Loyalty-Basic practices
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Loyalty programs are used to acquire new customers, increase spending of existing customers, improve retention rates, and shift spending to higher margin products. There are now over 1.8 billion loyalty program memberships in the US, though many members are inactive. Relevance, reducing complexity, and reinforcing choices are key principles of loyalty marketing. Understanding customer profitability beyond just loyal customers is important, as the bottom 30% of customers can reduce overall profits. Future loyalty programs will focus on segmentation, tiering, broadening relationships across purchases, instant rewards, and coalition programs with multiple companies.
Loyalty-Basic practices
- 2. Loyalty programs are often part and parcel of a comprehensive customer relationship strategy.
- 3. Why build on a loyalty program? The basic benefits of using a loyalty program to obtain customer information are summarized below: Shift - Acquire new customers Lift - Increase the spending of existing customers Retention - Improve the natural churn rate of customers Profit mix - Shift spending to higher margin products These loyalty program benefits form the basis for all loyalty program initiatives.
- 4. Fundamentals of Loyalty Marketing Commoditization of loyalty programs. desire for possessions to a desire for experiences - partly due to changing demographics. Overall, consumers are looking for the meaningful (which includes value and relevance).
- 5. The Space Graphics It is estimated by Colloquy (2009) that there are 1.807 billion loyalty program memberships in the US (a 25% increase from their 2006 census) - with the average US household participating in 14.1 programs. Approximately 56% of those memberships were inactive (defined as no engagement within a 12 month period), bringing the average household active participation to 6.2 programs. That is a lot to compete with
- 6. Trend in the Loyalty space Not surprising, loyalty varies across industries. As reported in the New York Times, Forrester Research found that across 12 industries, retailers inspire the most loyalty While others, like TV service providers and internet service providers proved more fickle.
- 7. Principles of Loyalty Marketing Relevance is the key to Loyalty Marketing The magnitude of the reward is less important that the perceived value of the reward ○ Benefits - Intermittent scheduling of rewards (“surprises”) can be more effective than regular scheduling ○ Special treatment ○ Recognition
- 8. Loyalty Marketing reduces the consumer’s decision-making complexity Loyalty Marketing reinforces the rightness or wrongness of the consumer’s choice Loyalists represent an incremental sales force Loyalty Marketing is information-dependent
- 9. What is Loyalty? The consumer is loyal to you is s/he frequently buys your product Desired Behaviour Loyal Behaviour Low High
- 10. The consumer is not necessarily desirable... Desired Behaviour Loyal Behaviour Low High If you have had to subsidize their purchases If s/he buys your product because of inertia or absence of an alternative
- 11. Commitment is an emotional bonding The actively loyal customer is the only (long High Potentiall Actively term) profitable y Loyal customer Loyal Behaviour Behaviou r Passively Loyal Low Behaviour Low High Desired Behaviour
- 12. Extend the relationship from Product to Brand High Depth of Involvement reflects moving from a narrow relationship with an individual product to Low High broad usage of the Desired Behaviour full range of products marketed under the brand
- 13. High AMEX An index of behaviours Commitment that reflect a CM’s attachment to AMEX - Tenure of membership -Total number of trans. per month - Months active - Total number of services Total $ revenue from all AMEX currently active products and services - Share of plastic spending - Total $ spending across all AMEX cards - Survey responding and - Total $ annual card fees responses - Total revolving balances on Optima Low High Desired Behaviour An index of the number of points of connection with AMEX - Total number of types of cards held - Total number of basic cards - Total number of services currently enrolled in
- 14. Loyalty Programs • Rebate Programs/Cash Back • Discount Programs • Points Program
- 15. Economic Value of a Customer 1. The top 20% of customers tend to produce 80% (varying by industry) of the profits. 2. Not all customers are equally profitable - this we know. But did you know that the bottom 30% can eat up to half the profits generated by the others? 3. Understanding the economic value of your customers, not just your loyal customers, can save you tremendous amounts of revenue and effort
- 16. As such, the idea of "firing" your most unprofitable customers is becoming more attractive. Even in the supermarket sector, by some estimates, 7 out of every 10 customers cost more to serve than they contribute in profits.
- 17. Understanding loyalty program economics is essential as running these programs isn't cheap. A study by McKinsey & Company estimated that a program's first year can cost as much as $30 million, with annual maintenance and marketing costs reaching $5 million to $10 million.
- 18. Take Home on Loyalty
- 19. Building a Winning Loyalty Program Program Objectives Program Positioning Program Strategies Financial Analysis/Modelling Value Proposition Currency strategy Business Analysis Data Analysis Platform Selection Segmentation & test Plan Measurement plan Exit strategies Keep in mind even if the above list is followed your loyalty program will not be successful until you are actively evolvong the program basis the prevailing trends & circumstances.
- 20. FUTURE Loyalty Programs As loyalty programs become ubiquitous, we believe some interesting dynamics will evolve in the loyalty marketplace: 1) Companies will continue to look for ways to differentiate their loyalty programs, while balancing program revenue and costs to achieve favorable economics. 2) Newer loyalty programs will be more segmented e.g. targeting life stages, lifestyles and interests 3) Existing loyalty programs will become more tiered i.e. concentrating resources on high potential and high value customers.
- 21. Holistic View * Focused 4) Loyalty programs will begin to take a more holistic view of customers - focusing on broadening customer relationships (i.e. "relationship rewards") - offering awards and recognition for broadened existing relationships - resulting in a strengthened hold on their customers. This takes on increased importance for program administrators as the customer's sense of entitlement rises. 5) Instant point redemption at merchant partners. Making it easier to redeem your points, program sponsors will begin to develop merchant relationships whereby loyalty program members will be able to convert their loyalty points on-site at the merchant partner for discounts, merchandise and/or services.
- 22. Value Proposition Through Coalition 6) Coalition Programs. We never thought we'd see the day in the India. While Coalition programs have proved to be very successful around the world (e.g. Air Miles in Canada), this model has had considerable difficulty making head way here in India, given the fragmented market and the resources required to get such a program up and running. That is about to change. As compelling value propositions become harder to come by, the importance of coalition programs increase.
- 23. THANK YOU