Customer Loyalty in 2015 & Beyond Are You Wasting Your Money? report. By Jeff Berry COLLOQUY Research Director. October 2015

Transcription

1 01 report October 2015 Customer Loyalty in 2015 & Beyond Are You Wasting Your Money? By Jeff Berry COLLOQUY Research Director

2 01 Is Your Loyalty Program Working for You, or Wasting Your Money? Sure, there s no doubt that loyalty programs are still popular. But are they still effective? Marketers continue to pour more and more time and money into their programs, but are they getting the kind of payoffs they expect in long-term relationships, customer engagement and impact on sales and profitability? Or are they wasting their entire loyalty investments? Loyalty is about much more than a program; it s a way of thinking about customers entire experience and creating an environment where they want to forge deep and long-lasting relationships. It s based on a sense of trust, on the expectation that companies will be responsible stewards of their personal data and use it to create personalized, meaningful and rewarding experiences. But loyalty marketers aren t doing enough to drive engagement and value for program members. And misalignment between program investment and business objectives is leaving money on the table, diluting retailers investment and failing to provide the experiences that create real longterm emotional loyalty. COLLOQUY recently conducted a major survey of more than 2,000 U.S. and Canadian loyalty-program members and found many programs lack clarity and ignore or simply fail to discover what customers truly value. They often fall short of meeting consumers needs for utility and reasonable time to reward, lack true differentiation and struggle to keep pace with technologies that are emerging at a staggering pace.

3 02 The good news is that consumers still love to join loyalty programs and show no sign of slowing down. In our 2015 COLLOQUY Loyalty Census released earlier this year, we revealed that memberships jumped Membership Growth: 2012 to BILLION total U.S. loyalty program memberships BILLION total U.S. loyalty program memberships 26% INCREASE ACTIVE MEMBERS 42% Of the total membership, consumers are active in only 42% of enrolled programs. Source: 2015 COLLOQUY Loyalty Census by 26% to 3.3 billion, from 2012 to The bad news: Active participation in those programs continues to decline. Our Census revealed a stagnant market in which more than half of members 58% don t even bother to participate, much less become engaged and enthusiastic members. Playing follow-the-leader by creating a lookalike program that doesn t differentiate itself isn t going to help. In fact, such blah efforts that don t stand out from competitors can actually do more damage than good by syphoning money into copycat value propositions and helping a competing program that offers a more meaningful experience. In other words: the exact opposite of loyalty, and potentially a nudge right into the arms of the other guy. So, what can be done? Luckily, a great deal. This report examines three areas in particular where marketers should rethink the loyalty equation to create better, more long-lasting and profitable relationships with consumers, as well as better aligning program goals and investments with consumer expectations.

4 03 Millennials are a unique breed with dramatically different ideas about consumerism and loyalty than other demographics. Ignore that fact at your program s peril. It s time for a loyalty shakeup; here s how to start: Stop acquiring members: You have enough, probably millions upon millions, and chances are good you re not creating meaningful relationships with them. Driving long-term retention of loyal members will lower your overall investment. And, surprise, you ll naturally acquire new members through reputation, not costly incentives. Partner up to create power: The lone wolf routine is getting old. You just can t do it alone these days; partnerships whether co-branded credit cards, teaming up with complementary companies or joining a formal coalition program are the only ways to create long-term, differentiated and meaningful value for customers. When it comes to loyalty, there truly is strength in numbers. Don t misunderstand millennials: Yes, you were once their age, but millennials aren t simply you in a time warp. It s crucial that marketers understand the needs of millennials those born roughly between 1981 and They re a unique breed with dramatically different ideas about consumerism and loyalty than other demographics. Ignore that fact at your program s peril.

