Rewarding Loyalty Things To Consider Before Launching A Customer Rewards Program

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1 Rewarding Loyalty Things To Consider Before Launching A Customer Rewards Program Presented by Customer Retention. New Customer Acquisition. Increased Customer Lifetime Value. There are a lot of terms floating around the retail/service industry, prompting most merchants, at one time or another, to consider whether or not they should introduce a loyalty or reward program. The short answer is that almost any merchant can and will benefit dramatically from a customer loyalty program BUT it has to be the right program for the merchant and its customers; it has to be structured properly and executed well or it simply will not work as well as it should; it will simply waste time and money instead of creating increased revenue & profit. There are many things to consider before implementing a program. This paper will outline the following: 1. Key benefits a merchant can expect from a program 2. The types of programs available 3. The pros and cons of the main program types Before getting started, it s important to ensure everyone is on the same page with regard to why they should even consider implementing a program, so the merchant should pre-qualify itself by answering yes or no to these 5 statements: My current customers are one of my most important assets as a merchant. Acquiring new customers is very important to the growth of my business. It s important to me to keep as many of my existing customers as possible. I d like to secure as much of my customers category spending as possible. It is extremely important to have existing customers refer their friends, family, neighbors and co-workers to me. If yes was the answer to any one of these questions, then some sort of customer loyalty program is likely in order. If yes was the answer to 2 or more of these questions, then the merchant should really get cracking and have a program in place ASAP. Lastly, the merchant may already have some sort of program in place but perhaps it is not working well or is underutilized; the good news is any program can be enhanced, salvaging the valuable customer contact information and transactional data you have accumulated to date and using it as the building base for a more profitable and effective program that encompasses the same merchant benefits as a new program.

2 1. Key Merchant Benefits There are a variety of benefits derived from customer reward or loyalty programs but not all of these benefits apply to every type of retailer; a lot depends on the merchandise mix and approximate # of visits available from the average customer. Here is a quick reference to consider before reviewing the key benefits listed below: Transaction Frequency Examples of Industries Key Customer Impact for Merchant Program Type(s) 1X/week or more Gas, Grocery, Pharmacy Retain, Acquire, Increase Lifetime Value In-house, 3rd Party 1X/month Pet stores, Restaurants Retain, Acquire, Increase Lifetime Value In-house, 3rd Party 1X/quarter-year Fashion, Building Supplies Retain, Acquire, Increase Lifetime Value 3rd Party Infrequent purchase Furniture, vehicles, homes Acquire, Increase Transaction Amount 3rd Party A) Customer Retention We frequently meet merchants who literally recoil at the thought of incurring a cost to reward existing customers why would I want to spend money on someone who already shops here? This is a key disconnect when it comes to evaluating a reward or loyalty program because the #1 purpose of these programs is to REWARD LOYAL CUSTOMER BEHAVIOUR. That is where these programs got their name. Any retailer needs to ensure customers feel appreciated, remain happy with their choice of retailer/service provider and keep coming back. Unless a merchant is the sole provider of the products/services sold, there is competition and competitors want to acquire their competitors customers; they will frequently try to steal them by using any number of tactics: advertising promotional specials, discounting, customer referrals, sponsoring the local amateur sports team, etc. Most merchants think nothing of buying insurance to protect their business, home, health, life, car and boat, etc. so it s important to think of a loyalty program as customer retention insurance; investing in customers to maintain the revenue they generate for the business. A customer who receives a reward they value/appreciate will spend more with the merchant offering the reward (about 40% more) than they spend with one who does not offer rewards; this same customer is far more likely to return to the reward issuer again (about 65% more likely) and less far likely to defect to a competitor (as much as 10X less likely). Bottom line: investing in customer rewards is a very profitable activity for any merchant. B) Increased Customer Spending and Lifetime Value It is easy for a merchant to assume or believe that every customer spends every dollar they spend in a category in their store, but this is simply NOT the case. People have choices about where they can spend their $$ in any category and while some people are unfailingly loyal to a single merchant, the majority simply are not; they are constantly being wooed by the competition and are bound to experiment with different providers or get a second/third quote in order to ensure they are getting the most value for their hard-earned $$. A merchant who rewards a customer for spending their $$ in their location not only ensures they are more likely to return and less likely to defect; when returning to the store, the customer will spend about 40% more (at the expense of the other providers they have been using), in order to earn the reward offered to them (assuming the reward value is reasonable), increasing the average value of the customer over the lifetime of their relationship with the merchant. Current share of customer spending in category Your share of customer spending with a loyalty/reward program C) New Customer Acquisition Every retailer likes to see new customers walk through the door but acquiring new customers can be expensive as the advertising and marketing required to generate new customer growth is not free; this is one of the reasons retailers love getting introductions from an existing customer to the customer s community of friends, family, neighbors and co-workers; a referral from a trusted source is FREE MARKETING for the retailer and is very impactful as a consumer is far more likely to act upon a suggestion from someone they know and trust versus an ad they see or hear; many people are skeptical about advertising claims but most act upon advice from friends and family.

