One of the great challenges to a loyalty program occurs between the sixth and 24th months of operation. It's in this period that the excitement and anticipation created by the launch wanes and customers and the company's CFO start to measure the program and its results.
There are five critical factors companies should consider in the first two years of operating a loyalty program.
1. Communicate, communicate, communicate. It takes a lot of planning to create a loyalty program, including thinking of ways to educate staff about it and ways to garner customer participation. Once the planning is over, the key messages of keeping staff informed and customer participation top of mind need to be reinforced constantly.
Create a presence for a loyalty program by thinking of it as an asset. When advertising, include information about it. Devote an area on the company Web site to the program. Continue in-store presence and point-of-sale promotion of the program.
Reinforce the program message to customers. If e-mail addresses are collected as part of enrollment, they should be used to communicate with members (those who opted in for this type of communication).
Let employees know some simple information about loyal customers. Factors like “40 percent of in-store purchases are made by loyalty program customers” and “the top 10 percent of loyalty customers have spent more than $500 and made an average of seven purchases” demonstrate the program's value, going a long way toward fostering good employee attitudes about it.
2. Time is your friend (for a change). There's a reason the first two years are critical. When a loyalty program launches, better customer retention usually tops the list of objectives. Better retention has a direct tie to profits. Bain and Co. reports that with respect to increasing retention “…the impact of retaining 5 percent of your customers can result in 25 percent to 85 percent increase in profit over time …”
The two key words are “over time.” Seeing the results of improved retention requires time — time to establish a baseline performance and time to be able to measure year-over-year performance.
Be careful about using the first six months of loyalty program data to start formulating year-over-year activity. Because most programs sign up new members when they make a purchase, the first few months show high levels of enrollment and spending.
The critical factor here is for organizations to continue to believe in the reasons that dictated the creation of the loyalty program and allow it to perform. There are many chances to meet short-term objectives — knowing who your customers are, communicating with them more frequently and planning promotions. Measuring longer-term objectives takes time.
3. Build a strong database management team. Because loyalty programs are successful through the information they gather, they require large databases. The customer knowledge represented by those databases is why the loyalty program was created.
It's important to have the expertise (internal or external) to leverage the value inside the database. Building a strong database management team is necessary to show success of campaigns or increased retention.
4. Measurement is about control. When planning promotions for the most loyal customers, there is a tendency to want to include everyone. However, without a control group, the results will not necessarily drive good business decisions.
For instance, if a company executed a campaign for all customers and created an average incremental spend of $10 per customer at a cost of only $2 per customer to execute, what would the result be? The business would be thrilled, of course, because the net profit of $5 (lucky business has a 50 percent gross profit margin) for a cost of only $2 is a great business return! Or is it?
Suppose we included a control group, and its members spent an average of $6 incrementally in the same period. The difference of $4 can be attributed to the promotion, and at a cost of $2 per customer to execute the company actually broke even.
Include a control group. Accurate promotional measurement helps drive better business decisions. To address the concern about excluding any loyalty members from the promotions, track which members have been excluded from a promotion in the past (because they were in a control group) and ensure they are included in the next few promotions.
5. Protect your customers' trust in you. In creating a loyalty program and asking customers for personal data (name, address, phone number, e-mail address, etc.) the company likely has made privacy promises to the customers. Even if no promises were made, there likely is an implicit trust.
Companies must never break the trust between their best customers, the strongest asset of the business. Do not sell or rent customer lists to third parties, and let customers opt out of various forms of communication (e-mail, promotional distribution, etc.).
The factors above are critical considerations when operating a new loyalty program. Keeping them in mind as you work with your loyal customers will help maximize the value of the program to your business. During the first months and year of a loyalty program, a profile of your company's best customers will emerge. That profile and those individual customers will help the business build retention and grow more profitable. The critical factors will help ensure active, positive participation.