How to Measure a Loyalty Programme s Return on Investment. Managing information and transactions securely

Transcription

1 How to Measure a Loyalty Programme s Return on Investment Managing information and transactions securely

2 Introduction Successful programmes have longevity because the overall benefits clearly justify the ongoing investment necessary to meet the changing market, retailer, and consumer needs. Today s Market There are a large number of customer loyalty programmes on today s high street, encompassing a range of propositions that deliver a variety of benefits to their membership bases. Many of these programmes have been delivering great results over a number of years, and also deliver well-quantified and accepted benefits for the retailer. A common theme among successful programmes is the existence of a clear loyalty strategy, underpinned by ongoing monitoring and rigorous analysis in order to optimise performance. Successful programmes have longevity because the overall benefits clearly justify the ongoing investment necessary to meet the changing market, retailer, and consumer needs. Often, most retailers aren t in a position to get the customer proposition right first time. They simply don t have a good enough understanding of their customers and what will motivate them to exhibit loyal behaviour. After all, gaining a detailed customer view is often the main objective for the loyalty programme in the first place. Right First Time A customer loyalty programme is not a one-off investment in technology that has a certain return on investment (ROI). It s an ongoing commitment to customers and the business, and must be built on the solid foundations of a clear loyalty strategy as well as a flexible Customer Loyalty Management platform. If these fundamental components are right, then all the tools will be at hand to establish and maintain a strong customer proposition that reaps rewards in terms of increased spend, increased visit frequencies, and improved brand engagement. Often, most retailers aren t in a position to get the customer proposition right first time. They simply don t have a good enough understanding of their customers and what will motivate them to exhibit loyal behaviour. After all, gaining a detailed customer view is often the main objective for the loyalty programme in the first place. In this situation it is important to mitigate the risk by establishing a loyalty strategy with the support and guidance of experts who can advise on an initial customer proposition underpinned by a ROI forecast. This enables the retailer to launch a loyalty programme with clear objectives and the necessary flexibility to optimise performance to achieve a stronger return in the medium to long term. page 2

3 Components of ROI Multidimensional Programme Benefits We need to consider where the benefit of a customer loyalty programme comes from, because an understanding of this helps to identify why the fundamentals of programme design are so important. Much of the benefit of a programme is generated by creating incremental changes in customer behaviour. This might sound obvious but many programmes forget, ignore or don t properly address this fundamental objective. The loyalty marketer shouldn t expect benefit without creating behavioural change and if our key performance indicators (KPIs) aren t built to identify, monitor and optimise these changes then the programme will not fulfil its potential. It s often said, but today s customers really are savvy. Give them something for free and they ll gladly accept. A good programme needs to give customers what they want in return for their loyalty and engagement with the brand. At The Logic Group we think of the revenue contribution of a customer loyalty programme coming from a combination of four areas; the relative performance benchmark of each being highly dependent on market sector and brand objectives: Loyalty uplift; Promotional uplift; Data asset; Brand awareness. page 3

4 Loyalty Uplift Loyalty Uplift The incremental revenue attributable to the loyalty programme is derived from the Incentive Uplift and the Engagement Uplift Redeemers Non-Redeemers Quantified Member Engagement It s a well publicised fact that engaged members of customer loyalty programmes increase their spending to attain rewards they actually want. Loyal customer engagement might manifest itself in an extra visit, choosing your business over a competitor, or by increasing basket size from time to time. We call this the loyalty uplift; the incremental revenue attributed to the member s engagement in the programme and the change in behaviour motivated by the desire to attain a reward. Engagement Uplift We break down the loyalty uplift into two components: engagement uplift and incentive uplift. Firstly, the engagement uplift is the incremental revenue earned from engaged members of the programme; those customers that behave differently because the programme provides them with value in return for their loyal behaviour. Although there are a number of ways to define engagement uplift, we would typically characterise the engaged membership as those that have attained a reward. Comparing the value of these members with those that haven t attained a reward gives us an insight into the influence that engagement in the programme is (or isn t) having. When a loyalty programme is launched, engagement uplift will be low or difficult to reliably measure. However, this can be optimised through a well designed customer journey. By monitoring engagement uplift, the loyalty marketer can track the performance of one of the key principles of good programme design - the attractiveness of the reward structure. Incentive Uplift The second component of loyalty uplift - incentive uplift - is the incremental revenue earned as members change their behaviour to attain a reward. The key variable here is the reward distance - the gap between a member s current reward balance and the total needed to obtain the desired reward. If we were to plot a member s spend against their reward distance, we would expect to see increasing spend as the reward distance reduces; with the final 25% showing, on average, a higher spend. It s a well publicised fact that engaged members of customer loyalty programmes increase their spending to attain rewards they actually want. Whilst incentive uplift is complex to isolate, an experienced loyalty analyst is able to identify the contribution of incentive uplift and help the loyalty marketer to optimise the benefit by carefully positioning the cost of the rewards. Typically, a range of rewards is provided in order to ensure that this benefit is maximised across all target customer segments. By careful programme design and a suitable selection and costing of rewards, we are able to maximise loyalty uplift; monitoring the two components to identify how well the programme is driving change in behaviour and maintaining an engaged membership that is motivated to spend more. page 4