3 Loyalty/reward programs can often help merchants acquire new customers in an extremely cost-effective manner as participating program participants tell others about their positive experience. Another way merchants can leverage a loyalty program to drive new customer growth and traffic is by introducing an established loyalty currency that is already being collected by prospective customers in their area; these include frequent flyer and hotel reward programs, among others, all with millions of active collectors - about 75% of whom will consider choosing/switching retailers/service providers to earn more of these currencies. 2. Type of Programs Available You know you want/need a reward/loyalty program, but what sort of program makes sense for your business? There really are only two main program types to choose from and depending on the type of retailer you are, one or the other usually makes more sense but in many instances, retailers can and do use a combination of programs to greater effect. A) In-House Programs: These are retailer-branded programs, built by and exclusive to the retailer who offers them. They may involve special or VIP benefits for program participants (special offers, discount on birthday or ongoing discount, advance notice of upcoming events, contests, etc.) or even a retailer-branded program currency (points, bucks, rewards, Miles, etc.) that has to be earned and spent with the retailer offering the program; these in-house earn and use currency programs are often referred to as closed loop programs. B) 3rd Party Programs: These are well-established programs with millions of Members in place already. The most common types of 3rd Party programs are frequent flyer and hotel reward programs like American Airlines Advantage, United Airlines MileagePlus or Holiday Inn s Priority Club. 3. Pros & Cons of Program Types Depending on the type of retailer you are and the demands/expectations/needs you have from a program, it is important to consider the basic criteria involved with introducing and using one type of program over another. Here are the basic things to consider. A) Cost/Time to Launch D) Ongoing Program Costs B) Ease of Program Execution by Staff E) Program Data Ownership & Use C) Customer Response A) Cost/Time to Launch Building a program from scratch can be expensive and requires reasonable lead times to accomplish. You need the program software and hardware to operate the program and unless you are a software expert, chances are you have to hire someone to provide this for you; the costs include lump sum build costs (anywhere from $25,000 - $250,000, depending on what you want/need) and ongoing maintenance costs involving monthly fees to process data and generate reporting. You also need someone/people to run the program on an ongoing basis; someone to develop, implement, execute and measure the program participants response to offers and use the program data to refine offers and to build sales.

4 Using established 3rd Party programs can be cheaper to launch and faster to get going as there is very little to build (the programs exist already) and the program can literally be turned on by the retailer; all that is required is to determine how the retailer gets the reward currency (Miles or Points) into the customer s reward account. B) Ease of Program Execution by Staff A retailer can structure the most amazing customer reward program in the world but if the program is not adequately promoted in the merchant s marketing mix and properly executed by customer-facing staff, it stands little chance of being successful. The program concept has to be very simple; easy for the staff to communicate as part of their typical customer interaction (or they simply won t do it) and easy for a busy & often distracted customer to understand whether seeing it mentioned in the merchant s marketing or being introduced to it by retail/service staff. Proprietary new retailer-branded programs can be impactful by their uniqueness but can be overly complicated for staff and customers if there are too many bells and whistles in addition to the basic base offer value. Customers can sometimes also suffer from program fatigue when they participate in too many programs at once and simply lose interest/the ability to remember/take advantage of all the disparate offers & incentives available to them. 3rd party programs can sometimes be easier to communicate as people have usually already heard of them and easier for staff to promote & execute as staff and customers often already use them personally and know how they work. No matter what sort of program is used, it also has to be easy for the staff to get the reward into the customer s possession. This can be accomplished for most programs through an integration with the merchant s point of sale (POS) system, a web-based reward interface or via credit/debit terminals. C) Customer Response Your customers have been inundated with increasingly aggressive discounting by many retailers; even if these discounts are made by retailers in different categories with larger margins, the impact has been consumers who are de-sensitized to more merchant-affordable offers in any category. Fashion or houseware retailers are notorious for promoting discounts of 40-80% at certain times and/or on certain goods/services because margins are often very high; as a result retailers with thinner margins have difficulty getting any sort of spike in consumer response when they try to offer a discount of 10-20%. This consumer desensitization has dramatic impacts for a low frequency merchant offering an in-house or closed loop program with a currency attached to it because their place of business is the only place to earn the currency; the offers need to be rich enough (more costly) to flag the customer s attention and stimulate sales otherwise the consumer response can be, why bother? I ll never accumulate enough of this currency to make it worth joining/using this program (after the retailer just spent thousands of $$ building it). They may join the program but rarely use it, resulting in admin costs with no increases in sales revenue. As a result, low transaction frequency-type retailers are typically not a good fit for an in-house program that offers a proprietary currency; these retailers should consider a non-currency type program or a 3rd party currency program where the customer can accumulate the currency in other locations, helping make it more worthwhile to take advantage of the merchant s offering and participate in the program. D) Ongoing Program Costs Aside from the cost to build certain types of programs, the bulk of any program s ongoing costs are tied to the program offer(s); costs are incurred whenever a merchant uses a consumer incentive and incentives typically take the form of discounts or rewards (or both); it is important to recognize both discounts and rewards are true costs. Many merchants tend to look at discounts as soft costs versus a currency offering but a legitimate 20% discount (as opposed to MSRP discounting) has an even bigger real cost to the merchant: $100 item x 30% margin = $30 gross profit, after the retailer pays for the $70 in product/service costs. STOP $100 item discounted by 20% to $80 = $10 in gross profit, after the retailer pays for the $70 in product/service costs. DISCOUNTING A discount of just 20% has actually cut profit by 66%, from $30 to $10. Discounts are typically advertised and then taken by all customers, regardless of the customer s historical value to the retailer. A customer who receives a discount is more likely to expect this discount in the future, resulting in the retailer habitually seeing lower relative profit.