5 04 [ Customer Acquisition vs. Retention: ] Don t Ignore Your Loyal Fans The lure of something new is a pretty much universal appeal, whether it s a new car, a new outfit or a new friend. It s no surprise, then, that loyalty programs spend a lot of time and money trying to attract new members. There s nothing inherently wrong with that; the problem arises when companies fail to distinguish between the two groups the shiny new object (a new member) and the tried-and-true standby (the longtime member). This can be a costly mistake. What the two groups want out of a program, how messages should be communicated to them and the probability of selling to them are all quite different. Many marketers split their investments almost evenly between member acquisition and member retention efforts. In fact, according to a 2014 Econsultancy survey, 47% of respondents indicated they would spend equally on both groups; 34% would invest more in acquisition, while only 18% would spend more on retention. Some programs, in fact, spend up to 75% of their time and money on acquisition. Yet existing loyalty members are far more likely to spend more money, spend more frequently, try new products, refer potential new customers and contribute to profitability than are new members. Invesp Consulting says existing customers are 50% more likely to try new products and spend 31% more, compared to new customers. As programs let the customer s life cycle guide communications (retention vs. acquisition), customer lifetime value increases as loyalty marketers take them further down the path of spend frequency, lift, redemption and loyalty. The irony is that, for many years, loyalty programs were hyper-focused on retention, but the pendulum has swung the other way in some cases, with companies aggressively pursuing new members. Spending half the budget, or more, to acquire new members many of whom will get their free sign-up desserts and be gone is a misalignment between investments and business objectives. Once acquisition efforts land new members, they must still be persuaded to develop new behaviors. A successful program strategy entails introducing motivators and stimuli to enhance and accelerate customer behavior and amplify sales (basket size, frequency).

6 05 And marketing the program and its benefits the same way for existing loyalty members and potential ones is a misfire, since those consumers define value differently. Acquisition efforts should focus on transactional value, emphasizing discounts, points and sign-up bonuses, for example. Retention efforts, meanwhile, should focus on emotional value, with an emphasis on topics such as the time to earn rewards, program simplicity and alignment with consumers values and interests. This contrast in transactional value vs. emotional value is illustrated in several of the questions we asked in our COLLOQUY Customer Loyalty in 2015 & Beyond survey. (This report focuses on U.S.-only results.) When asked which benefits motivated them to join a program in the past 12 months, the two top answers were earning points/miles on purchases to redeem for rewards (56% of respondents chose this) and product or service offer/discount (55% chose this). Acquisition Efforts vs. Retention Efforts ACQUISITION Which benefits motivated you to join a program? Earning points/miles on purchases 56% Product or service offer/discount 55% RETENTION I continue to participate because: Easy to understand Rewards and offers are relevant to me 75% 81% RETENTION Why did you stop participating? Did not provide rewards/offers that interest me Too hard to earn points for rewards 56% 54% COLLOQUY: Customer Loyalty in 2015 & Beyond At this new point in the consumer-program relationship, rationality rules and the customer is weighing the value of a relationship with the company. These top two answers are good news, because the new members expressed an interest in engaging with the loyalty program instead of just signing up for a one-time bonus.

7 06 Transactional vs. emotional approach Once consumers realize the rational value of joining a loyalty program, their focus moves away from a strictly transactional one. Survey participants who were asked why they continue to participate in a program, for example, cited these top two answers: The program is easy to understand (81%) and I get rewards and offers that are relevant to me (75%). The responses reflect a more personal and emotional outlook. I continue to participate in the program because: The program is easy to understand I get rewards and offers that are relevant to me It gives me lots of ways to earn rewards faster It supports my lifestyle/personal preferences It has a smartphone app 81% 75% 50% 54% 48% COLLOQUY: Customer Loyalty in 2015 & Beyond And when program members were asked the reverse why did they stop being active in a program the answers likewise reflect this emotional value. The top two reasons were too hard to earn points and does not provide rewards/offers that I m interested in. Loyalty programs must communicate differently with members at different stages of their life cycles, from new members to existing members with different lengths of time in the program. One company leading the pack in terms of understanding its loyalty members is Starbucks, whose My Starbucks Rewards grew 28% to 10.4 million active users in the third quarter of 2015, according to Marketing magazine. The program has continued to grow its appeal across its three levels of membership, each with increasing rewards. In addition to the new memberships, for example, My Starbucks Rewards also saw a big jump in members rising into the top, gold level: That group now includes 6.2 million members, a 32% increase from the same quarter in 2014, according to Marketing magazine. Starbucks loyalty success includes both transactional appeal its famously sophisticated and easy-to-use mobile app and integrated payments, for example and emotional appeal with rewards that feel personal to users and the caché of gold membership.

