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Leveraging the Loyalty Margin: Rewards Programs That Work

April 21, 2014 by Dylan Bolden, Patrick Hadlock, and Keith Melker
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    Loyalty programs are top of mind these days. As the competition for share of wallet—or shopping bag or household budget—intensifies, more consumer product and service companies are adding loyalty programs to their marketing mix, and customers are signing up. The number of rewards programs jumped 27 percent from 2010 through 2012, according to research firm Colloquy. Membership has soared as well. The average U.S. household has 22 loyalty-program memberships and actively uses 10. (How many loyalty cards are in your wallet? How many tags hang on your key chain?) Some companies generate up to 60 percent of their revenues from loyalty program members.

    Loyalty programs began as a tool of the travel industry, in which customer spending is high but the incremental cost of rewards is low. Customers assign a high value to a free hotel room or airline ticket, while travel companies can give these away virtually for nothing so long as the hotel or flight is not sold out. Loyalty programs have expanded into a host of other sectors with very different economics—in which rewards cost companies real money—including everyday-purchase categories with lower average prices and margins, such as convenience stores and gas stations. Many brands are now launching their first loyalty programs; others are relaunching programs for the third or fourth time. Long-time loyalty players continually adjust and improve their programs, raising the bar for new entrants. Market leaders refine, redefine, and reinvent the loyalty experience in a continuous effort to push incremental share—the combination of growth in membership and the additional amount spent by members—to new heights.

    But how well do loyalty programs actually work? How profitable are they? Despite the expanding view that every consumer-focused company needs to consider including one as part of its marketing strategy, there is little consensus about what makes a program successful. Many different models are in use, and it can be difficult to determine which approaches truly foster increased loyalty and drive profitable incremental share.

    The Boston Consulting Group has worked with hundreds of companies in such industries as travel, retail, and financial services, helping them design, implement, and redesign loyalty programs. Although each plan must be brand consistent and tailored to the company’s customer base and margin structure, there are some common principles that underlie successful models. Companies that design and execute programs that are built on customer needs and are closely integrated with broader brand and marketing goals find that the cost can be unexpectedly low—and the returns surprisingly high. For others, the price of simplistic or poorly planned programs can be painful. This report examines how smart brands—including both those new to the game and those that have been playing it for a while—make their programs rewarding for company and consumer alike.

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