
programs cannot support redemption. Now, how's that building loyalty? Many
Marketers don't ask the question. Ask!
Customer Penetration
In developing any program, set goals as to what you want each loyalty tier to do
e.g. spend goal. It is not unheard of to see 70% of sales being represented by
loyalty program members. By having clear cut goals, that will ensure that you are
marching toward success. And in coming up with your penetration goal, keep in
mind, not everyone wants to join a loyalty program. A good 25% of the general
population, in general, has no interest in loyalty programs. The balance of the
population's interest ranges from very passive interest to active interest (what we
call the "junkies").
Experiential Awards
For loyalty programs, the communications used to focus on tangible benefits e.g.,
our program is: "bigger," "better," "faster," "easier." These words have ceased to
have meaning. Everything works now. These are the table stakes. Consumers are
demanding more. Consumers have shifted from where we were leading up to the
Internet boom; away from a desire for possessions to a desire for experiences or
services that enhance their experiences. Going beyond points, discounts and cash
back, many loyalty programs are incorporating experiential aspects into their
program - an idea we have been huge proponents of since the early 1990s.
The experiential takes many forms but the common thread is that programs,
whether this has been developed internally or through partnering with 3rd party
companies, deliver to its members unique lifestyle driven opportunities/access
(many of them, once in a lifetime events). Masters of this have been American
Express with their "Gold Card Events" and "Front-Of-The-Line" opportunities
(advance ticket access, complimentary tickets); Visa with their Signature events,
such as Finish Line Suite access at the Kentucky Derby; and now MasterCard Unique
Experiences.
Increase spend
Visa, as reported at the 19th annual Card Forum & Expo, found that their Signature
"Access" attendees (Visa's experiential offering) spent more than non attendees
(56% higher transactions, 50% higher spend). To reinforce the business case for
such "experiences" or access, they also found that those who attended an event for
the first time, demonstrated an 8% higher spend on their Visa Signature cards over
the next 6 months. Given that these folks are already spending $27,000+ annually
on their Signature Cards, this amounts to a pretty penny. Let there be no doubt that
these experiential events can and do enhance brand/program advocacy and
commitment. Having attended a number of these "events," we can tell you first
hand, advocacy and commitment do increase e.g. attendees cutting up competitor
card brands at the event (not us though).
While many programs have been incorporating the experiential into their core
offering for many years now, that does not mean that this offering concept has run
its course. In mid 2007, Nordstrom Inc. rolled out a "tiered" rewards program, giving
shoppers a chance to earn perks such as free shipping, specially packaged trips and
access to "red carpet" events and store openings, if members spent enough on their
Nordstrom card at the store. In the past, Nordstrom rewarded only with points
toward less-glamorous spending credits. This competitive change was done in
answer to other high-end programs which have been masters in the experiential
realm e.g. Neiman Marcus and Saks Fifth Avenue. In fact Nordstrom restructured its
program following six months of focus-group study and surveys. Its conclusion:
Their customers are less interested in discounts and more interested in perks, such
as attending Nordstrom grand opening celebrations, being pampered during private
shopping parties, concierge services, access to limited issue designer products and
free alterations and shipping.
Neiman's InCircle program has 20 different tiers (with a top tier of five million
points) which allows it to customize the experiential and reward offering based on
value to the company. Saks Fifth Avenue offers four tiers. Both retailers tweak their
offering every year to keep them fresh.
Given that experiential opportunities really allow loyalty programs to enhance
differentiation - a cautionary note is to check motive before you begin to add these
types of experiences to your program. Are you differentiating because you can, or
because it allows you to meet a customer need?
We've all seen first hand, or heard the adage, that the top 20% of customers tend to
produce 80% (varying by industry) of the profits. Not all customers are equally
profitable - this we know. But did you know that the bottom 30% can eat up to half
the profits generated by the others? Understanding the economic value of your
customers, not just your loyal customers, can save you tremendous amounts of
revenue and effort.
As such, the idea of "firing" your most unprofitable customers is becoming more
attractive. Even in the supermarket sector, by some estimates, seven out of every
ten customers cost more to serve than they contribute in profits.
Program Measurement
The following elements are all tied to customer advocacy, which is tied to customer
loyalty - all of which affects your brand:
Simplicity = Make my life simple, don't confuse me with too much information
Benevolence = Understand my issue and take my side in getting a resolution
Trust = Doing what's right, honoring promises, and protecting customer's privacy
Transparency = Rates and fees are crystal clear, and comparisons are available
There are so many elements that you should track ongoing (and our consulting
team can help you ascertain what is important for success) - at a minimum, track
these often forgotten elements. That will make sure your program evolves as
envisioned. It will also keep you honest.
Exit Strategies
All good things come to an end. While exit strategies should be planned for in the
initial program construction, let's face it, some programs aren't designed as they
should be. As such, if your program isn't achieving the financial returns envisioned,
you may want to plan your exit strategy.
The number one goal in any planning exercise should be to "do no harm." The last
thing you want is a bunch of angry customers out there bad mouthing your brand -
not to mention the fact that a loyalty program with hard benefits or rewards is really
a financial obligation to the program members. As such, four considerations to build
into your loyalty program from the start so you can use them to end your program
in a considered fashion:
1) Sunset Clause: This can take a number of forms, but the bottom line remains the
same - the program can end in a timely fashion, should you need it to. The first form
is a definite end date written into the rules of your program. While you don't want to
emphasize the end date in your communications, this end date can always be
extended until the time you decide that the program needs to come to an end.
