Loyalty Programs Gone Right – Constructing the Utopian Loyalty Program

As a follow-up to a prior article around loyalty programs gone wrong, herein we define what a utopian loyalty program would like (one which not only satisfies members, but more importantly, has a positive impact on the bottom-line), while highlighting some best-in-class programs that have got it somewhat right…

Loyalty programs have become a de-facto standard in most B2C sectors (particularly retail, financial services, telecommunications, and travel); consumers take it now almost as a given that they will be rewarded by companies they give their business to. As such, there are tens (if not hundreds) of thousands of loyalty programs around the world.

Some come in the form of a simple punch card (buy 10 coffees, get one on us), others are rather complex (earn double status miles when purchasing V or higher fare type tickets, fly with 12,500 miles to zone A in non-peak season weekdays). Some give discounts as rewards (discounts on certain products in the supermarket for loyalty card holders), others pamper their members (access to an airport lounge).

One thing is fairly common across most loyalty programs though, that being that they are inadequate. A majority of companies have taken the easy way out by offering cookie-cutter loyalty programs to their customers, programs which fail to do enough to change customer behavior, to do enough to change the bottom line.

An effective and well-designed program is one which is used above and below-the-line in a strategic manner to accomplish a variety of objectives, including but not limited to:

Loyalty Circle

“Customer loyalty” and “customer satisfaction” mean absolutely nothing if the above objectives are not pursued, if a clear change is not made to the bottom line. We adamantly believe companies that offer loyalty programs that fail to pursue most of the objectives above are needlessly tying up internal resources, wasting marketing opportunities, and under-whelming the customer.

To right the ship (or build the ship right, for those companies that do not have a program), we recommend companies revisit their programs to see how they can make improvements, to ensure strategic objectives are being pursued actively; to that end, we highlight how this can be done, with examples of how some companies use their programs to do so.

 

Driving Up Acquisition

The most common method for using loyalty programs to drive up acquisition is through a referral component, whereby members receive certain benefits from the program for referring in friends or family members to the company (or program); when the referred person opens an account or purchases a given product or service, the referrer receives a certain set of benefits. Various rules are often built in to the referral feature, for the purpose of minimizing fraudulent activity (i.e. in the case of a banking loyalty program referral feature, the referred person must maintain at least a balance of 1,000 USD for a minimum of three months for the referrer to receive the benefit).

Another method for driving acquisition (re-acquisition, that is) via a loyalty program is around win-back efforts, whereby lost customers are lured back with various benefits. This works most effectively with those customers who showed a high level of engagement with the loyalty program prior to leaving, and, for example, may come back if incentivized with the right set of customized benefits (i.e. in the case of a supermarket loyalty program, inform a customer they will receive triple points on all pet category purchases, knowing they have a particular affinity for products in that category, based on past purchasing behavior). 

Driving Up Acquisition – Benchmark PracticeHero

Hero MotoCorp, the largest motorcycle manufacturer and retailer in India, has a strong referral component in its GoodLife Loyalty Program (which boasts over 10 million members). Existing Hero motorcycle owners who refer in friends or family receive 3000 points, which they can then spend in a variety of ways.

The feature has had a measurable positive impact on the bottom line – in a one-month period alone in 2011, 86,610 motorcycles were sold through the referral component of the program.

 

Increasing Share-of-Wallet

Possibly the one objective that can be the most aggressively pursued via loyalty programs, best-in-class programs spend a great deal of time and effort on trying to increase customer share-of-wallet, particularly through conducting below-the-line activities. This is of particular importance in those sectors in which customers spread their spend across a variety of companies (i.e. retail, hospitality, financial services, etc.), as the likelihood that a given customer is not giving you his or her full share-of-wallet is all that much greater (and thus, as is the opportunity).

Companies pursuing this objective via their loyalty programs most often identify first the “missing” share-of-wallet of their customers, then design below-the-line actions / offers aimed at capturing this missing revenue. An example, to illustrate – a supermarket that has loyalty program members that consistently buy baby food from them, but do not buy diapers, are sent an SMS informing them of a discount for any diaper brand valid on their next visit if they present their loyalty card upon purchase.

Such share-of-wallet increasing features can also be built into the program as an above-the-line feature as well, rewarding customers for giving as much as possible of their business to a given company – an example of this are total banking loyalty programs that reward customers for every single product or service they hold (rather than what most banks reward, credit card spending).

Increasing Share-of-Wallet – Benchmark PracticeMTN

MTN, South Africa’s second largest mobile operator, has a clever feature in its loyalty program, around rewarding subscribers for keeping their mobile phones on and active every day. The program rewards subscribers not just for how much they spend (as most programs do), but for every day their mobile phones are active on the network. This is a feature that MTN uses to help drive share-of-wallet increase with its subscribers, as the market is one in which multi-SIM, multi-operator usage is rampant. By rewarding subscribers for staying on the MTN network every day of the month, the operator is encouraging subscribers to give their full-share-of-wallet, and stop switching between networks.

 

Increasing Average Basket Size

Loyalty programs can also be used to help increase how much a member spends with a given company (in contrast with share-of-wallet spend increase, which necessitates shifting spend from a competitor, this is all about creating organic additional or new types of spend). The focus here is to get members to spend more than they normally intend to in a given transaction, traditionally either through driving them to buy a complementary product or service, or a larger / better product or service.

