Leveraging the Loyalty Margin: Rewards Programs That Work

Leveraging the Loyalty Margin: Rewards Programs That Work

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Leveraging the Loyalty Margin: Rewards Programs That Work

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    We expect loyalty programs to continue to grow, proliferate, and become increasingly dynamic. More customers are signing up, and companies are developing improved capabilities for managing program logistics and rewards mechanisms. They are also getting better at targeting high-value rewards and recognition. At the same time, program costs are falling. Declining hardware, software, and systems costs are a big factor, as is inexpensive data storage. Big-data analytical capabilities are increasingly available to businesses of all sizes. Companies also benefit from competition among vendors and agencies that specialize in loyalty program execution and management and from the rise of digital-only programs, which have limited marketing-collateral investment needs.

    Companies that have yet to integrate digital and mobile technology into their rewards programs will need to do so. The same factors that make these technologies—along with social media—powerful disrupters of the retail experience also apply to loyalty programs. These factors include wider selection and choice, greater transparency, location-based services, and the integration of friends into the shopping and rewards experience. Think about the ability to send messages to the smartphones of high-value customers known to be nearby, about a limited-time offer they can share with up to four friends.

    Moreover, digital data can help hone the loyalty margin to its sharpest-possible edge. The most profitable loyalty program gives away only what is necessary to drive the greatest incremental profit from a member. Using the three levers described above helps tailor programs to this goal. Data from digital interactions helps companies better understand members and their motivations in an even more tailored way, allowing companies to maximize the cost-benefit equation. Digital technologies help companies convert broad-based programs previously rooted to some extent in guesswork into highly focused programs based on hard data.

    Digitally capable loyalty programs are key to attracting younger consumers. BCG research shows that members of the Millennial generation—who outnumber the baby boomers and are entering their peak purchasing years—are heavy users of portable devices and are connected to brands wherever they go. Two-thirds of Millennials report that they use smartphones to access the Internet, far more than older consumers. They also engage with brands more deeply through social networks. More than half say that, at least occasionally, they use their mobile devices on social media to note that they “like” a brand, compared with only a third of boomers.

    Even more important, Millennials expect a two-way, mutual relationship with companies and their brands. Through the feedback that they express both off-line and online, Millennials influence the purchases of other customers and potential customers. They also help define the brand itself. Millennials are much more likely to factor their special status or membership in a loyalty program into their purchase decisions and to go out of their way to shop at stores and websites where they are members of frequent-buyer programs. (See Exhibit 2.)