Why You Should Kill Your Customer Rewards Program & Earn Billion Dollar Loyalty Instead

Why You Should Kill Your Customer Rewards Program & Earn Billion Dollar Loyalty Instead

Are you killing it with your customer loyalty program?

Or maybe a better question, one you may not be asking- is your loyalty program killing you?

Okay, before we answer this imagine for a moment your business is dead and the vultures are circling. You’re bankrupt and creditors are picking through your assets in search of anything of value they can swipe, sell for pennies on the dollar, and recoup some of the losses you caused them.

What do you think sits atop the vulture value chain?

Your hard assets like vehicles, buildings, and servers? Or maybe the algorithms, processes, or intellectual property you spent years building?

In the case of Caesars Entertainment Corp., a bankrupt casino operator known for its opulent Roman-themed casino on the Las vegas strip, the real gem creditors have been clamoring for is the company’s customer loyalty program.

The program is valued at $1 billion dollars.

Is your rewards program one of your most valuable assets?

If not, you’re likely working toward that goal since today’s marketing pros have unanimously told you a rewards program is a must-have in any performance marketing strategy. But will an idea that started in the travel industry and flourished in the hotel space really work for you?

Is your loyalty program profitable?

Turns out loyalty programs don’t always live up to the hype, can actually hamper growth, and crimp the margins of well-meaning companies.

Too many are viewed as obligations rather than assets.

So unless you’re willing to do what it takes to earn billion dollar loyalty like Caesars did- don’t worry we’ll show you how in just a moment- kill your customer rewards program today and stop wasting your time and money.

Loyalty’s Dirty Little Secret

Despite the fact U.S. consumers hold 3.3 billion memberships in customer loyalty programs, many of these programs simply do not pay off for the companies operating them.

In fact, a McKinsey study that evaluated 55 publicly traded companies offering rewards programs found those that spent more on loyalty grew at about the same rate or slightly slower that those that did not.

Loyalty programs, according to the research, did not drive stronger revenue growth.

Image via: McKinsey

Additionally, loyalty also appears to correlate negatively with profitability in some instances. The McKinsey study found companies that spent more on rewards programs experienced EBITDA margins that were approximately 10% lower than peers that spent less on loyalty.

Image via: McKinsey

Slower growth and pinched margins, what else could go wrong?

Well, according to research from The Boston Consulting Group, it can also be extremely difficult to break even with a rewards program. For instance, the firm calculates that a programs that costs 3% of revenue breaks even at a 10% incremental share.

While returns can rise rapidly once a customer punches through the break even point, the research suggests much time and effort may be spent just covering the costs of a rewards program.

Rewards Gone Wild

Despite the negative impact loyalty programs can have on the financial health of an organization, the number of U.S. consumers enrolled in rewards programs has increased 26% recently to more than 3.3 billion, according to The 2015 COLLOQUY Loyalty Census.

The argument often made to companies considering a rewards program is that driving sales via loyalty generates a larger ROI than new customer acquisition campaigns.

Loyalty programs done right can stimulate robust growth.

Engaged rewards members, according to this white paper from Rosetta Consulting, buy 90% more frequently, spend 300% versus others, and are 5x more likely to purchase from a brand offering a rewards program. This provides insight into why Amazon, according to analysts, is willing to lose between $1-$2 billion dollars on its Prime shipping subscribers.

Turns out, according to research from Consumer Intelligence Research Partners, Prime members spend $1,500 a year on average compared to $625 for non-members.

This phenomena is confirmed by research that suggests loyalty programs that increase customer retention by 5% can increase profits 25-95%. It’s not surprising then, when you consider there’s $6.2 trillion up for grabs when consumers switch brands, that companies are rushing to implement rewards programs despite the hiccups.

The Truth About Rewards

A well executed loyalty program can produce consumer sentiment results that register well beyond the balance sheet. Besides the impact rewards programs can have on a company’s bottom line, they also play a pivotal role in shaping the consumer’s perspective of the brand.

In fact, loyalty programs, according to this survey of more than 11,000 consumers, actually have more influence on brand satisfaction than price or perception of value.

Image via: Bond Brand Loyalty

But before you run down the hall and use this data to convince your boss to launch or amp up an existing rewards program, understand the competitive landscape.

The rewards program membership boom shows no signs of slowing and grew nearly 26% over the last two years.

Image via: Colloquy

Probe a bit deeper though and you’ll unearth a major problem plaguing loyalty programs; enrollment doesn’t necessarily translate into engagement.