An example of this can take the form of incentivizing a member to upgrade a standard room to a suite (by providing triple loyalty points for the upgrade at the time of booking in), or of giving an incentive for a member to buy dessert (by providing a buy one, get one free dessert coupon to program members that historically haven’t bought dessert).

Increasing Average Basket Size – Benchmark PracticePetro

Canada’s gas station chain giant Petro-Canada uses it program in various above-the-line manners to drive up the average basket size of its members, by incentivizing them with additional Petro-Points for spending more – this comes in the form of providing points for non-fuel purchases (such as for purchases inside the gas station stores or for carwashes), as well as for buying higher octane fuel (with up to five times additional points vs. normal octane purchases). Such tactics are excellent examples of how companies use loyalty programs to increase the average spend per visit per member.

 

Increasing Margins

Particularly relevant for companies that have within their product portfolio a variety of similar but substitutable products, loyalty programs can be used to incentivize members to switch to higher margin products, thus having a positive impact on the bottom line without necessarily driving up revenues. More often than not conducted as below-the-line activities, members who buy lower margin products or services are tactically motivated with incentives to switch up to higher margin products (often taking the form of a discount or additional points for purchasing given higher margin products).

Increasing Margins – Benchmark PracticeTesco

One of the world’s largest supermarket chains Tesco is renowned for using its Clubcard program for driving members to purchase higher margin products. Every quarter, the company sends millions of customized mailers to its members, with coupons that have been specifically included in them that intend to change a specific customer’s behavior. Prior purchases of each shopper are data-mined to identify the specific products they are purchasing that are low margin for that category. Then, a strategy is set to determine which product to upgrade the shopper to.

Shoppers buying low margin meatballs, for example, are incentivized with a discount coupon to pick up Tesco’s own private label meatballs the next time they visit. Taking such actions with millions of shoppers every quarter, as can be assumed, results in a significant uplift in margins; Tesco is a shining example of a company that truly reaps significant benefits from its loyalty program.

 

Decreasing Costs

Loyalty programs can go a long way towards helping drive cost reduction, particularly through changing consumer channel usage behavior. Incentives can be provided to program members to conduct transactions through lower cost channels, for example; such an effort, in fact, can serve as one of the primary methods of driving channel migration. Through conducting a transaction processing cost by channel analysis, companies can estimate the savings associated with driving transactions to a given channel, and, provide bottom-line positive impacting incentives to stimulate consumers to do so. Such efforts work particularly well when conducted below-the-line, as incentives can then be given only to those who are not conducting transactions in desired low-cost channels.

Decreasing Costs – Benchmark PracticeICICI

ICICI Bank (the second largest bank in terms of assets in India) has a loyalty program in place that is heavily tailored around driving consumers to use alternate self-service channels to conduct their transactions. The program rewards subscribers with points for conducting various transactions online. As their branches face significant congestion issues, as well as the fact that face-to-face transactions are costlier, the program is of significant importance in helping the bank to drive costs down by promoting channel migration.

 

Decreasing Churn

On a high level loyalty programs are supposed to have a positive impact on driving up customer satisfaction, and thus, retention rates. However, this is only theoretical; loyalty program member retention rates are traditionally higher vs. the general consumer base in companies due to the fact that a self-discriminating already more loyal base joins loyalty programs. What we refer to here is around using loyalty programs to proactively and reactively drive down churn – in essence, bribing program members with what they like from the program when they announce their intention to sever the relationship (or when a churn prediction model identifies the member as high risk, allowing for proactive retention activities to be taken).

Benefits can be given in exchange for a commitment from the customer who has threatened to churn (i.e. sign up for a one year contract extension, get 5000 points as a gift), or, as a one-off for customers who are suspected of being at risk (i.e. we value your business, and as such, we are upgrading you to the gold tier). Most important here is that members be given what they like, not what is convenient – this will require understanding what aspects of the loyalty program they like, or probing what they would like in exchange for committing not to churn.

Decreasing Churn – Benchmark PracticeCiti

Citibank manages one of the most well-known banking loyalty programs in the world, the Citi ThankYou® Rewards Program. Naturally, the bank receives a significant amount of card cancellation requests. To help manage and reduce the attrition volumes, the bank “bribes” cardholders with benefits to keep them from closing their accounts. A recent offer it has used, for example, is offering an additional 3% cash back to cardholders (as in earn 3% more) on their future purchases.

In so doing, the bank is providing benefits only for those consumers who remain active customers, and, is encouraging additional spend (which in turn is needed to offset the costs associated with bumping up the cash back ratio). The benefits offered to each cardholder are naturally modified to reflect the value of the customer, the tenure of the customer, the potential of the customer, etc.

 

We believe that it is due time companies step up their game when it comes to loyalty programs. It is without a doubt one of the areas where they have and are falling short in terms of marketing efforts. Well-designed programs that pursue numerous objectives concurrently are where things need to go; failure to do so is a sure-fire way to drive companies to consider scaling down loyalty program efforts. To learn more about constructing (or re-constructing) the utopian loyalty program, please contact us at info@forteconsultancy.com.

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