8 07 You must do these things As loyalty programs work to map their communications and offers to customers loyalty life cycles, there are key things to remember. Just as a point of entry, programs must get the basics right: Keep benefits simple and clear-cut. Choose an earnings structure and stick with it. Provide easy guidelines about program requirements and how to reach the next tier. Personalize rewards based on what motivates members. Set short goals within tiers to maintain member excitement to give them something to look forward to and to hit new thresholds in a reasonable time. And think seriously about doing these But that s just a jumping-off point. Loyalty programs that aren t doing the following five things now or at least within the next 18 months will be left behind: Fire your worst customers. Strip all value away from them, because they re wasting your time and your money which could be better spent on members with whom real long-term relationships have or can develop. Fire your worst customers. Strip all value away from them, because they re wasting your time and your money which could be better spent on members with whom real long-term relationships have or can develop. Integrate all marketing efforts into the loyalty program, including points, discounts, promotions, brand marketing, pricing and inventory management. If you want your loyalty program to soar, don t isolate it from your other corporate marketing. Integrate intent data with behavior data from your program. Over-invest in your best customers. Mass appeal is overrated; don t allow your thirst for appealing to everyone to dilute your attention and value for the best members. Many programs allow their worst customers to subsidize their best. Why?! Spend 75% of your loyalty investment on retention, vs. the 75% that many programs currently spend on member acquisition. By recognizing the differences in customer acquisition and customer retention, loyalty programs can tailor their communications and rewards in ways that use rewards to entice members to join and stay through their emotional attachment. By working toward this relevance, programs can also ensure that program tactics and investments support overall business objectives thereby avoiding leaving money on the table.

9 08 [ Strength in Numbers: ] Getting Strong by Sticking Together It s a pretty simple, and brutal, reality of running a loyalty program: If it takes too long for members to earn rewards, they will bail or simply stop participating. Members constantly weigh the monetary value of what they receive from a program against what they need to spend in dollars, time and aggravation to get those rewards. Half of respondents in the COLLOQUY survey said they continue to participate in programs that give them lots of ways to earn rewards faster. Moving customers toward a reward quickly keeps them engaged and loyal to the business: For example, more than 90% of those who redeem rewards with a business in Belly, a loyalty program with member businesses in more than 15 major cities, return to that business within a month. And the time it takes to be rewarded is consistently one of the most significant pain points for consumers; getting to rewards faster, on the other hand, consistently persuades consumers to stay and spend. Canadian coalition AIR MILES Reward Program has found, for example, that members spend three to five times more as they cross-shop with coalition partners. Program marketers, likewise, must constantly balance consumers desire to reach rewards faster with sustaining the program s economics. The resolution to this seemingly at-odds situation lies in partnership models. The idea of strength in numbers is certainly true in the loyalty world. By joining forces whether through partnerships with complementary programs, co-branded credit cards or full-fledged coalition programs, where members can earn and redeem rewards among a variety of partner companies loyalty programs can create more value for consumers than standalone models. If partnerships are thoughtfully chosen and executed, everybody wins. Consumers often become more engaged, enjoy the ease of consolidating much of their loyalty efforts and can earn rewards much faster the ultimate win in the loyalty game. As for program administrators, there are also several big payoffs to taking a partnership approach: They have a better chance of prompting behavioral changes in consumers, gaining access to a more data-rich CRM platform and winning a sustainable competitive advantage by creating an offering that stands out from the crowd.

10 09 Creating a partnership loyalty opportunity whether by aligning with compatible retail partners, offering a co-branded credit card or joining a coalition model is likely to please members and potential members. In our survey, 27% of respondents ranked the ability to earn points from multiple retailers as one of their top three appealing program features. The Importance of Partnerships Partnerships, co-branding and coalitions can solve one of the biggest customer pain points: not earning rewards fast enough. rewards was a reason for no 24% 27% longer participating in a program belong to the Costco Wholesale Club, which offers a cobranded credit card agreed that difficulty in earning enough points for 54% ranked the ability to earn points from multiple retailers as one of their top three appealing program features COLLOQUY: Customer Loyalty in 2015 & Beyond The benefits of coalition multiplier effect In fact, among the loyalty programs with the highest percentage of survey respondents saying they are currently members, most of them have some partnership aspect. This is less surprising among the Canadian respondents: Coalition programs are popular in Canada, Europe and many other countries. A full 79% of survey respondents in Canada indicated they are members of the AIR MILES coalition program. Consumers benefit from coalition membership by enjoying a common currency and achieving reward status more quickly; they can earn and spend their program currency any way they want within the partner network, perhaps choosing to shop mostly at a drugstore and several favorite retailers but spending all accrued points on a plane ticket from a participating airline. For coalition partner companies, the model has clear benefits, as well: They raise their visibility and brand footprints, gain access to richer and wider pools of consumer data, gain efficiencies from the pooled resources and efforts, and enjoy higher open and read rates on coalition communications than on single-source programs, according to LoyaltyOne research.

