The high cost of underperforming loyalty programs

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It's a whole new world of business challenges out there. Consumers' needs and preferences are ever changing, and companies that fail to adjust their business practices accordingly will struggle to grow.  Because of this, marketers need to take a good hard look at their existing strategies to ensure that they continue to meet customer needs and deliver results. Customer loyalty is one such strategy.

It has been estimated that companies spend approximately $2 billion annually on loyalty programs.  Compare that expense to reports that the average US household is enrolled in 14 programs but is active in less than half of those, and you have cause for concern.  A common reaction is to bump up rewards, but this is a short-term solution that may not be sustainable.  Before making any changes, evaluate your loyalty program and fix the underperforming areas. 

Both your customer needs and business needs have likely changed since your program was launched. It's important to start your evaluation with identifying today's business needs and growth objectives and to then compare those needs and objectives with the behavior your program rewards. If there is a gap, you need to update your program.

The next step is an in-depth series of diagnostics to quantify the impact your program has on customer behavior. Loyalty programs often are better at attracting discount devotees, than they are at strengthening relationships.

One of the byproducts of loyalty programs is the valuable customer information they yield.  If you aren't leveraging this information for relevant interactions, you are missing an opportunity to grow the relationship.   

Pitfalls to avoid

Be aware of some common pitfalls of program evaluation:

  • Complete data – To get a true picture, it is important that your customer data is complete and accurate. Failing to consolidate data or double-counting duplicate customers in your file will skew your results and impede your ability to make knowledgeable decisions.
  • Spare time – Using the same resources to assess your program as those who run the day-to-day operations often results in the evaluation getting pushed back on the priority list.  Don't let that happen. Customer loyalty is too valuable to place on the back burner.
  • Objectivity – It is hard to critique one's own work when you are so close to it. Leveraging external third-party resources for the evaluation will ensure objectivity.

Loyal customers are the cornerstone of your business, and a great deal of money is spent each year to nurture those relationships. Endeavor to know for certain how your investment is performing. Your customer relationships are depending on it.

Vicki James is a senior marketing strategy consultant and Kamal Tahir is a director of services management for Experian Marketing Analytics.

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