Raising the Bar of Customer Loyalty Programs

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1 Raising the Bar of Customer Loyalty Programs Identifying Your Best Customers and Driving Their Most Profitable Behavior by Carlos Dunlap, Vice President, Strategic Services, Maritz Loyalty Marketing A recent Maritz Poll of consumers found that 80 percent of Americans participating in a loyalty program said their membership in the program impacts their purchasing decisions. Seventy-four percent of Americans said that without the loyalty program, they buy less from the company offering the program. Savvy marketers already know this, and many have implemented loyalty programs to drive repeat purchases and establish longer, stronger customer relationships. Competition is fierce and companies are aggressively pursuing new customers. The credit card industry alone mailed over 4 billion offers and solicitations last year. Under these conditions, a marketer s gut reaction may be to offer deeper discounts to keep their customers coming back. And, with a growing number of loyalty programs in the market, consumers have more choices than ever before. My advice get to know who your best customers are and what motivates their best behavior. Attitudes towards your brand, as well as brand positioning play a key role in influencing customer behavior and creating loyalty, and should be considered when developing a loyalty program. Companies need a comprehensive understanding of loyalty, and to do this they must measure both attitudinal and behavioral loyalty and understand the relationship between the two. Intentions based on positive attitudes do not always translate to behavior. And, behavior in the absence of a strong attitudinal foundation is highly vulnerable to competitive threats. In order to be effective, a loyalty program s structure, reward offerings, and communications must be relevant and specific to your targeted audience, based upon their attitudes, behaviors, and demographics. The financial impact of launching a program that does not drive the desired behaviors from the right type of customers can be significant. A potentially greater and longer lasting risk is dramatically changing or ending a loyalty program with the participating member base. Once the program has been offered to your customers, it is difficult to take it away if it isn t meeting its objectives, without some degree of negative reaction. With this in mind, it is crucial that a loyalty initiative impacts customer behaviors including incremental transactions, higher average ticket size, repeat visits, and extension of the customer life cycle with your product. So, how do you identify your best, most valuable customers and build a program that motivates the behavior you want from those customers? In other words, how do you design a loyalty program that works?

2 Raising the Bar of Customer Loyalty Programs Page 2 Our clients have seen the highest return on investment when they follow an 8-step strategic process in building a customer loyalty program that is tailored to identify, retain, and grow their best customers. These steps include: 1. Loyalty situation analysis 2. Gap/needs assessment 3. Earnings overview 4. Program impact projections 5. Loyalty program structure and plan 6. Program investment estimate 7. Return on investment projections 8. Loyalty program test Step 1: Loyalty Situation Analysis Before jumping into the design of the loyalty program, you need to understand exactly what your current situation looks like and what your capabilities are in regard to instituting and managing an effective loyalty program. Conducting a thorough examination of the present environment, including the answers to the following questions, is key: What is my company s long-term vision? What are our business goals and objectives? How do we conduct business (operationally) and how do we generate profits? How do we capture customer data, and what data do we currently capture? What are the market conditions that could affect my loyalty program, including industry and competitor-relad issues? How much brand recognition do we have in the market, and what type of brand positioning do we promote? How many lines of businesses do I have, and how do they vary in regards to business model, offerings, programs, and target customers? A proper analysis of the company s current loyalty situation will provide a better overview of your loyalty marketing needs from a combined operations, revenue growth, and communications perspective. Step 2: Data Gathering & Gap Analysis After the situation analysis is conducted, you can drill down into the customer-specific data that your company captures, analyze it, and then identify what you want to happen to begin growing your best customers. This data capture will include customer demographics, purchasing/activity levels, how you segment customers and/or score their activities, how you analyze profits, and any recency, frequency, and monetary (RFM) value models you have built along various lines of business. Many of our clients have found the need to conduct additional research during this phase to understand why their customers are loyal to one company brand versus another and why their customers are loyal to them, in an effort to identify the loyalty profile of their best customers. Often the best solution is to work with a third party vendor who has the research expertise needed to understand the complexities of customer loyalty and better predict customer behaviors by combining both the attitudinal and behavioral aspects of customer loyalty.

