LOYALTY BEST PRACTICES

Loyalty programs are often part and parcel of a comprehensive customer relationship strategy.

Why build on a loyalty program? The basic benefits of using a loyalty program to

obtain customer information are summarized below: Shift - Acquire new customers Lift - Increase the spending of existing customers Retention - Improve the natural churn rate of

customers Profit mix - Shift spending to higher margin products

These loyalty program benefits form the basis for all loyalty program initiatives.

Fundamentals of Loyalty Marketing 

Commoditization of loyalty programs. desire for possessions to a desire for

experiences - partly due to changing demographics.

Overall, consumers are looking for the meaningful (which includes value and relevance).

The Space Graphics

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

Trend in the Loyalty space 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.

Principles of Loyalty Marketing

Relevance is the key to Loyalty MarketingThe magnitude of the reward is less

important that the perceived value of the reward○ Benefits - Intermittent scheduling of rewards

(“surprises”) can be more effective than regular scheduling

○ Special treatment○ Recognition

Loyalty Marketing reduces the consumer’s decision-making complexity

Loyalty Marketing reinforces the rightness or wrongness of the consumer’s choice

Loyalists represent an incremental sales force Loyalty Marketing is information-dependent

What is Loyalty?

The consumer is loyal to you is s/he frequently buys yourproduct

LoyalBehaviour

Low High

Desired Behaviour

The consumer is not necessarily desirable...

If you have had to subsidize their purchases If s/he buys your product because of inertia

or absence of an alternative

LoyalBehaviour

Low High

Desired Behaviour

Commitment is an emotional bonding

Hig

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Low High

Desired Behaviour

Co

mm

itm

ent Potentiall

yLoyalBehaviour

ActivelyLoyalBehaviour

PassivelyLoyalBehaviour

The activelyloyal customeris the only (longterm) profitablecustomer

Extend the relationship from Product to Brand

Desired BehaviourLow High

Depth of Involvement

Co

mm

itm

ent

Low

Hig

h

Product

Brand

Depth of Involvementreflects moving from anarrow relationship withan individual product tobroad usage of thefull range ofproductsmarketedunder the brand

AMEX

Desired Behaviour

Low High

Depth of Involvement

Low

Hig

h

Product

Co

mm

itm

ent

Brand

An index of behavioursthat reflect a CM’sattachment to AMEX- Tenure of membership-Total number of trans. per month- Months active- Total number of services currently active- Share of plastic spending- Survey responding and responses

Total $ revenue from all AMEXproducts and services- Total $ spending across all AMEX cards- Total $ annual card fees- Total revolving balances on Optima

An index of the number of pointsof connection with AMEX- Total number of types of cards held- Total number of basic cards- Total number of services currently enrolled in

Loyalty Programs

• Rebate Programs/Cash Back • Discount Programs• Points Program

Economic Value of a Customer

1. The top 20% of customers tend to produce 80% (varying by industry) of the profits.

2. 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?

3. 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, 7 out of every 10 customers cost more to serve than they contribute in profits.  

Understanding loyalty program economics is essential as running these programs isn't cheap. A study by McKinsey & Company estimated that a program's first year can cost as much as $30 million, with annual maintenance and marketing costs reaching $5 million to $10 million.

Take Home on Loyalty

Building a Winning Loyalty Program Program ObjectivesProgram PositioningProgram StrategiesFinancial Analysis/ModellingValue PropositionCurrency strategyBusiness AnalysisData AnalysisPlatform SelectionSegmentation & test PlanMeasurement planExit strategies

Keep in mind even if the above list is followed your loyalty program will not be successful until you are actively evolvong the program basis the prevailing trends & circumstances.

FUTURE Loyalty Programs

 

As loyalty programs become ubiquitous, we believe some interesting dynamics will evolve in the loyalty marketplace:

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.

Holistic View * Focused

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.

 

5) Instant point redemption at merchant partners. Making it easier to redeem your points, program sponsors will begin to develop merchant relationships whereby loyalty program members will be able to convert their loyalty points on-site at the merchant partner for discounts, merchandise and/or services.

6) Coalition Programs. We never thought we'd see the day in the India. While Coalition 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 India, given the fragmented market and the resources required to get such a program up and running. That is about to change. As compelling value propositions become harder to come by, the importance of coalition programs increase.

 

Value Proposition Through Coalition

THANK YOU