11 10 Coalition Multiplier Effect $250 $200 $150 $100 $50 Number of Coalition Member Businesses Shopped SOURCE: The Loyalty Leap, by LoyaltyOne CEO Bryan Pearson And, importantly, coalition partner companies enjoy what LoyaltyOne calls the multiplier or network effect. The more coalition partners a consumer patronizes, the more money she will spend at the originating sponsor the company that first brought her into the coalition program. If, for example, she typically spends $100 at a favored drugstore chain, for example, she is likely to increase her spending there to $125 once she has become a shopper at two other stores in the coalition. As she becomes a patron at more partner companies, she likewise will often continue to increase spending at the originating sponsor. The multiplier effect isn t just about spending, though. It s about changing behavior and consolidating shopping habits. Overall, consumers who are members of coalitions are not spending more money, but they are consolidating more of their spending to companies in the coalition. By doing so, the consumer increases her rewards-earning power, becomes more entrenched and forges an emotional connection to the coalition and its partner companies. A few that are doing something right In the United States, formal coalition loyalty has not previously taken root primarily because of the challenge of market regionality but it is just gaining traction this year with the new American Express-backed Plenti program. Nonetheless, several loyalty programs that have some partnership aspect were among the most popular among respondents. For example, 24% of respondents said they are current members of the

12 11 Costco Wholesale Club, which offers a co-branded credit card. Likewise the Fred Meyer Rewards program, part of supermarket giant Kroger Co., was cited by 59% of respondents; it, too, features a co-branded credit card. The Fred Meyer Rewards Visa, issued by U.S. Bank, demonstrates how partnership models can create value for all parties. The grocer s customers earn program currency on purchases, the financial institution gains value through consolidated consumer spending through the card, and the retailer finds value as consumers consolidate their spending to maximize program investment. Starbucks, too, has recently created partnership opportunities for members of its wildly popular My Starbucks Rewards, offering shareable rewards with car-service company Lyft, music-streaming firm Spotify and The New York Times. The partnership allows Lyft riders, for example, to collect Starbucks loyalty program stars and gives all Lyft drivers gold status. When using Spotify, the coffee lovers earn Starbucks stars and have input on in-store playlists. And they can read a selection of free Times stories via the Starbucks mobile app, as well as earning stars through paid digital and print newspaper subscriptions. As for Plenti, the first large-scale, formal coalition-loyalty program in the United States, time will tell whether it will have the engagement depth and staying power of AIR MILES, UK-based Nectar and other long-running programs in other parts of the world. The results so far are promising: CEO Abeer Bhatia said Plenti has enrolled nearly 30 million members since its May launch and, at current growth rates, is approaching $1 billion in value awarded annually. Creating some kind of partnership is a viable way to help loyalty members earn rewards faster while still balancing the economic realities of the program operators. While partnerships can be a great approach, the fundamental principles of loyalty still must be delivered. Partnerships that don t deliver on the utility customers expect will soon find themselves flailing. Those that get it right, however, can create effective and interesting new approaches for their customers, their partners and their programs.