3 Raising the Bar of Customer Loyalty Programs Page 3 Analyzed data elements may include: Segments defined by company Product profit margins Channels by which products were purchased Customer communication channel ( , direct mail, etc.) Upon establishing a best customer profile, you can identify the needs or gaps between where you are today and where you want to be tomorrow, in order to pinpoint areas that will garner the greatest return on investment. The gap analysis also is an effective tool to educate and build consensus among key stakeholders on where the company needs to focus to grow profits. Step 3: Earnings Overview Once the best customer profile has been identified, you can begin to project earnings based on well-established loyalty marketing models. When these earnings are quantified for key stakeholders to see, you can begin identifying customers and lines of business that show greater promise to generate the best profits. This tool will help you and your stakeholders focus even further on the areas of greatest profitability. An RFM earnings model would likely include: Recency of purchases Number of purchases The overall margin/$ of specific products purchased Step 4: Potential Program Impact Once you know where you want to focus, you can begin plotting out scenarios to move the needle in specific customer behavior categories. During this exercise, you will identify potential cross-sell/up-sell, segment migration, retention, and customer acquisition opportunities based on your knowledge of your audience and the market environment, and any customer research you ve conducted. In essence, you are setting up profitability goals that you want your loyalty program to reach before you design it. For example, through your own internal company knowledge or with the assistance of an experienced loyalty provider, you may project that it is reasonable to expect a 5% increase in customer retention due to the efforts of your program and increased loyalty. The revenues for such improved tenure are then projected out in terms of incremental revenue. Step 5: Loyalty Program Design You understand your environment, you identified and closed your data gaps, you have identified your best customer profile, and you ve set your earnings projections and profitability goals. Now you can design a program that will include the structure, payout levels, and reward recommendations that will drive the desired behaviors of your best customers. In our experience, the following loyalty reward program characteristics are essential to creating a reward program that will attract, retain, and grow your best customers:

4 Raising the Bar of Customer Loyalty Programs Page 4 Quality Offering: Matching the quality of the reward to the expected quality of the brand. For instance, electronics may be offered at all tiers, with higher quality brand names listed only at the top tiers, using less expensive brands for lower tier redemption. Cash Value: Establish the value of a reward as a percentage of what the customer spends to earn the reward. For example, if the customer is required to spend $1,000 to earn a $10 reward, the cash value is 1 percent. Many factors determine the appropriate cash value of rewards, including incremental gross profit generated from the program, product purchase cycles, program enrollment fees, and competitive positioning, just to name a few. Perceived Value: The perceived value of rewards may vary from person to person, but the total reward mix should be perceived as having high value. Aspirational Value: Offer rewards that motivate customers to change their behavior and increase spending to reach a certain level of rewards. Tiered reward structures to allow for redemption at multiple levels work well. Redemption Choice: Offer a variety of reward items within a volume tier. Convenience: Once earned, make it easy for the customer to redeem, obtain, or use their reward. Overall, 56 percent of adults who are in a loyalty program prefer to redeem via the Web versus point-of-purchase, mail, and via phone, which finished second, third and fourth, respectively. Relevance: The perception that the reward level is achievable. The most profitable customers should accumulate enough points within 3-6 months to redeem for a reward.this will get them engaged early in the program, thereby increasing retention. For less profitable customers, the time line should be 6-9 months, which encourages increased spending and frequency. Unique: Your overall reward mix should be unique and difficult to duplicate. Remember, your customers have a variety of rewards programs to choose from and you want yours to stand out. Communication: Create better-targeted offers, messaging, rewards, and services relevant to individual customers based on the subtle differences in attitudes, preferences, and intent. Step 6: Estimate Your Program Investment What is it going to cost to build, maintain, and refine your customer loyalty program on an ongoing basis? Much of this will be based on your situation and gap/needs analysis, how far you want to move the needle, and how much profit you want to generate. An estimated program investment analysis encompasses the costs of research and strategy development, setup, operations, project management, systems, support services, communication, mailings, fulfillment, and rewards. Step 7: ROI Model A return-on-investment model should detail investment, incremental profit, breakage, and liability projections at one, three, and five years. Measuring ROI should be an ongoing process, to ensure your loyalty program is rewarding profitable behavior. The overall projection will include: Projected incremental profit generated by the recommended program Profit by line of business Profit detail by category, if applicable Profit detail by segment, if applicable Your financial liability, with breakage (points never redeemed by customer)

5 Raising the Bar of Customer Loyalty Programs Page 5 Generally speaking, a well-crafted loyalty program should break even at year one, covering set up and implementation costs. A well-designed program will cover internal rates of return (i.e. 2:1 or 3:1) in year two and continue to improve year three and beyond as customers become more engaged and membership increases. Step 8: Test the program Before you undertake a widespread implementation of your customer loyalty program, it s a good idea to test it with a select number of existing customers and/or focus groups. The test phase allows you to test your introduction method, reward mix, payout structure, and communication schedule and vehicles. This can be an invaluable tool to providing much needed feedback, helping you tweak the program to meet the needs of your most valuable customers and rewarding their best behaviors. Though it may seem an arduous process, these are the necessary steps to a successful customer loyalty marketing program in the new millennium. Rewarding your best customers not only makes sense; it makes millions. For more information, please visit or contact Maritz Loyalty Marketing at MARITZ or

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