The average U.S. household, according to The 2015 COLLOQUY Loyalty Census, belongs to 29 loyalty programs but is active in less than half of those.

Image via: Colloquy

Consider as well that active or engaged users, defined as those who earn or redeem at least once a year, are becoming increasing less engaged as the number of loyalty programs in existence booms.

Image via: Colloquy

The slide in participation is now in its fifth year.

It means if you’re going to offer a rewards program, enrolling customers is the easy part. Getting them to actively participate is a bigger challenge.

But the question remains; should you even bother?

To Reward or Not to Reward

Keep in mind that if you botch your loyalty program or fail to make it stand out from others there are likely to be consequences. In fact, you can expect a negative social media barrage should your rewards program fail to impress.

Image via: Capgemini Consulting

Let’s assume then that if you do decide to offer a rewards program, you do so with a commitment and energy level second to none. But first, you must decide whether a rewards program is the right thing for both you and your customers. In other words, will it create value for the two parties involved?

This is a question that can’t be answered by marketing alone. A holistic approach, one that includes input from finance, product, and operations, is required when attempting to determine whether a rewards program is likely to be profitable.

Fortunately, The Boston Consulting Group has done a bit of the work for you. It says the value of a loyalty program may be determined by a formula based on what it calls loyalty margin. In other words, forecasting the value of a loyalty program is somewhat similar to forecasting the potential profitability of other business endeavors.

Three factors to consider when weighing the benefits a rewards program offers to customers against the costs of those benefits to the company include;

  • Loyalty margin
  • Incremental share
  • Program size

You can calculate each and forecast the overall value of your rewards program using this chart:

Image via: The Boston Consulting Group

The value of a rewards program differs by category. However, this formula indicates that it’s easier to make rewards programs economically viable for big-ticket items in relatively high-frequency categories (think airline tickets and hotel rooms). However, researchers also suggest sophisticated programs can work for smaller ticket categories as well.

But only if designed and executed appropriately.

Why Loyalty Fails

Less than half of the 11,000 U.S. consumers surveyed in The Bond 2015 Loyalty Report agree they spend more money after joining a loyalty program. The report also indicates that 44% believe it’d be easy to replace a particular rewards program with one offered by a competitor.

Today’s loyalty programs often fail because they blend in rather than stand out.

Before we outline exactly why loyalty programs fail to impress members, it’s important to briefly identify the common types of rewards programs being used today. The Boston Consulting Group suggests there are three basic kinds of loyalty programs:

1. Earn & Burn- purchases earn rewards

    Examples: frequency, points, discounts

    Downside: high costs can undermine margin

    2. Recognition- repeat customers earn differentiated service

      Examples: seat upgrades, jump to front of line, branded recognition cards

      Downside: Number of participants may be limited

      3. Customer Relationship Management-purchase data used to tailor and target rewards

        Examples: recommendations, quarterly rewards, targeted email

        Downside: Can undercut incremental sales

        The majority of loyalty programs are generally built around one or more of these models.

        The problem isn’t necessarily the models, but rather the impact they have on certain categories, how they’re combined, and the degree of creativity used in customizing each. Programs that fail to create value for the consumer and company often do not differentiate themselves from others.

        Here then are five reasons loyalty programs fail:

        Loyalty Fail #1: Reliance on Discounts

        Reliance on too many discounts

        Rewards programs are often mindless ways of routinely delivering discounts that can chip away at margins and harm an organization’s financial health.

        The Bond 2015 Loyalty Report suggests brands that structure rewards programs solely based on discounts often become, “...trapped in an endless cycle of one upmanship and outspending the competition on rewards.”

        In fact, McKinsey & Company suggests discounted rewards reserved only for members doesn’t reward consumers for true loyalty since non-members often enjoy the same rewards at the check-out where cashiers often swipe a generic rewards card on their behalf.

        Loyalty Fail #2: Lack of Differentiation

        Every Rewards Program is The Same

        Rewards programs that are implemented with a one-size-fits-all approach are less likely to be memorable.

        This may be one reason program engagement is on the decline.

        The 2015 Bond Loyalty Report points out that consumers have a finite capacity regarding the number of programs in which they can actively participate. As the McKinsey study suggests, a me-too mentality that cuts and pastes its rewards program fails to provide members a compelling reason to engage.

        Loyalty Fail #3: Lack of Reward Relevance

        Loyalty programs often offer rewards the company prefers to offer rather than what the customer actually wants or needs.

        Capgemini Consulting estimates 44% of negative social media chatter surrounding rewards programs stems from rewards that are not aligned with customer preferences.