13 12 [ Missing the Mark on Millennials ] The millennial demographic generally recognized as those born between 1981 and 1997 is a media darling, and for good reason: The U.S. Census Bureau says the group is nearly 80 million strong in the United States, with more members than other age groups. A new report by financial services firm Standard & Poor s indicates that millennials have an estimated $600 billion in annual buying power and, by 2020, they are expected to represent 30% of total U.S. retail sales. Growth of Millennial Buying Power There are nearly 80 million millennials in the United States $600 BILLION buying power projected $1.4 TRILLION projected spending ++ + Source: U.S. Census Bureau ++ Source: Standard & Poor s COLLOQUY: Customer Loyalty in 2015 & Beyond The age group represents a huge opportunity for loyalty marketers to create lasting and profitable relationships or to drop the ball and miss out. Millennials are a different breed when it comes to loyalty, and they have dramatically different ideas about consumerism and loyalty. Programs that fail to recognize that and act accordingly risk either not tapping deeply enough into their strength, or alienating them entirely. And the stakes are larger than one demographic alone, as millennials influence purchase decisions for themselves, their parents and social networks. The good news is that millennials show strong engagement: 63% of survey respondents in the age group said they had joined a loyalty program within the past year.

14 13 The good news is that millennials show strong engagement: 63% of survey respondents in the age group said they had joined a loyalty program within the past year. To successfully target millennials, loyalty marketers must recognize that they have different values and different relationships with loyalty. Members of this group respond to exclusivity, lifestyle values and immediacy more than those in other age groups. For example, 25% of them say they joined a program in the past year because it offered access to member-only events, compared to 16% of all respondents. And 40% of millennials said they joined for access to member-only sales, products and services, compared with 33% of the general respondent base. Marketers also must structure their programs to capitalize on millennials desire for instant gratification and their love of attention-grabbing features. More than a third of millennials, 34%, said that the word that best describes their experience being a member of their favorite program is fun, whereas only 26% of the overall base respondents chose fun. Meanwhile, 66% of the overall respondent base chose economical as the word that best described that experience; only 56% of millennials chose economical. They like exclusives and hate inconvenience When asked why they stopped using a loyalty program, 34% of millennials say they did so because it didn t offer access to members-only exclusives. Only 27% of the overall base respondents stopped using a program for that reason. And participating in a loyalty program that supports lifestyle preferences (charities, wellness or sustainability efforts, for example) matters much more to millennials than to others: 63% of them participate in a program because of those lifestyle considerations, compared to 53% of Gen X members (roughly, those born between 1965 and 1980) and 46% of baby boomers (born between 1946 and 1964). Another thing loyalty marketers must understand about millennials is that, even more so than people in other demographics, they have little tolerance for unnecessary effort, unneeded communications or inconvenience. Indeed, 49% of them stopped using a program because it sent irrelevant communications, compared with 37% of the overall respondents base. 49% of millennials said they stopped using a program because it sent irrelevant communications, compared with 37% of overall respondents. Millennials demand technological prowess, too. Overall smartphone penetration in the United States is 75%, and they are not being used as occasional touchpoints; our COLLOQUY: Customer Loyalty in 2015 & Beyond COLLOQUY: Customer Loyalty in 2015 & Beyond

15 14 smartphones have become part of the fabric of daily life. While 42% of millennials say they continue to participate in a program because it has a mobile payment option, only 15% of baby boomers said the same. And 18% of millennials stopped using a program because it lacked a smartphone app; 13% of the overall base did the same. Mobile provides direct access to the consumer, gives brands the ability to know exactly where their audiences are at a given time, and supports the growing belief that location isn t a platform but, instead, a data set. Even more of a gap: Only 7% of boomers stay in a program because it has a competitive game or social aspect such as badges, leaderboards or communities. But over one-quarter, 27%, of millennials stayed for that reason. And 72% of millennials say they research and shop their options online before going to a store or mall, according to The Intelligence Group, a division of Creative Artists Agency. Status and Non-Monetary Reward Influence I continue to participate in the program because: Millennial Gen X Boomer It supports my lifestyle/personal preferences It has a smartphone app It gives me a mobile payment option It includes a competitive game or social aspect 63% 59% 42% 27% 53% 55% 32% 18% 46% 31% 15% 7% COLLOQUY: Customer Loyalty in 2015 & Beyond One loyalty program that is successfully engaging millennials is Sephora V.I.B., which offers features such as gamification through attainable tiers, tier movement through relevant rewards, surprise rewards and member-only sales and events. Sephora also taps into millennials desire for personalized programs with its Beauty Profile tool and personalized recommendations. And it leverages the influence of peers an important factor for millennials, who were practically raised on social media by limiting traditional mass-market advertising and instead focusing on peer recommendations with consumer advocates and the BeautyTalk Community.