Another common Sunset Clause, which also happens to help with financial liability,
is to establish an expiration period for points earned. Like the first form of Sunset
Clause, this too can be extended.
2) Timing: From the time you announce your program's termination, allow members
sufficient time to redeem outstanding points - especially considering that some
members may have made a significant commitment to your program. Give them
the respect and sensitivity they deserve.
1) Companies will continue to look for ways to differentiate their loyalty programs,
while balancing program revenue and costs to achieve favorable economics.
2) Newer loyalty programs will be more segmented e.g. targeting life stages,
lifestyles and interests
3) Existing loyalty programs will become more tiered i.e. concentrating resources on
high potential and high value customers.
4) Loyalty programs will begin to take a more holistic view of customers - focusing
on broadening customer relationships (i.e. "relationship rewards") - offering awards
and recognition for broadened existing relationships - resulting in a strengthened
hold on their customers. This takes on increased importance for program
administrators as the customer's sense of entitlement rises.
6) Coalition Programs. We never thought we'd see the day in the United States.
While Coaltion programs have proved to be very successful around the world (e.g.
Air Miles in Canada), this model has had considerable difficulty making head way
here in the U.S. given the fragmented market and the resources required to get
such a program up and running. That is about to change as market forces spin their
magic.
Air Canada spun their frequent flyer program (Aeroplan) off as an income trust in
2005. Qantas is about to do the same. United Airlines here in the U.S. is again
seriously considering divesting itself of its Mileage Plus program. American Airlines
and NWA are under investor pressure to sell their frequent flyer programs. Add to
that the fact that Citi is rumored to be seriously considering selling its "Thank You"
program to a third party.
As spin offs begin to emerge, we believe that will portend increased aggressiveness
in the marketplace. Layer onto that the fact that Air Canada and "Thank You" are
developing a coalition type model, we suspect that a newly liberated American
AAdvantage program would evolve as a Coalition type model - in the pool with Citi
here in the U.S.
While all of the above are somewhat inter-related, all six items above can really be
filtered down into two: a) program differentiation and b) broadening existing
relationships.
With regard to program differentiation - we've already seen loyalty programs adding
experiential awards to their reward catalog - trying to inject the "wow" factor.
American Express has been doing this for years with their Membership Rewards
program. Canada's CIBC's answer is the Aventura Gold Visa - offering over 200
lifestyle rewards built around the concept of adventure and unique, life-changing
experiences. Other's like the Bank of Montreal have focused on developing a
product that allows the customer to customize/configure their credit card - choosing
the reward program, special features, and interest rate plan that best suits them.
While conceptually it is an interesting loyalty platform, the product may be too
much for the consumer to digest - hence why they pared down the number of
feature "buckets" from which consumers can choose.
With regard to broadening relationships, the Bank of Montreal again (in partnership
with Air Miles) has really taken the lead in awarding customers for each new
relationship they add with the bank - every new relationship from deposit accounts
to credit cards to mortgages to loans are awarded. Even Air Miles, the thousand
pound loyalty gorilla has attempted to broaden its relationship with its members --
expanding beyond just its retail partners to include B2B, travel, books, flowers and
online.
How will all this evolve? It has been slow. But with that said, future economic,
demographic and legal landscapes could accelerate company attention to customer
retention and the concept of coaltion and "relationship rewards."
ACNielsen Homescan - A consumer panel which you don't join, you're invited
depending on the research company's needs. Wonderfully executed program with
great surprise and delights and member communication. Strong member affinity to
the program - especially considering the high involvement required by its members.
Harrah's Total Rewards - Competition from Native American casinos has forced
established casino marketers to become more sophisticated than ever. Data
collection is phenomenal - up to 85% of play tracked. Member benefits vary by
property.
Neiman Marcus InCircle - This close to 20 year program continues to peek and
exceed its very chichi member's expectations
Air Miles - The thousand pound Canadian gorilla. With 50-60% of Canadian
households carrying an Air Miles card, they continue to be THE model of how to
execute a loyalty program.
Starwood Hotels - Probably the best value in frequent stay programs. Marketing
continues to be of the highest creative quality. We do however question the ROI on
their programs
UPromise - Tapping into the college savings craze, UPromise has a dream list of
partners (online and off-line). Great concept and execution but we question its
profitability.
Fuelrewards.com - While not a loyalty program per se, very novel cross marketing
company nonetheless - focused on grocery stores with petroleum on site
Sites of Interest
Colloquy - the voice of the loyalty marketing industry
Retail Strategy Center, Inc. - Brian Woolf and Retail Strategy Center specializes in
loyalty marketing, helping retailers develop and strengthen their loyalty programs
Freddie Awards - Frequent guest and frequent flyer programs from around the world
compete in nine Freddie Award categories for the best in class designation
In keeping with our site's mission to represent CRM best practices, we reiterate our
call that should you come across content and links that, in your opinion, represent
the best of the Internet, we strongly encourage you to pass them along so we can
continue to keep our community abreast of the latest and best.