5 Promotional Uplift The benefit achieved by promoting the right offer to the right customer at the right time. Targeted Profitable Dialogue All marketers know that targeted communications perform best. If we deliver the right offer to the right person at the right time then the return on investment is optimal. We refer to this benefit as the promotional uplift; and for most retailers this offers the biggest opportunity to drive incremental revenue from the loyalty programme. Well constructed promotional offers that take account of customer preference, behaviour, and engagement with the loyalty programme, drive the biggest benefit and are most appreciated by members. The Logic Group s approach to maximising promotional uplift within the context of a customer loyalty programme is an advanced strategy built around a recency, frequency, monetary (RFM) segmentation. This segmentation becomes the framework for quantifying and monitoring member value, alongside engagement in the programme, in order to construct offers that recognise the member s Well constructed promotional offers that take account of customer preference, behaviour, and engagement with the loyalty programme, drive the biggest benefit and are most appreciated by members. current and potential value to the business. Using this RFM framework, engagement strategies are devised to support retention of the most profitable member segments and growth in those with the potential to perform better. This may be achieved using targeted incentive promotions or through improved marketing communications, optimised by a detailed understanding of the member and their motivations. The benefit of promotional uplift is easily measured on a campaign-by-campaign basis using traditional database marketing techniques including control cells, a fallow cell and pre/post analysis as appropriate. page 5

6 We can also include the intrinsic value of a loyalty programme s rich data as a contributor to ROI. Programme Value A loyalty programme is an effective vehicle to communicate a brand s values. Data Asset In addition to the loyalty uplift and the promotional uplift, we can also include the intrinsic value of a loyalty programme s rich data as a contributor to ROI. Whilst this benefit is often difficult to monetise, especially for smaller organisations, it does offer huge opportunities for a data-led retailer to manage their business around the customer and their needs. For some, this outcome is valuable enough to justify the programme, and the other components of the programme s benefits become secondary considerations. Brand Awareness A loyalty programme is an effective vehicle to communicate a brand s values, to keep the brand front of mind and front of wallet over and above the competition, and to build and maintain a dialogue with members. For many retailers, particularly those in the luxury sector, this benefit may be the primary justification for the programme. In this case, the penetration of the programme and the percentage of spend attached to the programme (share of wallet) are key performance indicators that should be monitored by the loyalty marketer. However, we shouldn t forget that although brand awareness is key for the luxury sector, it s also well documented that the more affluent amongst us still like discounts! page 6

7 Conclusions The successful loyalty marketer builds a ROI model from the outset and uses this to measure and optimise the benefit of the programme to not only ensure that costs are recovered, but that the return is genuinely recognised by the business. A clear loyalty strategy, underpinned by an effective ROI model, is critical to establish and maintain a value proposition that meets the needs of customers and drives value into the business. To deliver this, the loyalty marketer must put in place a flexible Customer Loyalty Management platform and appropriate Key Performance Indicators backed up with rigorous customer analysis to ensure success. page 7

8 About the author Jon Worley Principal Consultant, Customer Loyalty Management Jon Worley is a Principal Consultant at The Logic Group and is responsible for leading the Customer Loyalty Management consulting practice. Jon has over 20 years experience managing complex technology and business change projects, and has provided consultancy to over 25 customer loyalty programmes in the UK and Europe. Jon s experience has been gained in multiple sectors including retail, financial services, and hospitality and leisure. His previous roles include senior project management positions both in the UK and the US. This broad business experience coupled with in-depth knowledge of customer loyalty solutions and strategy enables Jon to ensure that our client s projects are successful in engaging their customers and achieving the desired business outcome. About The Logic Group The Logic Group partners with leading organisations across Europe to enhance the effectiveness, security and profitability of their customer interactions. The company specialises in the secure management of information and transactions through the delivery of trusted payment and loyalty solutions that enable increased revenue, improved profit, and reduced operating costs and risk. We combine our skills, experience and innovation into client solutions that drive improved customer experience, enhanced customer insight and stronger customer relationships. We believe that we have an unmatched passion and track record for building effective customer interactions. That is why the company is behind many of the best known names in Europe for whom maximising the value of their customer interactions matters most. The Logic Group Enterprises Limited Logic House Waterfront Business Park Fleet, Hampshire GU51 3SB United Kingdom phone fax info@the-logic-group.com Managing information and transactions securely 2011 The Logic Group Holdings Limited