Loyalty programs are a dime a dozen. Started by American Airlines’ frequent flier program in the early 1980s, loyalty programs today extend from airlines to retailers to banks to sports teams and just about everything in between.
The programs seek to help companies build and retain a customer base that will return time and again for products and services, even if customers can obtain similar products and services from competitors at lower prices. Additionally, the programs aim to gather demographic and other customer data critical for ongoing communication with existing customers, as well as for targeting prospects.
Starbucks‘ 2012 Q4 earnings report showed just how impactful a loyalty program can be. According to the report, Starbucks said it had more than $1 billion loaded on its loyalty cards in the fourth quarter of the year, representing 27% of the company’s revenue.
However, not all loyalty programs are successful in driving additional business to a company.
Many loyalty programs today are dealing with a “midlife crisis,” according to Bill Hanifin, consulting practice leader for Aimia. “Most of today’s programs were designed by boomers for boomers. So companies are looking for ways to make programs more effective,” Hanifin says. “Consumer behavior has changed. People are relying more on referrals, recommendations, and online opinions for what they need. There’s a lot of research that shows that people already have their mind made up [about] what they’re going to buy before they go to the mall.”
So the loyalty program of today needs to help customers make up their minds before they make a purchase. But the programs need to do so in a way that benefits both company and customer.
Additionally, to be truly effective, loyalty program reward structures need to offer something of more value to customers than just another discount. Otherwise they become conditioned to discounts, rather than becoming loyal to the brand. The result will be that customers will seek out discounts, whether offered by a particular brand or its competitor, and will wait for discounts before making purchases.
Hanifin and other loyalty experts are big proponents of data analysis to drive programs. Analytics can provide the insight necessary for four key elements of establishing a successful loyalty program: having the right goals, offering the right rewards, targeting the right customers, and integrating the program with other marketing initiatives.
“You have to have a certain boldness,” Hanifin says. “You can’t be afraid to fall on your face, to make some mistakes. You need to experiment and learn.”
1. Setting program goals
Loyalty programs should have clearly established goals in terms of value to the customer and returns to the company. These goals should be established with time frame parameters, as well.
They also should bolster a company’s brand image. “The program should look to reinforce the brand and establish a strong connection with the customer,” says John Bartold, VP of loyalty solutions at Epsilon. “The brand has to be infused throughout the program.” For example, a high-end restaurant chain shouldn’t use its program to offer cheap dinners to program members.
To ensure that loyalty program goals are properly established:
Begin with the end in mind. Determine in advance the expected ROI of the customer loyalty program.
Start small. Set just a few specific goals at first, and then prioritize them. For example, the program may be designed to help increase average cart size for a retailer or drive additional customer visits to a restaurant.
Get in alignment. Loyalty program goals should align with both overall marketing objectives and broader corporate goals.
Be image conscious. Design the program to deliver on the brand promise in terms of the experience and the rewards.
Be real. Don’t wait until you’ve designed the perfect program to launch it. Models are often imperfect; what works in a model may not work in practice. Launch the loyalty program, and then adjust it as necessary.
Measure results. Create an ongoing cycle of testing and learning to determine if the program is on target to reach its goals or if changes need to be made.
Rethink the numbers. Move beyond a focus on the frequency of customer transactions and concentrate on the long-term profitability of the program.
Evolve. A customer loyalty program is not a static initiative. It should evolve with the company and with consumer tastes. Expect to test different program ideas over time.
2. Design an optimal reward base
Creating a reward structure that drives the desired customer behaviors, bolsters loyalty, and supports corporate goals is part art and part science, says Matt Howland, VP of Tibco Loyalty Labs. “‘Test and learn’ is the core of any loyalty program today,” Howland says, adding that, “Loyalty program customers want to be acknowledged.”
Some customers will respond to earning rewards, such as double miles, while others prefer rewards that reflect status, like advance boarding for frequent fliers. Starwood Hotels & Resorts allows its millions of loyalty program members to choose from nine different types of rewards.
To ensure that a program has the optimal reward structure:
- Consider allowing customers to choose their own rewards. This enables a company to best target its customers’ actual aspirations, rather than misjudging them. Two customers with similar demographic backgrounds can have different triggers for increasing their brand loyalty.
- Design a rewards structure offering loyalty program customers benefits for additional spending, not just discounted prices.
- Take the time to understand how loyalty program members’ additional spending can impact revenues and profitability.
- Create a tiered rewards structure to recognize high-value customers. Also consider offering more than one loyalty program: one for most customers, and an invitation-only program with its own set of unique benefits for high-value customers.
- Employ champion-challenger testing, as well as test marketing, to tweak the program’s rewards such that they deliver maximum benefits not just to customers, but also to the company.
- Shift to a loyalty program that focuses more on value and aspirational rewards than on discounts. But plan for a gentle transition to the new structure. Conditioning customers to expect discounts may be ineffective over the long term, but quickly taking away expected discounts can alienate customers.
3. Targeting the right customers
It’s certainly a customer benefit to offer rewards for their loyalty. Consequently, the customers a company targets should be the right ones: the ones who will increase a company’s ROI, rather than customers who will be costly to maintain while providing little additional value to the company.
Determining customers’ potential future value to an organization is a “rigorous science,” says Scott Robinson, senior director of loyalty and consulting solutions at Maritz Loyalty Marketing.
You have to use cues from [customers’] behavior to try to help evaluate their future potential. It’s an ongoing learning process and something that relates to the loyalty program’s actual communications with its participants.”
To reach the right customers:
- Target customers who are most likely to increase their incremental spending with the company. Some customers are unlikely to or simply won’t buy additional products or services, so marketing a loyalty program to them most likely won’t yield the desired results.
- Profile the company’s high-value customers to help target similar customers. Additionally, profile other loyalty members, as well, to develop a segmentation strategy.
- Proactively market to customers who are near their rewards or points expiration, to prompt them to make a purchase or take another desired action to retain their reward. Also, market to members who have recently allowed their rewards to expire. These are critical times to reinforce customer retention.
- Pay particular attention to new loyalty program members immediately after they enroll. Take steps to prompt them to make a habit out of buying from the company.
- Send different offers to different loyalty program members based on such areas as their segment, past behaviors and transactions, and growth potential. Sending one blast promotion to all members can encourage them to wait for discounts.
4. Linking to other initiatives
Customer loyalty programs are most effective when integrated with other initiatives, rather than being run independently, as many historically have been. One way to integrate them is by sharing data within the marketing department, as well as with other customer-facing areas of an organization.
“Have a data strategy,” says Mark Ratekin, SVP of consulting services at Walker. “In the past all of the marketing departments had their own data, there was no comprehensive data strategy.”
By pulling together data from across the organization and from external sources to create a more holistic view of the customer, companies can benefit from the power of Big Data to refine their marketing in general, as well as their loyalty program marketing in particular.
To incorporate a customer loyalty program with other marketing initiatives:
Do ensure that the entire marketing staff fully understands every aspect of the loyalty program.
Don’t have the loyalty program in its own silo.
Do reflect the brand image in the loyalty program similarly to how it’s woven into other marketing initiatives.
Do encourage two-way communications with loyalty program members, an essential element of all marketing with the advent of social media.
Do ensure that information flows freely between the marketers running the loyalty program and those who oversee other marketing initiatives.
Don’t overburden members with communications. Customers may ignore too-frequent messages. Ask program members to select their preferred frequency of communications.
Don’t market to all customers in the same manner. Some customers prefer email; others prefer text messages; while others prefer mail, in some cases viewing it as a sign that a company values them. Just as with frequency, ask customers how they want to be contacted.