5 Offering a bonus on a full priced purchase, instead of using a discount, can often stimulate better results, with less actual cost. Offering a bonus using a currency like Miles or Points is a value-added incentive; it maintains margin integrity while wooing the customer with an equally appealing incentive Miles or Points they already collect and covet. Because the consumer is earning theses currencies in many places, increasing their totals more quickly, they do not expect/need really rich offers from any one retailer. Further, a bonus-type offer of currency is passed on only to the reward program members (who tend to be the retailer s best customers) not all customers. Lastly, the true cost of the bonus can be a lot less than a discount needs to be as customers don t tend to expect a bonus while discounting is an age-old practice. Retailers who use a currency-based bonus can see dramatic results from offers costing as little as 2.5% - 5% of the transaction value and when offered only to program members not all customers. $100 item x 30% margin = $30 gross profit, after the retailer pays for the $70 in product/service costs. $100 item with bonus offer of 1 Mile/Point per $1 = 100 Mile/Point cost to retailer; Miles/Points cost $0.05 each = $5 cost of offer to retailer = $25 in gross profit after the retailer pays for the product/service costs of $70 and the Mile/Point cost of $5. Consumers who collect currency see the offer as good value relative to other ways they earn this currency. Retailer bonus offer of 1 Mile/Point per $1 has reduced profit by just 16.7%, from $30 to $25. A customer does not always expect a bonus, resulting in the retailer better able to control offer costs. E) Program Data Ownership & Use While many retailers see immediate short-term results from program incentives offered to customers, the real long-term value of any program is the transactional data that can be tied to a customer profile, enabling the merchant offering the program to identify gaps or spikes in the customer s purchasing history and then make offers to fill those gaps or further encourage spikes (bulk purchases, higher margin items, etc.). In-house program data is entirely owned by the merchant as the customers enroll in the merchants program. The merchant owns both the customer profile (name, contact information) and the transactional history, enabling them to target each customer with relevant offers based on what they have been/have not been buying so far. When using a 3rd party program currency, the merchant owns the transactional history but because the customer is a member of an external program, the merchant needs to somehow capture the customer s profile in order to know who is buying/not buying what. To that end, best-in-class retailers who use a 3rd party program must capture the customer s profile by requiring them to provide it in exchange for receiving the 3rd party currency. These retailers can then also make relevant offers to the consumer, based on purchase history. CUSTOMER DATA Relevant offers are crucial for effective program results no matter what type of program is being used; the more personalized offers can be, the greater the likelihood the consumer will act upon them and drive the sales behavior desired by the merchant. It is estimated that irrelevant offers result in program abandonment rates as high as 65% as the consumer loses interest when being offered incentives on things they have purchased recently or on things they have no historical interest in purchasing. Myths of Loyalty 1. Rewarding my existing customers is a cost I don t need to incur. 2. My customers are 100% loyal to me, spending all their category $$ in my store. 3. Discounting a purchase is only a soft cost. 4. Loyalty programs are complicated to offer and execute. For more information about the pros and cons of offering different types of customer reward or loyalty programs, please contact: Graham Farrell, President Mobile: graham@lift-and-shift.com Josh Beller, VP Operations Direct: josh@lift-and-shift.com Web: