Loyalty programs are often part and parcel of a comprehensive customer relationship strategy. So welcome to our loyalty marketing best practices section.
“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:
- 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
For loyalty programs, communications used to focus on tangible benefits – what we call the “ER” words. That is to say, “Our program is…” ‘bigger,’ ‘better,’ ‘faster,’ ‘easier.’ These words have ceased to have meaning. Everything works now. These are the table stakes. As such, the market has changed in that consumers are demanding more. Rewards have evolved in the marketplace from being a nice little extra for one’s loyalty to being perceived as an entitlement (partly the result of the commoditzation of loyalty programs). Concurrently, consumers have shifted, to some extent, away from a 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 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 (2015) that there are over three billion loyalty program memberships in the US (a 26% increase from their 2013 census) – with the average US household participating in 29 programs. Approximately 58% of those memberships were inactive (defined as no engagement within a 12 month period), bringing the average household active participation to 12 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.