16 15 Here s a short list of ways to make your loyalty program more appealing to millennials: Consider sub-programs that directly and exclusively target them, rather than trying to force their unique needs into a one-size-fitsall approach. Prioritize experiences over economic gains; millennials love to try new things. Gamify everything, because competition is important. Add some zing, in the form of gaming, to many aspects of your program. Leverage FOMO (Fear Of Missing Out) as a very real phenomenon to achieve engagement. This one seems obvious, but few programs do it: Hire millennials to design program parts aimed at them. To compete and thrive, successful loyalty programs must tailor their approach to the intended audience. When courting the highly influential millennial demographic, that means offering omni-channel functionality, simplicity, exclusivity and experiential value that aligns with lifestyle values. By creating these meaningful, convenient and status-aware experiences, loyalty programs can create deep and lucrative relationships with a demographic whose power is only going to grow in the coming decades.

17 16 [ Conclusion: People Still Love Loyalty, ] So Don t Mess This Up! 92% of loyalty-program members described their participation as either fun or economical. COLLOQUY: Customer Loyalty in 2015 & Beyond Take heart: The loyalty program appears to be here to stay, with membership continuing to climb. Our survey revealed that 42% of respondents participate in at least one program weekly, and 92% of them describe their participation as either fun or economical. Furthermore, 55% said they had joined a loyalty program in the past year, with a full 63% of millennial respondents having done so. But there s a big gap between engagement and simply signing up. With members active rate continuing to slip and the loyalty landscape becoming ever more competitive, retailers must step up their game. If they fail to meet customer expectations on value, benefits and usefulness, they risk being ditched for being relevant. True loyalty kicks in when programs offer simplicity, alignment on brand values and meaningful recognition for customers commitment. How each company achieves the right mix depends on its products, services, brand identity, competitive market and target customers. Customers know how valuable their data is, but marketers often miss the mark on using it to create relevant communications and personal experiences. Retailers must use the knowledge of their customers to resolve their pain points and make their journeys valuable. There s a narrowing window of opportunity to make the loyalty landscape better, to build more trust, create an emotional connection and create customer-centric strategies that deliver on expectations. Loyalty marketers must determine what success looks like for their programs and choose from the right models, technologies and motivators to get there. They must resolve misalignment between investments and objectives in order to stop leaving money on the table. They must double down on their efforts to resolve the three key areas we ve examined: acquisition vs. retention efforts, partnership models and the importance of the millennial market. Only then can they truly share the journey with consumers and create real, long-term emotional loyalty. Marketers that fail to shake up loyalty programs and make them matter could find their investment going down the drain.

18 17 [ABOUT THE AUTHOR] As research director at COLLOQUY, Jeff Berry manages research initiatives in North America and internationally. With more than 15 years of experience in loyalty marketing, analytics and customer engagement, Jeff manages and directs the development of LoyaltyOne s thought leadership content including research and best practices for global loyalty marketers. Jeff s background in client management, business development and consulting in both the B2B and B2C spaces developed his expertise in the theory and practice of loyalty marketing. Jeff joined LoyaltyOne, COLLOQUY s parent company, in 1999 and held a number of positions managing relationships for the AIR MILES Reward Program with clients such as American Express, Bank of Montreal and Rexall. In 2006, Jeff became the head of loyalty and database marketing at Fairmont Hotels, where he helped institute the structure and discipline of a customer management strategy and leveraged data and analytics to drive customer engagement and profitability. He also spent three years developing a small research and consulting operation focused on helping Fortune 500 companies market and sell to small businesses. [ABOUT COLLOQUY] Celebrating its 25th year, COLLOQUY has served as a leading publishing, education and research practice, bringing together loyalty practitioners from around the world. A pioneer in the industry, COLLOQUY is the first publication dedicated expressly to the art and science of loyalty marketing and has since become the go-to resource for loyalty intelligence. Today COLLOQUY engages and educates loyalty marketers with its magazine, weekly e-newsletter and timely and comprehensive loyaltymarketing website, colloquy.com. COLLOQUY delivers industry-leading loyalty benchmarking reports and educational workshops, webinars and speeches. The COLLOQUY Summit is the premiere annual loyalty event.