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 ($$, frequency, cross/up-sell) in the long run
› Enhancing customer engagement, satisfaction & brand advocacy
Additionally, loyalty/reward programs (when done right) could enable businesses to –
› Bolster their in-house insights, analytics & CRM platforms
› Offer innovative hyper/personalized propositions to stand apart from competitors
Loyalty/Reward Program Models
When it comes to loyalty/reward programs; retailers & service providers may choose to adopt/modify one of the many ‘off-the-shelf’ models (e.g. coffee card, mileage, etc.), build an entirely bespoke model from the ground-up OR construct a hybrid model that best serves their customer acquisition/retention, profitability and branding goals
Coffee Card Model
Reward for achieving preset purchase goals– transaction #, spend $$, 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 (read: perceived 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 viability & success
Forthcoming segments will explore key loyalty/reward program delivery mechanisms, benefits & challenges as well as KPIs/metrics to evaluate their effectiveness
Stay tuned!