        Failing to align rewards with desires, the report suggests, causes people to perceive the program only as a way to cross-sell or upsell. Similarly, The Bond 2015 Loyalty Report says authentically fulfilling customer needs is key in making a rewards program desirable and relevant.

        Loyalty Fail #4: Choosing the Wrong Metrics

        Choosing the wrong metrics

        While The Boston Consulting Group found some companies generate 60% of their revenue from loyalty program members, successful efforts are characterized by first calculating whether a program is beneficial to the customer and profitable to the company.

        Unfortunately, McKinsey & Company found many program rewards are not actually tied to profitability. While the study concedes metrics such as miles flown or groceries purchased are correlated to revenue, those metrics may not work to optimize profitability.

        Loyalty Fail #5: Reflection on the Brand

        Poorly designed loyalty program can reflect negatively on the brand

        Poorly designed and executed loyalty programs can reflect negatively on the brand organizations have spent time and treasure building.

        In fact, three-quarters of the Americans surveyed in The Bond 2015 Loyalty Report believe loyalty programs are part of the relationships they have with brands. Despite the shortcomings of many loyalty programs, the study also found more than one-third of customers say they would not be loyal to a brand if it weren’t for the brand’s loyalty program.

        Simply put, loyalty is about much more than just points, it’s about people.

        Designing a Next Generation Loyalty Program

        Whether you’re launching or relaunching your loyalty program, you must consider their brand, customer base, and cost structure when designing a program. While each plan requires customization, research indicates programs built on customer needs and integrated with overall company marketing goals can result in lower than expected costs and higher than anticipated returns.

        In lieu of a list of tactics, which can be found elsewhere, here we offer a collection of five design principles you may use to guide the creation of a loyalty program that is rewarding for both you and your members.

        Principle #1: Segment Loyalty

        Segment customers based on degree of loyalty

        Not all loyalty is created equal. Rather than looking at loyalty on a bifurcated basis (loyal vs. unloyal) start seeing loyalty as a matter of degree. Too often, research indicates, companies lump high-value and high-potential customers in with with the rest of a loyalty program’s membership.

        This ignores CLV and can lead to margin pressure. Implementing a tiered reward system, based on degree of loyalty, may be done so optimally by relying on analytics to identify individual segments based on degree of loyalty. Link the reward to the degree of loyalty and allow customers to work their way up to receive higher-value rewards. Besides incremental share, segmentation positions you to stop offering discounts or rewards to less loyal customers who are expensive to service and only bite when offered heavy discounts.

        Base your definition of loyalty, in part, on metrics that create value for you; frequency of engagement, customer profitability, or net promoter score. In fact, Nielsen argues segmenting based on loyalty may be used innovatively to influence store remodels, dictate special customer service response scripts, and to fine-tune inventory to meet the lifestyle preferences of your most loyal customers.

        Additionally, segmenting loyalty positions you to, as McKinsey suggests, allocate loyalty investments to your most profitable customers. It also helps you formulate a mindset, as The Colloquy Loyalty Census suggests, to begin seeing high-value customers not simply as members of a segment, but as individual segments of one. This positions you to better personalize the experience.

        Principle #2: Data-Rich Loyalty

        Look-alike modeling for Customer Loyalty

        You’ll refine your loyalty segmentation efforts while simultaneously offering relevant and margin-appropriate rewards by building a loyalty program rich in data. However, you don’t have all the data you need to earn loyalty optimally.

        The best loyalty programs, according to research, merge outside data from partners with their own. Researchers suggest striking data-sharing agreements that position you to combine in-house data with third-party demographic and purchasing behavior data. You might even consider using rewards as carrots to get more data or potentially boost sales.

        For instance, Post Foods doles out virtual rewards in return for prospects watching a branded video or clicking on an ad. A data-rich rewards program can prevent you from offering inappropriate or costly rewards.

        For example, if you looked only at data for a busy executive who travels frequently you might consider it smart to offer a reward based on frequent destinations. However, if the executive hates to travel, does so only for work, and wants to remain close to home on days off, your reward would be perceived as irrelevant and possibly off-putting.

        Incorporating behavioral, geo-location, and transactional history data can help you improve your program and the value it offers. If you lack rich data or the ability to purchase it, consider look-alike modeling, which uses the data you have on 10-20% of your customers to make more accurate predictions about the behaviors, preferences, and characteristics of the 80% for which you lack data.

        Principle #3: Personalized Loyalty

        Image via: The Bond 2015 Loyalty Report

        Only after you segment your loyalty membership based on rich data can you deliver what today’s rewards members crave; personalization. Problem is more than two-thirds of all rewards members, according to research, do not feel they’re getting a personalized rewards experience.

