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‘Loyally Rewarded’ – View on loyalty/reward programs (Part 1)

Loyalty/Reward Programs – Why?

Acquisition vs. Retention studies say… statistically speaking the cost of acquiring new customers could be anywhere in the range of 5X – 15X vs. that of retaining existing ones

– According to Bain & Co., 5% increase in customer retention can increase a company’s profitability by 75%

– Gartner says that 80% of a company’s future revenue will come from just 20% of their existing customers

Studies such these continue highlight the importance of customer retention & loyalty for businesses of all sizes and across industry verticals

For many B2C-centric businesses; developing and integrating a robust loyalty/reward program could effectively help address some of their key challenges, namely  –

› Acquiring new customers at lowest possible cost

› Retaining current customer base efficiently

› Growing per customer spend ($$, frequency, cross/up-sell) in the long run

› Enhancing customer engagement, satisfaction & brand advocacy

Additionally, loyalty/reward programs (when done right) could enable businesses to –

› Bolster their in-house insights, analytics & CRM platforms

› Offer innovative hyper/personalized propositions to stand apart from competitors


Loyalty/Reward Program Models

When it comes to loyalty/reward programs; retailers & service providers may choose to adopt/modify one of the many ‘off-the-shelf’ models (e.g. coffee card, mileage, etc.), build an entirely bespoke model from the ground-up OR construct a hybrid model that best serves their customer acquisition/retention, profitability and branding goals

Coffee Card Model

Connected Corners

Reward for achieving preset purchase goals– transaction #, spend $$, etc. (e.g. for every 11 items purchased, the customer receives their 12th item for FREE)

– Relative Complexity: Typically simple and straightforward

– Application: Effective model to encourage repeat e/store visits and purchase transactions

– Consumer Appeal: Simplicity, (reward) achievability and instant gratification

– Risk: Over-complicating reward earning & redemption process could lead to low adoption & utilization rates or maybe even a negative brand experience (e.g. “Purchase 11 coffees at full price and receive 20% off the 12th coffee when redeemed between 2pm – 3pm Weekdays OR 5% off when redeemed on Weekends. Reward discount not valid on public holidays or when snow falls”)

– Example: QSR (fast food, coffee shops, etc.)

Membership / Club Model 

For a recurring fee (typically annual); members get access to exclusive products/SKUs, discounted/bulk pricing, bundled services (shipping, etc.) & enhanced value added benefits (extended warranty, returns, etc.)

– Relative Complexity: Typically simple

– Application: Relatively straightforward model to help encourage repeat, cross-sell and/or up-sell purchase transactions

– Consumer Appeal: Simplicity & exclusivity

– Risk: Hidden/add-on fees and/or honeymoon membership pricing (i.e. subsequent membership fees raised significantly after the discounted anniversary term) could leave create a negative brand experience

– Example: Membership-based warehouse & e-commerce retailers (Costco, Amazon Prime – According to CIRP; Prime ‘members’ spend an average of $1,500/yr. on Amazon compared to only $625/yr. by non-Prime ‘customers’) and increasing number of pure-play service providers (e.g. computer software, etc.)

Retail Points Model

Customers accrue points based on their purchase behavior (visit frequency, $$ spent, etc.); which they can redeem for various products, services or cash-backs from the same business (and/or partners & affiliates)

– Relative Complexity: Simple through to Complex

– Application: Most retail, supermarket and some services industries

– Consumer Appeal: Relative simplicity & exclusivity

– Integrating an element of gamification & instant gratification (instant in-store bonus point offers, freebies, contests, etc.) could further bolster the program’s appeal and encourage ongoing usage

– Risk: Adding complexities to earning & redeeming points (readperceived un-achievable) could be detrimental to future adoption and long-term engagement

– Example: Most high street r/etailers, supermarkets, pharmacies, etc.

Miles & Tier/Status Model

Traditional airline loyalty model where members earn regular frequent flyer and ‘tier/status boosting’ miles to unlock varying degree of benefits & rewards

– Relative Complexity: Typically complex with varying degree of conditions and caveats on earning/redeeming points

– Application: Airline & related travel/hospitality industry businesses

– Consumer Appeal: Potential for lucrative high-value’ rewards (upgrades, etc.)

– Risk: Adding constraints to an already complex model; particularly as it relates to earning & redeeming frequent flyer points could impede future program adoption, long-term engagement and potentially lend to negative brand advocacy

– Example: Most airlines

No Model At All… Is there even a need for one?

Businesses may choose to not offer any loyalty/reward programs at all!

– Often, these businesses already have an (established) loyal customer base and/or perpetual/high demand for their products services; thereby availing them the ‘luxury’ of forgoing loyalty/reward programs altogether

– Despite the lack of any (direct) loyalty/reward programs, Apple Inc. still has one of the most loyal customer base; attributed in part to their industry-leading products and award winning customer support services


Significance of Engagement

Success of a loyalty/reward program can be determined by its active adoption and engagement… after all; what good is an ‘expensive’ loyalty/reward program if customers don’t actively adopt and/or use it?

In fact, a 2015 Colloquy Customer Loyalty Census study showed that though American households on an average hold 29 loyalty/reward programs… but they actively engage with less than half of them (i.e. actively earn & redeem)

– For businesses whose loyalty/reward programs aren’t actively used, this could translate into wastage/loss of precious capital, time & resources

Customer Engagement Variable

Businesses have to factor in various customer/segment engagement ‘variables’ when developing their loyalty/reward program; importantly the ever-evolving traits (likes, wants, needs & expectations) of their current and future customer segments/base

– For example: Some consumer sub-segments may only choose to actively engage with programs that offer unique experiential rewards (travel, music shows, shared benefits, etc.) whilst some others may prefer traditional ‘tangible product’ rewards

Similarly, select consumer sub-segments may only choose to actively engage with digital loyalty/reward programs (e.g. smartphone) whilst some may prefer engaging with programs that use good ol’ fashion plastic cards

Strategies to address/balance these types of mid-long term customer engagement scenarios would ideally need to be factored early on in the program’s design phase


So…

For most businesses, developing a robust loyalty/reward program can be one of the most effective tools in achieving their long term customer acquisition, retention & CLV / revenue goals

– To best suit their product range (consumables, discretionary, etc.) and long-term customer acquisition, retention, engagement, CX & brand advocacy goals; businesses can choose from a variety of loyalty/reward strategies & models (off-the-shelf / bespoke / hybrid)

– Developing loyalty/reward programs from the ground-up typically involves significant capital operational investments and as such businesses should factor in apt customer adoption/engagement strategies that ensure the program’s long-term viabilitysuccess

Forthcoming segments will explore key loyalty/reward program delivery mechanisms, benefits & challenges as well as KPIs/metrics to evaluate their effectiveness

Stay tuned!