        When customers, especially loyal ones, provide you with personal information they expect you to use it to send them targeted messages. While research from Experian indicates personalized email subject lines boost open rates by 26%, it appears as if the subject line is where personalization often stops. More than half are not using recommendation engines across channels.

        Image via: Experian

        This is one way you can solve the problem of scale when it comes to personalization.

        Another is to segment your loyalty members by pain point. In the research conducted by McKinsey, the company suggests Amazon solved a huge customer pain point with Prime; the ability to order more items without having to pay massive shipping costs.

        Combined with its recommendation engine, Amazon provides a truly personal experience.

        Where to start? While discounts, points, and rebates may play a role when tailored to specific segments, the research conducted by Bond suggests a truly personalized experience is created when marketers authentically fulfill a customer need. Simply put, Colloquy’s study suggests mining the data and doing the research necessary to identify the elements and preferences most important to rewards members and deliver on them. The report also indicates relevant and real time interactions are key in creating a personalized rewards experience.

        Principle #4: Cross-Device & Cross-Channel Loyalty

        Track loyal customers cross-device

        Image via Wikimedia Commons

        Relevant and personal messaging, according to this research, isn’t done in silos but rather across channels and devices. The McKinsey study, which highlights Starbucks as a model, argues loyalty must be integrated into the full experience regardless of where or when the experience occurs.

        But to communicate personally when and where your members prefer you have to know how and where they’d like to communicate. The Experian study indicates that while the majority of marketers communicate across channels, just 7% market based on customer channel preference.

        Do you allow for your customers to choose which channels you market to them?

        Image via Experian

        Plus, 60% never give customers the option to select the types of email they’d like to receive. Our guts tell us we need to be everywhere. But the lesson is not to do cross-channel & cross-device blindly or void of data. Here’s one important reason why. The Bond study found that while 48% of loyalty members want to communicate via a mobile device, just 12% have actually downloaded a loyalty program app.

        Combine that with the fact that, according to Bond, 61% of smartphone owners are not even aware if their loyalty program offers an app.

        None of this data is meant to scare you away from seamlessly integrating your program across channels and devices. Just know you must regularly educate consumers about your offering. Those who do are often rewarded handsomely.

        In fact, the Capgemini research highlights a French cosmetics retailer that synced its mobile loyalty app with a digital payment service that empowered members to view offers and redeem points whenever and wherever they preferred. The strategy resulted in loyalty members spending double and purchasing twice as frequently as non-members.

        Principle #5: Valuable & Meaningful Loyalty

        Image via Bond

        Nearly half of the negative social media sentiment associated with loyalty programs, according to the Capgemini research, stems in part from members not perceiving rewards as valuable.

        Almost all rewards are transactional in nature rather than engagement-based. However, Capgemini suggests rewards offered in return for product feedback, online reviews, and referrals can add to the perceived value of rewards.

        The customer journey in any rewards program begins with offering high quality and valuable rewards:

        Image via: Capgemini Consulting

        Almost two-thirds of the consumers surveyed by Bond would not recommend the loyalty program in which they’re enrolled.

        The perceived value of the rewards offered is undoubtedly responsible for part if this reluctance to recommend. However, tangible rewards are only part of the equation. The Boston Consulting Group study suggests offering recognition with rewards increases the customer value proposition.

        Recognition programs, according to the research, provide differentiated offers based on status and generate incremental revenue from customers who value being recognized by brands. Extending incentives outside your brand may also improve your loyalty value proposition.

        Partner with other brands to increase the relevance of your loyalty program

        Image via PFSK

        For instance, Starbucks recently partnered with rideshare provider Lyft in a way that allows riders to earn points toward coffee and food each time they use the ride service. Despite a well-established and successful rewards program, Starbucks is an example of the constant pressure that exists to continually increase the value offered via rewards programs.

        Conclusion

        Your loyalty program is not really a program but rather an asset. Remember, that’s exactly how creditors view the rewards program left in the wake of the Caesars’ bankruptcy. Put another way, a well-designed and executed loyalty program may be a competitive advantage used to predict customer behavior, generate incremental revenue, and create value for each of the parties involved.

        Would the vultures fight over your rewards program should you suddenly disappear?

        How you answer that question will determine whether you’re on your way to earning billion dollar loyalty.



        About The Author

        Nick Winkler is a contributor to the Shopify Plus blog. He helps individuals & organizations generate new leads, make more money, and ignite growth with story. Get more from Nick here.